LEBANON: CHATAH DISCUSSES BUDGET, ECONOMIC REFORM WITH

UNCLAS SECTION 01 OF 03 BEIRUT 001627 SENSITIVE SIPDIS STATE FOR NEA/ELA, EEB/IFD/ODF, EEB/CIP/BA STATE PASS USTR TREASURY FOR PARODI/BLEIWEISS/AHERN USDOC FOR 4520/ITA/MAC/ONE NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT STATE PASS USAID FOR BEVER/LAUDATO/SCOTT E.O. 12958: N/A TAGS: ECON EFIN EAID PGOV LE SUBJECT: LEBANON: CHATAH DISCUSSES BUDGET, ECONOMIC REFORM WITH TREASURY DAS MENDELSOHN SUMMARY -------------- ¶1. (SBU) In a November 11 meeting with Treasury Deputy Assistant Secretary for Intelligence and Analysis Howard Mendelsohn, Finance Minister Mohammad Chatah said that despite differences between the U.S. and Lebanese definitions of terrorism, there is ample room for terror finance and anti-money laundering cooperation between the two countries. He said his ministry was focused on the passage of the 2009 budget, as well as the rollover of USD 14 billion of debt over the next fourteen months. Chatah reiterated his previous statements that Lebanon's economy and banking sector have so far weathered the international financial crisis well, but said the largest threat to the Lebanese economy is a potential slowdown in the Gulf. ¶2. (SBU) Chatah noted that the IMF was expected to approve a second Emergency Post-Conflict Assistance (EPCA) program for Lebanon on November 14. He said the GOL had begun collecting its gas excise tax as a result of falling oil prices, and though the tax rate is currently not as high as the one called for in Lebanon's first EPCA, it still showed the GOL's will to reform in the face of political pressure. He said he expected electricity tariff reform to be presented and passed by the end of the year. He claimed there was strong political will across the political spectrum to complete mobile telecom privatization, but that current market and political conditions might delay the actual sale until after the 2009 parliamentary elections. End summary. COMMON OBJECTIVES IN TERROR FINANCE -------------- ¶3. (SBU) Visiting Treasury DAS Mendelsohn and the Ambassador called on Finance Minister Chatah in his ministry office November 11. Chatah advisors Huda Saigh, and Nadine Abukhaled, as well as Treasury analyst Kristofer Doucette, Regional Treasury Attach Alex Severens, and EconOff also attended the meeting. DAS Mendelsohn described the role of his office within the Treasury Department and its priorities in terms of terror finance, particularly in Lebanon. Chatah noted that terror finance is a sensitive area in Lebanon (as well as in Palestine) because of what he called its "greyness," i.e. lack of agreement with the U.S. on what constitutes a terrorist organization. He noted that Hizballah is part of the national unity government in Lebanon, and has a significant number of seats in parliament, which obviously excludes GOL cooperation with the U.S. on issues relating to the party. ¶4. (SBU) Nonetheless, he said, the USG and GOL share many common objectives. He mentioned that the Special Investigation Commission (SIC),the autonomous financial intelligence unit under the auspices of the central bank, had been set up after September 11, 2001 to monitor banks and investigate activity related to terror finance and money laundering. He said that while the Finance Ministry did not usually have direct involvement in such cases, it was always ready to be helpful in any way possible. DOMESTIC FINANCIAL ISSUES -------------- ¶5. (SBU) Chatah stated that while the U.S. was preoccupied with the current financial crisis, the GOL was mostly focused on passing a budget for 2009 and ensuring that it is financed. He said he was currently reviewing the budgets for the various ministries, and expected the budget to pass at the end of the week of November 17. He noted that the Lebanese cabinet had already approved a new EPCA, and that the IMF board would meet in Washington November 14 to approve it. He said the Lebanese banking sector, certainly of particular interest to DAS Mendelsohn, was of huge importance to the GOL, since the banks are a substantial source of funding to the government. Chatah said that USD 14 billion in government loans will come to maturity over the next fourteen months, and the GOL is counting on banks to accommodate a rollover. ¶6. (SBU) In response to the Ambassador's inquiry about the budget for the Lebanese Army and the Internal Security Forces, Chatah said security took up a large percentage of the budget, and there had been concerns in the past that the government was not getting "bang for the buck" in those areas. That said, he insisted there was consensus in the cabinet about the importance of support to the security services, and though Interior Minister Ziyad Baroud had not given Chatah estimates for the cost of a new border security BEIRUT 00001627 002 OF 003 program Chatah said he had included reserves in the budge to cover it. (Chatah also noted that Baroud had not yet forwarded the ministry's 2009 parliamentary elections budget to the cabinet.) SO FAR IMMUNE FROM THE CRISIS, BUT FEAR ABOUT IMPACT ON THE GULF -------------- ¶7. (SBU) Chatah reiterated what he has said numerous times both in public and in private: that the international financial crisis had so far not had a significant impact on Lebanon. He said any effect might be felt later, if the crisis brought about a serious slowdown in the Gulf region. ¶8. (SBU) Chatah stated that the Gulf is Lebanon's "safety valve," with remittances and investment from the region cushioning political and economic crisis in Lebanon. He said there are 250,000 Lebanese working in the Gulf, which represents one-fourth of the workforce in Lebanon itself. Given that these expatriate workers earn four to five times what they would in Lebanon, Chatah said the "Lebanese economy in the Gulf" is actually larger than domestic GDP. Because of links between the two, any slowdown in the Gulf would be damaging to Lebanon itself. While Chatah worried that a liquidity squeeze in the Gulf might hurt investment, he believed the flight from financial to real assets might actually cause some Gulf investors to increase investments in Lebanon, so any net effect would be small. ¶9. (SBU) Chatah also stated that bank assets in Lebanon have been increasing at a rate of 12-15 percent in recent years, even through various political crises and a war. Moreover, they have continued to increase during the financial crisis, he said, adding that a liquidity squeeze in Lebanon therefore appeared unlikely. STATUS OF CASH TRANSFER CONDITIONS -------------- ¶10. (SBU) The Ambassador and EconOff asked Chatah about the status of the two remaining conditions for the disbursement of the USG's Paris III cash transfer pledge. Econoff noted that Embassy contacts claimed the electricity tariff restructuring was on track for passage by the end of the year, although they were increasingly pessimistic on mobile telecom privatization. EconOff explained that Washington was considering using the cash transfer funds for other purposes, and therefore would be particularly interested in any change of timing on the telecom license sale. ¶11. (SBU) Chatah pointed out that even though the USG abandoned the cash transfer condition of increasing the gasoline excise tax, the GOL is now once again collecting the tax as oil prices fall. He admitted that the tax rate currently is not at the 300 Lebanese pounds per liter that was mandated by the original condition, but noted that the GOL was insistent on collecting some tax now, in the face of political pressure. This, he said, demonstrates the GOL's commitment to reform in the sector. ¶12. (SBU) Chatah said Energy Minister Alain Tabourian had made reform of the electricity tariff one of the priorities of his mandate as minister, and was due to present a plan shortly. Chatah believed the new tariff structure would be approved by the end of the year. ¶13. (SBU) The minister noted that telecom privatization was mentioned in the ministerial statement, and has support across the political spectrum in the cabinet. He said the sale would take place, with the only question about timing and market conditions. He observed that parliament must pass a law authorizing the sale of the licenses, and most other donors had put passage of that law as a condition for any contribution as a sincere step by the GOL toward reform. ¶14. (SBU) Chatah said the government wanted to do the sale before the elections, but market conditions have deteriorated to the point where if the sale took place, the government could be accused of cheating the people out of getting fair value for the mobile licenses. "No one says it shouldn't happen," he said, "It is just a question of timing." He said he expected the sale would take place either in the spring, as originally planned, or in the fall, after the spring parliamentary elections. ¶15. (SBU) Minister Chatah reiterated his wish to see the remaining BEIRUT 00001627 003 OF 003 cash transfer funds used to pay off high-interest Eurobonds held by the central bank, rather than World Bank loans. SISON