LEBANON: IMF SAYS GOL MET 2008 TARGETS BUT 2009 WILL BE

UNCLAS SECTION 01 OF 02 BEIRUT 000272 SENSITIVE SIPDIS STATE FOR NEA/ELA STATE PASS USTR FRANCESCKI STATE PASS USAID BEVER/LAUDATO/SCOTT TREASURY FOR PARODI/BLEIWEISS/CORREA USDOC FOR 4520/ITA/MAC/ONE NSC FOR MCDERMOTT CAIRO FOR FAS: MALDONADO E.O. 12958: N/A TAGS: ECON EFIN PREL PGOV LE SUBJECT: LEBANON: IMF SAYS GOL MET 2008 TARGETS BUT 2009 WILL BE DIFFICULT (ECONOMIC WEEK IN REVIEW, MARCH 2 - 8, 2009) CONTENTS -------------- -- IMF RESREP: GOL CAN DO MORE ON REFORM -- IMF SATISFIED WITH MACROECONOMIC PERFORMANCE -- IRRIGATION BIGGEST CHALLENGE FOR FARMERS -- AGRICULTURE ISSUES CLARIFIED IN WTO MEETING -- RECORD $3.5 BILLION BALANCE OF PAYMENTS IN 2008 -- FISCAL DEFICIT UP BY 14.7% IN 2008 -- FPM SEEKS NEW REAL ESTATE ACQUISITION LAW IMF RESIDENT REPRESENTATIVE: GOL CAN DO MORE ON REFORM -------------- ¶1. (SBU) On March 3, IMF Resident Rep Edward Gardner told EconOff the GOL could have implemented more reforms, even in the difficult political context, but instead used politics as an excuse for delay. "They constantly say the situation is too bad, but the reality is that it is always bad," he sighed. The GOL's economic policy has been short-term, and structural reforms are slow, he said. He also noted that the state budget is not an effective instrument to restrain spending, as a lot of spending occurs outside the budget and accountability is poor. He stressed that the GOL was "very good in crisis management," which is why Lebanon has not been affected by the global financial crisis. Gardner, who has worked on Lebanon for five years and was IMF's first Resident Representative beginning in February 2008, was clearly frustrated with the lack of reform progress in Lebanon, and will leave next week for a new assignment. IMF SATISFIED WITH MACROECONOMIC PERFORMANCE -------------- ¶2. (SBU) In his briefing to donor countries on March 3, Domenico Fanizza, head of the IMF mission preparing the Article IV report and the Emergency Post-Conflict Assistance (EPCA) II review, said the GOL met the macroeconomic objectives in 2008, and the mission was satisfied with the fiscal and monetary indicators. The GOL maintained a primary surplus, and its debt to GDP ratio improved, reaching 160% at the end of 2008 compared to 180% in 2006. (Note: The improvement in debt to GDP ratio is a result of a 2008 growth estimate of 8.5% by the official Central Administration of Statistics, a figure which donor country representatives assessed as ;too high. End note.) ¶3. (SBU) Meanwhile, Fanizza said 2009 will be a difficult year because of the global crisis, projecting growth of 3-4%, with a primary surplus close to zero due to substantial pre-election spending. The IMF mission also discussed contingency plans with the GOL to cope with domestic political developments, increased fiscal deficit, and the impact of the global crisis. Fanizza said GOL achievements in macroeconomic stability were noteworthy, despite the lack of progress in underlying reforms. Following June parliamentary elections, the Fund plans to discuss an IMF program with the new cabinet. The mission will publish its report in six weeks. IRRIGATION BIGGEST CHALLENGE FOR FARMERS -------------- ¶4. (SBU) On February 24, visiting Foreign Agricultural Service Attach Julio Maldonado and Econ staff met with Acting Director General of the Ministry of Agriculture (MOA) Samir Chami for an overview of the agricultural sector in Lebanon. Chami noted that agricultural production had suffered from high costs of production -- particularly in land and labor -- relative to neighboring countries, and a lack of proper irrigation systems, despite Lebanon's abundant water resources. ