MGLE01: GOL PRESENTS UPDATE ON ECONOMIC REFORM

C O N F I D E N T I A L SECTION 01 OF 05 BEIRUT 000836 SIPDIS SIPDIS STATE FOR NEA/ELA STATE PASS USTR TREASURY FOR MSHWARZMAN USDOC FOR 4250/ITA/MAC/OME NSC FOR ABRAMS/DORAN/WERNER/SINGH E.O. 12958: DECL: 03/13/2016 TAGS: PGOV ECON EFIN LE SUBJECT: MGLE01: GOL PRESENTS UPDATE ON ECONOMIC REFORM AGENDA Classified By: Charge d'Affaires Christopher Murray for Reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. On March 10, Prime Minister Siniora presided over the GOL's 90-minute presentation of "A Medium-Term Reform Program for Lebanon with International Support" to representatives from nineteen embassies and international organizations. Siniora, Finance Minister Azour, Central Bank Governor Salameh, and Economy and Trade Minister Haddad summarized GOL efforts in enhancing economic reform measures, a privatization program, prudent monetary policy and financial sector reform, social sector reform, and fiscal adjustments. Azour told the group that the presentation was a summary presentation and that various ministries would have more detailed five-year action plans. Azour said that the major objectives of the Lebanese reform program would be to increase economic growth, increase employment, and strengthen the Lebanese social system. Azour, Salameh, and Haddad discussed elements of the reform agenda while a series of roughly 30 Power Point slides were being presented to the audience. Representatives of Kuwait, Italy, the U.S., Germany, Japan, and the World Bank asked questions and offered comments to Siniora following the presentation. END SUMMARY. ¶2. (C) Siniora began the meeting by stating that the GOL had several meetings in the past few weeks with Cabinet members and prominent members of the business community to help gain feedback. He said that reaction so far to GOL proposals has been welcoming. He promised to give meeting participants a copy of the program after Cabinet members had received a hard copy of the program over the weekend. Azour then told the group that the presentation was a summary presentation of what the GOL intended to present at a Beirut donors' conference. He said that the program was drafted as a basis for consultations with the international community and would be complemented with a macroeconomic framework that would be presented at a later date. Azour said that GOL reform efforts go beyond the summary presentation, as many of the ministries have more detailed five-year action plans. Azour stated that the program was drafted by an economic team led by PM Siniora's office with help from the Ministry of Finance, the Ministry of Economy and Trade, and the Central Bank. The basics of the program were finalized in late November and December and then presented to members of the Cabinet in three sessions. ¶3. (C) According to Azour, the reform program's objectives are to improve the condition of the Lebanese by stimulating economic growth, providing increased employment, and strengthening the social system. The GOL aims to modernize the economy and stimulate economic growth of four to six percent in the medium term. The reform agenda will focus on creating employment while both improving social indiators and providing social assistance to protectthe poor. Azour said the reform document plans o achieve economic stabilization by reducing thefiscal deficit in the medium term to less than tree percent of GDP and gradually increasing the primary surplus as a percentage of GDP from three percent in 2005. According to Azour, there are five major policies (or pillars) of the Lebanese reform agenda--(1) the economic policy and growth agenda will lead to growth-enhancing reform; (2) privatization and market liberalization will improve the quality of services and expand the participation of the general public in the reform effort; (3) social sector reform will shift GOL policies in order to improve social indicators, mainly in health and education, and strengthen the social safety net; (4) good fiscal policy, sound governance, and public sector reform will reduce the deficit and debt; and (5) prudent monetary policy and financial sector reform will maintain price stability. Azour said the growth agenda would include improving the legal infrastructure in Lebanon as well as reforming the financial markets. The Lebanese economy would also be strengthened by its integration into the world economy. ¶4. (C) After Azour discussed the reform program's objectives, Haddad discussed ways that the reform program BEIRUT 00000836 002 OF 005 would improve the business environment in Lebanon. The GOL plans to address the cost of doing business in Lebanon and improve Lebanese business' competitiveness by: lowering the minimum capital requirements and registration costs, reducing the time it takes to obtain a business license and open a new company, further simplifying tax procedures and reducing the number of separate taxes and fees, ratifying a modern