LEBANON: FINANCE MINISTER FOCUSED ON BUDGET

C O N F I D E N T I A L SECTION 01 OF 04 BEIRUT 001337

SIPDIS

DEPT FOR NEA/FO, NEA/ELA
ALSO FOR EEB/FO DSULLIVAN, EEB/ODF DEMARCELLUS
USUN FOR KHALILZAD/WOLFF/SCHEDLBAUER
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT
STATE PASS TO USAID FOR LAUDATO/BEVER/SCOTT

E.O. 12958: DECL: 09/12/2018
TAGS: ECON ELAB EFIN ENRG PGOV PREL SA EG LE
SUBJECT: LEBANON: FINANCE MINISTER FOCUSED ON BUDGET
SUPPORT, NOT KEEN ON CASH TRANSFER REPROGRAMMING

Classified By: Ambassador Michele J. Sison for reasons 1.4
(b) and (d).

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


1. (C) Finance Minister Mohamad Chatah told USAID Deputy
Assistant Administrator James Bever and the Ambassador that
budget support is his number one priority. He discussed the
pros and cons of the cabinet's recent approval of a higher
minimum wage, and said he planned to ask the IMF for a new
Emergency Post-Conflict Assistance (EPCA) agreement during
the upcoming World Bank/IMF meetings in Washington. He also
outlined the Prime Minister's plans to reinvigorate
development projects left dormant during the long political
stalemate in Lebanon.


2. (C) Chatah said that to replace the gas excise tax
condition for disbursement of a tranche of the USG cash
transfer pledged at Paris III, he would like to see a
condition related to structural reforms in the telecom, IT,
or power sectors, rather than one based strictly on budgetary
criteria. He said Telecom Minister Bassil wants to privatize
mobile telecoms early, well in advance of the spring 2009
parliamentary elections. He described plans to restructure
electricity tariffs to bring in more revenues and rationalize
consumption, and highlighted the importance for Lebanon of
securing electricity, oil, and gas supplies from its
neighbors. While he did not reject the idea of reprogramming
a portion of the cash transfer for assistance projects ahead
of the 2009 elections, after two months as Finance Minister,
Chatah was not particularly keen on the idea either. End
summary.

BUDGET PROBLEMS
--------------


3. (C) The Ambassador, USAID Deputy Assistant Administrator
James Bever, Acting AID Director, and EconOff called on
Finance Minister Mohamad Chatah in his ministry office
September 10. Chatah made it clear that budget support was
his top priority, though he was pessimistic about being able
to make any improvements over the next eight months in
Lebanon's budget or debt position. He said that if Lebanon's
GDP growth were running at six to seven percent per year
instead of four to five percent as it is now, he would be
able to maintain the current debt to GDP ratio, but in the
near term, he expected that ratio to worsen. Referring to a
Saudi pledge of one billion dollars in development loans for
Lebanon, Chatah said he wanted to ask that at least half of
that go into budget support, "if the Saudis ever deliver it".
(Note: This is a separate issue from the never-delivered
Saudi promise to provide a $1 billion deposit at Lebanon's
Central Bank. End note.)


4. (SBU) Chatah noted that the new minimum wage increase
approved by the Council of Ministers September 9 would worsen
the GOL's budget situation, costing approximately 500 million
dollars annually. Nonetheless, he said, he had convinced the
cabinet to approve four measures that would help compensate
for these costs, as part of the minimum wage package: 1) a
tax increase from 5 percent to 7 percent on interest income,
2) elimination of part of a VAT exemption on schools and
hospitals, 3) collection of fees and taxes on illegal beach
resorts and seafront developments, and 4) a tax of two
percent on corporations' revaluation of assets. Revenues
from these measures would cover about half the cost of the
new minimum wage, said Chatah, though there would still be a
significant increase in the deficit.


5. (C) In addition to the fiscal challenges of the minimum
wage, Chatah said he had had a hard time defending the
increase to Lebanon's industrialists, who, as a result of the
cabinet decision, will have to increase their workers'
salaries as well. Chatah admitted that he sympathized with
them, especially given the market conditions in Lebanon,
particularly the rising cost of electricity, which is already
several times more expensive in Lebanon than it is in other
countries in the region. "Companies are picking up everyday

BEIRUT 00001337 002 OF 004


and moving to the Gulf, where they have cheaper energy and
cheaper labor and can export to Lebanon," he said. "We are
losing jobs." Nonetheless, he said, there had been no
minimum wage adjustment in Lebanon since 1996, so this
increase was due.


6. (SBU) In his continued push to shore up finances, Chatah
said he planned to request another EPCA agreement from the
IMF during his trip to Washington for the annual World
Bank/IMF meetings in October. Lebanon's first EPCA, agreed
after the 2006 Israel-Hizballah war, expired at the end of

2007.

"IS THIS THE TIME TO THINK BIG?"
--------------


7. (SBU) Chatah said that Prime Minister Siniora had decided
to lead a serious effort to start a new economic push in
Lebanon. Chatah said Siniora wants to move forward on two
development projects in Beirut that had been dormant since
the 2006 war, and that he hoped these would attract big
investment from the Gulf countries. Siniora also wants to
push ahead on encouraging private investment in the Tripoli
economic zone and upgrading the airport, and he has plans to
make progress on an IT/media sector project in the south.


8. (SBU) With such a short time before the 2009
parliamentary elections, "is this the time to think big?"
asked Chatah rhetorically. Even if it is not, he said, that
is the way the PM thinks. According to Chatah, Siniora
thinks some of these projects can attract big investment from
the Gulf states, and that they could be convinced to divert
some of their investment into social projects, particularly
those in line with Paris III commitments, in other parts of
Lebanon, so ensure that everyone benefits.

