UPDATE ON LEBANON DONORS CONFERENCE

UNCLAS PARIS 000158 SIPDIS SIPDIS SENSITIVE STATE FOR EUR/WE; NEA STATE ALSO FOR EB/IFD/ODF EMILY WAECHTER NSC FOR ABRAMS/MAGAN E.O. 12958: DECL: N/A TAGS: EFIN KDEM PGOV PREL LE SY FR SUBJECT: UPDATE ON LEBANON DONORS CONFERENCE SENSITIVE BUT UNCLASSIFIED, NOT FOR INTERNET REF: PARIS 112 ¶1. (U) SUMMARY: FRANCE IS ENCOURAGED BY THE GOVERNMENT OF LEBANON'S PROPOSED ECONOMIC PROGRAM TO GARNER DONOR SUPPORT, AND IS RELATIVELY WELL-ADVANCED IN PREPARATIONS FOR THE JANUARY 25 INTERNATIONAL CONFERENCE FOR LEBANON. THE LEBANESE ECONOMIC TEAM GAVE A VERY GOOD PRESENTATION OF ITS ECONOMIC REFORM PROGRAM AND APPEALED FOR GENEROUS DONOR SUPPORT ON THE 25TH. LEBANON AND THE FUND ALSO INDICATED THAT THEY WERE ACTIVELY DISCUSSING SOME SORT OF AN IMF PROGRAM FOR LEBANON, ALTHOUGH IT IS CLEAR THAT THE GOL IS STILL DIVIDED ON WHAT TYPE OF PROGRAM IT SHOULD BE. END SUMMARY. ¶2. (U) EB PDAS LIZ DIBBLE, NEA DAS ROBERT DANIN, AND TREASURY DAS AHMED SAEED HELD A SERIES OF MEETINGS IN PARIS IN CONNECTION WITH THE JANUARY 25 LEBANON DONORS CONFERENCE (A/K/A PARIS III) - BILATERALLY ON JANUARY 9 WITH THE FRENCH TREASURY CONFERENCE COORDINATOR; SUBSEQUENTLY A MEETING THAT INCLUDED TREASURY U/S TIM ADAMS AND THE LEBANESE ECONOMIC TEAM OF FINANCE MINISTER JIHAD AZOUR, MINISTER OF ECONOMY SAMI HADDAD, CENTRAL BANK GOVERNOR RIAD SALEMEH, AND ADVISOR TO THE PM MOHAMMED CHATTAH; AND FINALLY A MULTILATERAL CORE GROUP MEETING ON JANUARY 10. FRENCH REPORT ON PARIS III CONFERENCE -------------- ¶3. (SBU) JEAN-PIERRE JOUYET, COORDINATOR FOR THE JANUARY 25 CONFERENCE TO BE HOSTED BY FRANCE, STRUCTURED THE BILATERAL MEETING TO COVER THE POLITICAL SITUATION IN LEBANON; EXCHANGE VIEWS ON THE PROPOSED LEBANESE ECONOMIC REFORM PACKAGE; URGE IMF INVOLVEMENT; AND EXCHANGE INFORMATION ABOUT THE NATURE AND SIZE OF EXPECTED PLEDGES AT THE CONFERENCE. THE USDEL NOTING THAT THE INTERNAL POLITICAL SITUATION IN LEBANON IS COMPLICATED, EXPRESSED POSITIVE VIEWS OF THE REFORM PROGRAM, AND NOTED THAT THE USG WOULD SUPPORT AN AGREEMENT BETWEEN LEBANON AND THE IMF (EITHER A STAFF MONITORED PROGRAM OR AN EMERGENCY POST-CONFLICT ASSISTANCE PROGRAM) PROVIDED THE GOL REQUESTS IT. ¶4. (SBU) JOUYET SAID HE UNDERSTANDS THE IMF IS SPLIT INTERNALLY OVER AN EPCA, AND THE MANAGING DIRECTOR HAS NOT YET TAKEN A POSITION. HE AGREED THAT THE GOL NEEDS TO ASK FOR AN EPCA, BUT ALSO IS CONSIDERING WHETHER TO HAVE FRANCE INITIATE A HIGH-LEVEL DEMARCHE TO CONVINCE THE MANAGING DIRECTOR OF THE MERITS OF AN EPCA. THE USDEL ENCOURAGED JOUYET TO GET THE GOL AND THE IMF TO REACH CLOSURE, NOTING THAT A UNIFIED G7 POSITION COULD ALSO BE HELPFUL. INTERNAL LEBANESE QUALMS (ESSENTIALLY FROM THE CENTRAL BANK) ABOUT AN IMF PROGRAM ALSO SHOULD BE ADDRESSED. JOUYET OPINED THAT CENTRAL BANK GOVERNOR SALAMEH WANTS TO CONTINUE TO BE SEEN AS A MIRACLE-WORKER, AND HE NEEDS ASSURANCE THAT HE CAN CONTINUE TO SET MONETARY POLICY. ¶5. (SBU) JOUYET ASKED ABOUT THE SIZE OF THE U.S. CONTRIBUTION. THE USDEL ASSURED HIM IT WOULD BE SUBSTANTIAL. IN ADDITION, SECRETARY RICE WILL CONTINUE TO ENCOURAGE OTHER DONORS TO BE SIPDIS GENEROUS DURING HER TRAVEL TO THE MIDDLE EAST. JOUYET SAID FRENCH PRESIDENT CHIRAC WILL ALSO BE PLACING CALLS. JOUYET THOUGHT THE GREATEST DIFFICULTY WILL COME FROM QATAR. THE UAE ALSO HAS NOT BEEN VERY FORTHCOMING. JOUYET IS REASONABLY CONFIDENT ABOUT THE EU CONTRIBUTION, GIVEN THE EXPECTED ATTENDANCE OF EC PRESIDENT BARROSO (COMMENT: WE HAVE SUBSEQUENTLY HEARD FROM USEU THAT THE EC CONTRIBUTION IS EXPECTED TO BE 187 MILLION EUROS OVER FOUR YEARS, WITH ANOTHER 100 MILLION EUROS FROM THE EIB. END COMMENT). HE NOTED UK RELUCTANCE TO OPEN ITS TREASURY COFFERS, AND ITALIAN COMMENTS ABOUT ALREADY CONTRIBUTING THROUGH UNIFIL. HE HAS NOT HEARD FROM JAPAN OR CANADA. ¶6. (SBU) ON POSSIBLE CONFERENCE OUTCOME DOCUMENTS, JOUYET SAID HE HAS TO DEFER TO PRESIDENT CHIRAC, BUT AGREED TO ACCEPT INPUT, TO MEET AGAIN WITH THE USDEL BEFORE THE CONFERENCE AND TO TRY TO MINIMIZE THE NEED TO NEGOTIATE TEXT. LEBANESE FINANCE MINISTER PRESSES FOR AID -------------- ¶7. (SBU) IN A CORDIAL BILATERAL MEETING WITH THE LEBANESE FINANCIAL TEAM, LEBANESE FINMIN JIHAD AZOUR SUMMARIZED FOR TREASURY U/S ADAMS WHAT AZOUR CHARACTERIZED AS AN AMBITIOUS 5-YEAR PLAN FOR ECONOMIC DEVELOPMENT. AZOURS GREATEST WORRY IS IMPLEMENTATION, GIVEN THE LEBANESE POLITICAL SITUATION, ALTHOUGH HE STRESSED THE PLAN'S ELEMENTS CAN BE TRACED BACK TO POSITIONS SUPPORTED BY ALL THE MAJOR POLITICAL PARTIES. LACK OF A PRESIDENTIAL SIGNATURE POSES NO ROADBLOCK, SINCE UNDER LEBANESE LAW THE PLAN WILL BECOME EFFECTIVE IF THE PRESIDENT FAILS TO SIGN AFTER A CERTAIN PERIOD OF TIME. THE GOL IS EVEN MAKING PROGRESS WITH SOME TECHNICAL LAWS IN PARLIAMENT, ALTHOUGH THE GENERAL NON-FUNCTIONING OF THE PARLIAMENT LIMITS IMPLEMENTATION. ¶8. (SBU) LEBANESE CENTRAL BANK GOVERNOR RIAD SALAMEH ASSURED THE USDEL THAT HE IS COMMITTED TO THE REFORM PROGRAM, BUT LEBANON FACES A POLITICAL FIGHT. THE BIGGEST RISK IS DELAY, WHICH LEADS TO MARKET NERVOUSNESS, HIGHER INTEREST RATES, AND A LARGER BALANCE OF PAYMENTS DEFICIT. GIVEN THE SIZEABLE DEBT SERVICING REQUIREMENTS FALLING DUE THIS