competition law and an anti-dumping law. Haddad said that the GOL was working on improving the investment climate through new legislation, such as a newly ratified consumer protection law and anti-dumping and WTO-compatible laws that are now in Parliament. Small and medium-sized enterprises (SMEs) will be a priority, as the GOL aims to increase access to credit for SMEs, create business development centers and incubators, and design a program to minimize the legal framework needed to open or close a business. ¶5. (C) Haddad told the meeting's participants that the GOL had just concluded a successful round of Working Party talks towards WTO accession in Geneva and stated that the GOL was moving forward with the WTO accession process. Haddad said that Lebanon is now working towards WTO accession by the end of 2006. According to Haddad, the GOL seeks deeper economic cooperation with the EU under the European Neighborhood Policy and is working diligently to improve both the procedure for exporting goods and the quality of Lebanon's exports. Haddad stated that the GOL was also reacting to private sector requests on simplifying the cost of doing business in Lebanon. ¶6. (C) Haddad continued with an update of the GOL's privatization program. As Haddad explained, the importance of the privatization program is multifaceted, as it fits well with the GOL's intention to redefine the role of the state in the economy, improve the efficiency in the delivery of services, create significant foreign direct investment, generate jobs for Lebanese nationals, and help develop the Lebanese stock market. Haddad said that the regulatory framework for the privatization of the telecommunication sector has been set up, as the finalization of the process for privatization of the two GSM mobile companies is expected by the end of summer 2006. The GOL will work in parallel to transform the fixed line Ogero into Liban Telecom, which is slated for privatization in 2007. The GOL does not have many other assets that are currently ready for privatization, but its plans include privatizing MEA, Intra, and the Casino du Liban. Haddad did not discuss plans to privatize the power sector and Electricite du Liban; Azour discussed efforts to reform EDL later in the presentation when he discussed important ways of reducing GOL expenditures. Haddad stated that privatization was not expected to result in job losses, as there was currently not a large amount of excess labor in sectors slated for privatization. ¶7. (C) Salameh then discussed GOL efforts to achieve prudent monetary policy and financial sector reform. Salameh stated that price stability was the primary objective of the Central Bank. Salameh noted the balance of payments surplus of USD 700 million in 2005 "despite the many difficulties" during the year. The Central Bank is focused on backing Lebanese banking expansion in the Arab world and internationally. Salameh said that the GOL is working at bringing international banking standards to the Lebanese banking sector; he said that Basel II standards will be applied in Lebanon starting on January 1, 2008. Salameh said the GOL expects voluntary contributions from the banking sector to help back the GOL's economic program, and the Central Bank is now working on a "stress test" to apply to banks individually to help fill the expected gaps in needed financing. Salameh said the Central Bank was working to privatize its assets. He noted that the Central Bank had sold Banque Libanaise pour le Commerce (BLC) and was in the process of evaluating Middle East Airlines (MEA) to begin selling shares in June 2006. ¶8. (C) Azour followed with a presentation of the GOL's efforts to modernize non-bank financial services. The GOL has launched an action plan with three major avenues--(1) improving the regulatory framework through two new laws and two draft laws, (2) a strategy to develop Lebanon as a BEIRUT 00000836 003 OF 005 regional financial center, and (3) a plan to modernize the debt market and the fixed income market. Azour stated that the development of the financial sector in parallel with the banking sector would help establish the right platform for privatization. ¶9. (C) Azour said that social sector reform was one of the major pillars of the Lebanese economic reform program. The GOL objective was to strengthen the social system in Lebanon by accompanying fiscal reforms with a new social contract for Lebanon. Haddad then presented the headlines of the social reform program. He said that the social reform agenda was a interministerial effort between the Ministry of Health, the Ministry of Economy and Trade, and the Ministry of Social Affairs. Haddad stated that despite public and private spending of 20 percent of GDP on health and education, social indicators are not desirable (as an example, he cited the wasteful spending found in a student/teacher ratio of nine to one). Haddad said the GOL was seeking to put together a concrete action plan