LEBANON: FINANCE MINISTER UPDATES U/S FORE ON

C O N F I D E N T I A L SECTION 01 OF 02 BEIRUT 003728

SIPDIS

SIPDIS

NSC FOR ABRAMS/DORAN/MARCHESE/HARDING

E.O. 12958: DECL: 11/28/2016
TAGS: EAID ECON PGOV PREL LE
SUBJECT: LEBANON: FINANCE MINISTER UPDATES U/S FORE ON
PARIS III, AGREES TO VAT RELIEF FOR AID


Classified By: Ambassador Jeffrey D. Feltman for reasons 1.4 (b) and (d
).

SUMMARY
--------------


1. (C) Expressing appreciation to visiting Under Secretary
Fore for U.S. assistance, Finance Minister Azour updated Fore
on progress toward a donor conference and a broader economic
reform program. Azour pledged prudent public finance and
monetary policy measures which will see the Lebanese economy
through current political instability. He agreed to find
interim and long-term ways to waive value-added and customs
taxes on U.S. assistance and to update the 1951 bilateral
assistance agreement. End Summary.

PROCEEDING WITH PARIS III PREPARATIONS
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2. (C) Finance Minister Jihad Azour met with visiting Under
Secretary Henrietta Fore and the Ambassador on November 27,

SIPDIS
and expressed appreciation for U.S. assistance in planning
for the Paris III donor conference. Azour also updated Fore
on preparations for the conference and a broader economic
reform program. Since the end of the war, the GOL has
conducted a direct and indirect impact damage assessment in
conjunction with the International Monetary Fund (IMF). The
economic team completed sectoral needs assessments with the
assistance of the World Bank. Finally, Azour said Lebanon is
building a program to improve governance and transparency in
public finance, procurement, and foreign assistance
management. A second draft of the economic reform program
will be ready for cabinet discussion by the end of this week.
The current political situation is not conducive but the
economic team is readying a legal framework to support
reform. The government is seeking to accelerate reviews of
draft laws in a parliamentary vote of confidence, and is
meeting with the private sector to build support.


3. (C) International cooperation is continuing despite
political uncertainty. French officials are ready to send
invitations and are preparing to hold the Paris III
conference on January 25. Azour is preparing his regular
end-of-month progress report and assistance request to
Economic Core Group members. The Finance Ministry is
continuing its regular consultations with bilateral and
multilateral partners. As the volume of foreign aid
increases, Azour is working with the IMF to implement greater
GOL control over the sources and destinations of that aid.
Through customs and value-added tax (VAT) legislation, the
Ministry of Finance and Ministry of Economy and Trade are
able to oversee donations and audit aid use at
non-governmental organizations. The Central Bank has the
authority to oversee and audit cash donations.

ECONOMY WEATHERING
POLICIAL INSTABILITY
--------------


4. (C) The same prudent public finance and monetary policy
measures that saw Lebanon through the July-August war will
see it through the aftermath of the November 21 assassination
of Industry Minister Pierre Gemayel, Azour told us. He
alluded to "new inflows" similar to the long-term Saudi
deposit of USD 1 billion at the Central Bank of Lebanon
(CBL),made during the July-August war, and suggested that
depositors who wanted to withdraw money did so during the
war. Azour is increasingly consulting with the private
sector in an effort to restore market confidence and support
quick economic recoveries after bouts of political
instability. (Comment: In separate conversations, local
bankers report that since early November the Lebanese lira
has come under pressure and the CBL is selling dollars for
the first time since the July-August war. Estimates are that
it sold USD 100-150 million (of USD 13.5 billion) in foreign
currency assets on November 27. Bankers noted that capital
outflows are minimal and the foreign exchange market reaction
was small. In a separate action, Moody's Investor's Service
downgraded the financial strength ratings of several Lebanese
banks based on higher political instability and liquidity
risk. End Comment.)

VAT RELIEF FOR AID, AND AN
UPDATED ASSISTANCE AGREEMENT
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BEIRUT 00003728 002 OF 002



5. (C) In response to Undersecretary Fore's request, Finance
Minister Azour agreed to find both interim and long-term VAT
and customs relief for U.S. assistance. Azour will appoint a
small Ministry of Finance team to work with Embassy staff to
find an interim solution based on measures implemented during
the July-August war. Over the longer term, the same team
will work with U.S. staff to update the 1951 bilateral
Economic, Technical, and Related Assistance Agreement.
(Background: The decree that exempted humanitarian shipments
from VAT and customs dues expired October 31, 2006. The
current bilateral agreement for technical cooperation was
signed in 1951 and has limited provisions on tax exemptions
and no exemptions related to aid. End Background.)
FELTMAN