YEAR, THE GOL NEEDS TO GET ASSISTANCE UPFRONT. ¶9. (SBU) AZOUR SAID THE OPPOSITION'S MAIN CRITICISM IS THAT ECONOMIC REFORMS ARE BEING IMPOSED ON LEBANON. U/S ADAMS ASSURED AZOUR THE US WOULD GET THE MESSAGE OUT THAT THE PROGRAM IS "HOMEGROWN." AZOUR MENTIONED THAT THE GOL HAS NOW DEVELOPED A DOMESTIC PUBLIC RELATIONS CAMPAIGN FOR THE ECONOMIC PROGRAM. HE DOES NOT SEE HOW DEMOCRACY CAN BE STABILIZED WITHOUT AN ECONOMIC RECOVERY. HE PRESSED FOR DISBURSEMENTS THAT ARE FRONT-LOADED, WITHOUT CONDITIONS, AND WELL IN EXCESS OF PARIS II PLEDGES. HE ASKED FOR USG HELP TO GAIN G7 SUPPORT, AND TO HAVE THE IFIS INCREASE THEIR ASSISTANCE ENVELOPES. HE ALSO ASKED FOR USG HELP IN DECIDING BETWEEN AN EPCA AND A STAFF MONITORED PROGRAM (SMP) WITH THE IMF. ALTHOUGH THE DANGER OF OVERLY HIGH EXPECTATIONS IS REAL, IT IS NO SECRET THAT THE GOL NEEDS BETWEEN USD 8-10 BILLION. ¶10. (SBU) SALAMEH INTERJECTED WITH A NUANCED VIEW THAT THREE APPROACHES ARE NEEDED OVER THE NEXT FIVE YEARS - FIRST A LARGE UPFRONT DONATION IN 2007, THEN FUND HELP TO IMPLEMENT THE REFORM PROGRAM, AND FINALLY WITH THE BENEFIT OF TIME, A STAND-BY ARRANGEMENT. HE FAVORS AN SMP OVER AN EPCA SINCE AN EPCA USUALLY ONLY PERMITS DIPPING INTO A SMALL PORTION OF THE IMF QUOTA. ¶11. (SBU) THE USDEL PRESSED AZOUR TO MAKE USG ASSISTANCE EASIER BY REMOVING IMPEDIMENTS TO A SUCCESSFUL PARIS III OUTCOME, SUCH AS BY REACHING AGREEMENT QUICKLY WITH THE IMF, AND REACHING OUT TO POTENTIAL DONORS. U/S ADAMS STRESSED THAT AGREEMENT ON AN IMF PROGRAM WOULD ENCOURAGE G-7 DONORS AS WELL AS THE GULF STATES. CORE GROUP: LEBANON NEEDS TONS OF CASH, FAST -------------- ¶12. (U) AT A CORE GROUP MEETING ON JANUARY 10, LEBANESE FINMIN AZOUR SPOKE OF THE USD 6 BILLION COST OF THE WAR, THE PROPOSED ECONOMIC REFORM PROGRAM, AND THE NEED FOR INTERNATIONAL SUPPORT FOR THE EXPECTED USD 4.5 BILLION IN IMMEDIATE FINANCING NEEDS, AND USD 87 BILLION OVER THE NEXT FIVE YEARS. LEBANESE ECONOMIC MINISTER SAMI HADDAD PROVIDED DETAILS OF THE REFORM PACKAGE, STATING THE OBJECTIVE IS TO REACH 4-5% GDP GROWTH RATES. LEBANESE CENTRAL BANK GOVERNOR SALAMEH TOUCHED ON THE ROLE OF THE BANK IN MAINTAINING CONFIDENCE AND PARTICIPATING IN THE REFORM PROGRAM. AZOUR CONCLUDED BY ARGUING THAT INTERNATIONAL SUPPORT IS LIKELY TO UNLOCK LEVELS OF PRIVATE SECTOR SUPPORT THAT WOULD FAR OUTSTRIP DONOR GRANT LEVELS, PUTTING LEBANON ON A VIRTUOUS ECONOMIC DEVELOPMENT PATH. ¶13. (SBU) THE IMF REPRESENTATIVE STATED THE FUND HAS BEEN WORKING CLOSELY WITH THE GOL, ESPECIALLY ON FISCAL ADJUSTMENT. THE REFORM PROGRAM IS AMBITIOUS, BUT COMMENSURATE WITH THE