USG CASH TRANSFER AND ELECTRICITY SECTOR REFORM
-------------- --


9. (C) The Ambassador brought up the USG cash transfer
support for payment of Lebanese debt, agreed upon at the
Paris III conference in 2007. She asked what the Minister's
thoughts were on what would be an appropriate replacement for
the adjustment of gas excise tax (a politically infeasible
option in the current economic and political climate) as a
condition for the release of one of the two tranches of the
transfer yet to be disbursed. While reiterating his focus on
budget support, Chatah stressed that he did not want a
condition attached to budget or debt targets, given the
difficulties he had just laid out in making progress on that
front in the next year. He said he wanted to see
conditionality attached to structural reforms, perhaps in the
telecom, IT, or power sector.


10. (C) Chatah said that Telecom Minister Gebran Bassil was
anxious to carry out the telecom privatization as soon as
possible, but certainly well in advance of the parliamentary
elections. Bassil wants the political fallout of
privatization to be cleared up before election season.


11. (SBU) In terms of the power sector, Minister Chatah
pointed out that electricity is the single largest drain on
the national budget, because of a combination of production
inefficiencies and subsidies. He cited Minister of Energy
Alain Tabourian's claim that Electricite du Liban (EDL),
Lebanon's state power utility, is running a two billion
dollar annual deficit. Chatah said Tabourian had not been
taking into account the effect of upcoming reforms on that
number, and Chatah believed they had the potential to improve
the revenue numbers.


12. (SBU) Chatah said he and Tabourian had discussed putting
in place a new tariff structure at EDL that would charge
higher rates for higher usage. Tabourian had believed that a
new meter system would be necessary for implementation of the
new rate structure, but Chatah said he had found a way to
implement it now. He said that under the new plan, the 70
percent of Lebanese whose consumption fell under 500 kwh per
month would see no change in their monthly bill; their rate

BEIRUT 00001337 003 OF 004


would remain at the current subsidized rate. However, any
consumption above that quantity would result in the consumer
paying a higher tariff on the entirety of his or her
consumption, not merely the margin above 500 kwh. For the
biggest consumers, those using over 1000 kwh per month, the
subsidy would be eliminated entirely, said Chatah.


13. (SBU) There would certainly be resistance from
consumers, but Chatah hoped that a communication plan "so
that people understand" might lessen the blow of the higher
rates. In addition, the new rate structure would not apply
to industrialists, though it will apply to small business.

THE KEY IS ENERGY
--------------


14. (SBU) Chatah said that the immediate challenge for
Lebanon will be getting electricity and natural gas from
Egypt, and oil from Iraq. He said the Egyptians offered to
sell Lebanon electricity, but they still are trying to sell
it to Lebanon at a cost based on production using fuel oil,
instead of natural gas. This would result in Lebanon's
paying several times more than the Egyptians or Jordanians
pay for electricity.


15. (SBU) As for oil, Chatah said that during PM Siniora's
August trip to Baghdad, the Iraqis had agreed to supply
Lebanon with oil at the same subsidized price at which they
sell to Jordan (a subsidy of 22 dollars per barrel),but
while Jordan has oil refineries to process crude oil, Lebanon
does not. He said the Lebanese would need to find a
mechanism either to get Iraqi crude refined for them or swap
their crude for refined oil before they could start buying
from Iraq.


16. (SBU) Chatah said that PM Siniora had also worked with
the Iraqis on a cooperation agreement and on ways or
promoting private sector linkages. Chatah hoped that on PM's
next trip to Baghdad, he could bring private sector
representatives with him.

"ALL I CARE ABOUT IS BUDGET SUPPORT"
--------------


17. (C) Throughout the meeting, Deputy Assistant
Administrator Bever and the Ambassador probed Chatah about
potential projects that would be useful for Lebanon in the
coming months, perhaps in the areas of energy and water
infrastructure. Chatah came back time and again with his
number one priority: budget support. When discussing whether
it would be appropriate or beneficial for the USG to target
some of the cash transfer money (meant for budget support)
for anything else. Chatah shrugged, "All I care about is
budget support. If the Saudis come through with budget
support, then you can do what you like."


18. (C) The Ambassador asked Chatah why the Saudis so far
had not come through on their pledges for project loans and
central bank deposits. Chatah replied that there was always
a disconnect between the Saudis' political positions and
their financial and economic actions. "Which is strange,"
said Chatah, "because they are all the same people." He
suspected, however, that PM Siniora might have gone begging
to the Saudi royals a few too many times. When he was an
advisor to Siniora at the Grand Serail, he said, for a
certain period, Siniora would call or send a letter to the
Saudis every two or three days, asking for help on one thing
or the other. "I think that might have backfired," said
Chatah.

COMMENT
--------------


19. (C) Chatah mentioned two reforms that could potentially
be used as a replacement condition for the gas excise tax
adjustment. The first is the package of revenue-increasing
measures he cited as part of the minimum wage decision that
will act to offset losses from the wage increase. They show
a continued commitment to Paris III reform. Nonetheless,

BEIRUT 00001337 004 OF 004


they are already completed, which we suspect may make them
less palatable in Washington.


20. (C) Post recommends we move forward with the second
reform, electricity tariff reform as the replacement
condition, as a strong structural reform that will bring in
revenues, rationalize energy consumption, and hopefully
reduce losses as EDL. If Washington agencies agree with that
recommendation, however, we would like to confirm with Chatah
his agreement before proceeding further.

SISON