that would target the lowest income part of the population. The program would include cash transfers and in-kind benefits that would seek to increase the coverage of health services to the disadvantaged. The GOL would also seek to provide free books and free meals to lower income students. Haddad talked of the need of a comprehensive pension reform program that would combine the National Social Security Fund (NSSF) with the army and civil service pension schemes in order to make the system more equitable, reduce the liability facing the public sector, and provide a more flexible labor market. ¶10. (C) Azour then began discussing the strong need for fiscal adjustments to improve the performance of the Lebanese economy. One of the main objectives of the economic reform plan is to progressively reduce the level of the budget deficit and increase the primary surplus, according to Azour. The GOL seeks to increase the primary surplus from three percent of GDP at the end of 2005 to eight percent in the medium term. The GOL's budget deficit will also not exceed three percent of GDP. ¶11. (C) Azour stressed the need to change the debt dynamic in Lebanon. He said the GOL had taken reform measures since 2000 that had achieved stabilization in the debt to GDP ratio, but that further efforts were needed to reduce the debt to 138-139 percent of GDP by 2010. Azour said that the GOL would seek to achieve this goal even if there was no support from the international community or the banking sector. ¶12. (C) Azour stated that the "road map" to achieving fiscal responsibility was well known and not difficult. The GOL seeks to reform expenditures by reducing public spending and seeks structural reform through better public finance management. Azour said that one way to reduce expenditures in the medium term was to limit hiring and have a real wage freeze. Azour emphasized that social security reform and the reform of EDL were the most important measures that the GOL could accomplish to achieve fiscal sustainability. Azour would like to shift much of the spending that is currently going towards pensions and EDL into public infrastructure and social reform. The GOL seeks, at the end of five years, to reduce expenditures as a percentage of GDP from 30 percent to 26 percent. Azour would like to transform EDL by undbundling and then restructuring the power utility. The GOL could save two to three percent of GDP in the next five years through the reform of EDL. Azour emphasized that if the GOL succeeds in reforming EDL, nearly half of all needed fiscal adjustments will be accomplished. Azour said that pension reform was also needed to address fiscal imbalances. He stressed the need for transparency and accountability in all stages of fiscal reform in order to ensure that there was no "slippage" in efforts. ¶13. (C) Azour then began discussing revenue-enhancing measures that would be needed to accompany the expenditure cuts in order to rationalize public expenditures. Three important measures stressed by Azour included: raising the value added tax from 10 percent to 12 percent in 2006 and 15 BEIRUT 00000836 004 OF 005 percent over the medium term; aligning the price of gasoline with international prices and then compensating the low income residents who are hurt by the loss of the gasoline subsidy; and increasing the tax on interest from five to eight percent. Other revenue measures mentioned by Azour were the imposition of a global income tax in 2007 and settling the issue of seashore violations. Azour expects the GOL in the medium term to reduce the ratio of revenue to GDP from 22 percent in 2006 to 24 percent in 2010. Revenue enhancing measures would also be accompanied by structural reforms that would include reactivating a large taxpayer's office and reorganizing the tax authority. By strengthening tax collection coverage, the GOL would be able to increase revenue without increasing the tax rate, according to Azour. ¶14. (C) According to Azour, the GOL will improve governance through new initiatives and legislation. Azour promised to propose an audit of all public finances since the end of the Lebanese Civil War. The GOL was also studying a new public procurement law to improve transparency and accountability. Azour stated that there is currently new draft laws designed to change the way civil servants are hired and reform the court of accounts. ¶15. (C) Azour stated that the pillars of the economic reform program are all linked together. Renewed confidence in the Lebanese economy would lead to the attraction of larger investments and an improved overall risk profile. Lower fiscal deficity would lead to higher levels of economic growth and more employment prospects. The eventual goals of the program were to both reduce the deficit and level of public debt while increasing economic growth and income per capita. Azour said that in addition to the summary presentation the GOL had created a matrix of measures with implementation