SIZE OF THE IMBALANCES. THE FUND HAS PREPARED AN INITIAL DEBT SUSTAINABILITY ANALYSIS, AND USING THE ARBITRARY FIGURE OF USD 9 BILLION IN GRANT ASSISTANCE, CONCLUDED LEBANON WOULD BE ABLE TO SOLVE ITS DEBT PROBLEM. THE FUND IS STILL DISCUSSING INTERNALLY WHAT OPTIONS EXIST FOR A PROGRAM, AND EXPECTS A DECISION IN THE NEXT FEW DAYS. IN ANY EVENT, DONOR SUPPORT SHOULD BE STRUCTURED IN A WAY THAT MAINTAINS INCENTIVES FOR LEBANON TO KEEP ON THE REFORM PATH. ¶14. (U) THE UN REPRESENTATIVE ANNOUNCED THAT UN SYG BAN KI-MOON WOULD ATTEND THE JANUARY 25 MEETING, AND URGED DONORS TO FOCUS ON THE MOST DISADVANTAGED BY THE WAR. THE EUROPEAN COMMISSION REPRESENTATIVE ARGUED AGAINST EXCESSIVE UPFRONT REFORM MEASURES, EXCEPT FOR REMOVING ANY IMPEDIMENTS TO THE PRIVATE SECTOR, AND EXPRESSED HOPE THAT EU MEMBER STATES WOULD BE GENEROUS. THE EUROPEAN UNION WILL BE REPRESENTED BY JOSE BAROSSO, PRESIDENT OF THE EUROPEAN COMMISSION; BENITA FERRERO-WALDNER, EUROPEAN EXTERNAL RELATIONS COMMISSIONER; AND JAVIER SOLANA, SECRETARY GENERAL OF THE EU COUNCIL AND HIGH REPRESENTATIVE FOR EU COMMON FOREIGN POLICY. THE WORLD BANK DELEGATION WILL BE HEADED BY PRESIDENT PAUL WOLFOWITZ. ¶15. (U) IN A TOUR DE TABLE, PARTICIPATING DELEGATIONS REACTED TO THE GOL PRESENTATION AND INDICATED THEIR GOVERNMENT'S LIKELY LEVEL OF REPRESENTATION AT THE JANUARY 25 CONFERENCE. ALL EXPRESSED APPRECIATION FOR THE AMBITIOUS REFORM PROGRAM TO WHICH THE GOL HAD COMMITTED. SOME HAD UPDATES ON THE STATUS OF STOCKHOLM PLEDGES, BUT THERE WERE FEW SPECIFICS ON PLANS FOR THE JANUARY 25 CONFERENCE (WITH A FEW EXCEPTIONS, NOTED BELOW). ¶16. (SBU) IN TWO SEPARATE INTERVENTIONS IN THE MORNING AND IN THE AFTERNOON, U/S ADAMS AND PDAS DIBBLE CONGRATULATED THE GOL FOR PASSING AN AMBITIOUS AND SERIOUS REFORM PROGRAM. THEY ANNOUNCED THAT AS A DEMONSTRATION OF US SUPPORT FOR LEBANON, SECRETARY RICE WOULD LEAD THE (LARGISH) INTERAGENCY USG SIPDIS DELEGATION. THEY URGED DONORS TO DEMONSTRATE SUPPORT TO LEBANON WITH SUBSTANTIAL CONTRIBUTIONS, WITH ADAMS EXHORTING THE GROUP TO "GIVE UNTIL IT HURTS". THEY STRESSED THE IMPORTANCE OF AN IMF PROGRAM TO ENSURE A SUSTAINED REFORM EFFORT AND TO LEND A CRITICAL SEAL OF APPROVAL TO LEBANON'S REFORM EFFORTS, BUT NOTED IT WOULD BE UP TO THE GOL TO SOLICIT THE PROGRAM. ¶17. (SBU) BELGIUM AND LUXEMBOURG INDICATED THEY WOULD BE REPRESENTED AT THE LEVEL OF PRIME MINISTER. THE FOLLOWING DELEGATIONS EXPECTED REPRESENTATION AT THE LEVEL OF FOREIGN MINISTER: GERMANY (INCLUDING IN ITS ROLE OF THE EU PRESIDENCY; IT HOPES TO GIVE MORE THAN THE 31 MILLION EUROS PLEDGED AT STOCKHOLM BUT THE LEVEL OF SUPPORT WILL DEPEND ON REFORM IMPLEMENTATION),NETHERLANDS, NORWAY (THE DEVELOPMENT MINISTER WILL ALSO ATTEND, NORWAY WILL HAVE A "SUBSTANTIAL" PLEDGE); SWEDEN (WILL ALSO BE REPRESENTED BY THE MINISTER FOR INTERNATIONAL ASSISTANCE); ITALY (FOREIGN MINISTER PROBABLE, THE ITALIANS WOULD "DO THEIR BEST" AND WERE LOOKING AT HOW TO DO BUDGET SUPPORT OR SOFT LOANS); GREECE (LIKELY CONTINUED FOCUS ON PROJECT-BASED ASSISTANCE IN AREAS SUCH AS RENEWABLE ENERGY); THE NETHERLANDS (LIKELY); FINLAND; SPAIN; MALAYSIA; AND CYPRUS. SAUDI ARABIA WILL BE REPRESENTED BY BOTH ITS FOREIGN AND FINANCE MINISTERS. THE SAUDI REPRESENTATIVE EMPHASIZED THE SUPPORT THE KINGDOM HAS ALREADY PROVIDED AND SAID IMF ENGAGEMENT WOULD BE HELPFUL GOING FORWARD. ¶18. (SBU) THE FOLLOWING DELEGATIONS EXPECTED REPRESENTATION AT THE LEVEL OF FINANCE MINISTER: EGYPT; KUWAIT (TO BE JOINED BY DIRECTOR GENERAL OF THE KUWAIT FUND, NO DETAILS ON LIKELY PLEDGE BUT WOULD WORK CLOSELY WITH COUNCIL FOR DEVELOPMENT AND RECONSTRUCTION TO IDENTIFY APPROPRIATE PROJECTS); AND JORDAN. ¶19. (SBU) THE UK WILL BE REPRESENTED BY MINISTER OF STATE HOWELLS. (THE UK REP NOTED THAT LEGISLATIVE RESTRICTIONS MADE PROVISION OF SUBSTANTIAL ASSISTANCE IN LEBANON DIFFICULT, BUT PROMISED TO TAKE HOME CORE GROUP'S MESSAGE OF IMPORTANCE OF DOING AS MUCH AS POSSIBLE; HE TOLD US PRIVATELY THAT THE UK MAY HAVE TO RETHINK THE LEVEL OF PARTICIPATION, GIVEN THE LEVEL OF OTHER COUNTRIES' PARTICIPATION.) QATAR, JAPAN (LIKELY TO PROVIDE SUPPORT FOR DE-MINING OPERATIONS AND TECHNICAL ASSISTANCE),UAE, CANADA (EMPHASIZED IMPORTANCE OF AN IMF PROGRAM),BRAZIL AND AUSTRIA WOULD ANNOUNCE REPRESENTATION AT A LATER DATE. THE CHINESE DELEGATION WILL BE LED BY THE SPECIAL ENVOY FOR THE MIDDLE EAST; AUSTRALIA BY ITS AMBASSADOR TO FRANCE. ¶20. (SBU) IN HIS SUMMARY, CONFERENCE ORGANIZER JEAN-PIERRE JOUYET REMARKED THAT ALL DELEGATIONS HAD EXPRESSED STRONG SUPPORT FOR THE REFORM PROGRAM DESCRIBED BY THE GOL. THE IMF REP HAD ALSO PRAISED THE QUALITY OF THE PROGRAM AND HIGHLIGHTED THE IMPORTANT ROLE OF THE INTERNATIONAL COMMUNITY'S ASSISTANCE TO ITS SUCCESS, JOUYET NOTED. IT WAS NOW INCUMBENT ON THE GOL TO TRANSFORM THE PROGRAM INTO A NATIONAL AGENDA AND FIND PRACTICAL STEPS FOR MOVING IT FORWARD FOR THE BENEFIT OF THE LEBANESE PEOPLE. IDENTIFYING APPROPRIATE SEQUENCING FOR IMPLEMENTATION AND PROGRAMMING IS A CRITICAL NEXT STEP. ¶21. (U) THIS CABLE WAS CLEARED BY THE DELEGATION AFTER RETURNING TO WASHINGTON. PLEASE VISIT PARIS' CLASSIFIED WEBSITE AT: HTTP://WWW.STATE.SGOV.GOV/P/EUR/PARIS/INDEX.C FM STAPLETON #