timelines that would be submitted to a donors' conference. ¶16. (C) Azour said that the international community could play a major role in assisting the GOL in its economic reform efforts through boosting confidence in the Lebanese economy and addressing the crippling debt dynamic. Azour further stated that the GOL would like to discuss this program with the international community and appreciates any feedback. Azour then concluded his part of the presentation. Siniora told the gathering that the presentation was the result of discussions with international organizations and certain business and labor leaders. Siniora stated that the purpose of the March 10 presentation was to show the international community that the GOL was "ready" despite the tense political situation and frequent political interruptions. He added that the GOL was "committed" to reform and the GOL's reform agenda has to be well studied and well discussed before a Beirut donors' conference. Siniora then opened the floor for questions. ¶17. (C) The Kuwaiti Ambassador praised the GOL's efforts to present a comprehensive reform agenda to the international community. He stressed his government's confidence in Siniora and welcomed the discussions of the National Dialogue. Siniora told the gathering that the National Dialogue was the "first time ever" that the Lebanese had sat down together without a guardian or a foreign sponsor to discuss the nation's problems. He added that the participants in the National Dialogue were now discussing matters that had never been discussed before in a highly civilized manner. Siniora said that there had already been two important breakthroughs at the National Dialogue, including agreement on an international tribunal to investigate the series of recent political assassinations and agreement on the issue of Palestinian arms. ¶18. (C) When the Italian Ambassador asked Siniora if the political and social parties of Lebanon would support the reform agenda and if the economic program would have its own National Dialogue, the prime minister told the group that the GOL would be very busy in the coming weeks making presentations of the economic reform agenda and sitting down and answering any questions. He said that he knows that the economic reform agenda is an "ambitious program", but that he BEIRUT 00000836 005 OF 005 will be firm in making sure that the package is adopted "as a whole." He stated the GOL needs to show the people "that real benefits will accrue from this program" and "jobs will be created, particularly for the lower income groups." Siniora promised to distribute the reform document to his ministers. He then quipped that all of Lebanon should know the contents of the program, as "the difference between people who know and people who don't know in Lebanon is a matter of a few hours." ¶19. (C) Charge then asked if the GOL would adopt a formal IMF program. He advocated that an IMF program would free up capital flows, inpsire international confidence, and provide a mechanism to monitor progress in Lebanon's reform program. Azour answered the question, although not directly, by stating that the GOL and IMF views were converging and that the IMF's participation and contribution to the GOL would in part be determined by the events and agreements at the Beirut donors' conference. World Bank Representative Omar Razzaz then added that the World Bank and the GOL had been working together on a continuing dialogue that included economic growth measures, good governance, and social safety nets. Razzaz said that the results of the dialogue were reflected in the presentation. He said that the World Bank looks forward to a successful conclusion to the National Dialogue. He said that after a successful National Dialogue, we can hope for a national dialogue on economic and social issues. Siniora echoed Razzaz's sentiments by stating that a successful conclusion to the political dialogue would be a good beginning for discussing economic and social matters. He added that the recognition and awareness of the importance of economic issues was increasing among the Lebanese people. ¶20. (C) When the German Ambassador asked if the GOL would accept in-kind contributions such as hardware and technical experts, Siniora said that support for the GOL could take many forms, including the enhancement of internal security. Siniora then told the Japanese Ambassador that he did not want to set a date for the Beirut donors' conference because he did not want to be a "prisoner of a certain date." He said that once there is agreement on a reform agenda, it will be "easy to fix the date." Haddad added that the GOL would like to see a date "as soon as possible." Siniora told the gathering that he would speak with the media concerning the economic reform agenda on Saturday March 11. He promised that the GOL would tour countries that were expected to participate in a donors' conference to answer any relevant questions. MURRAY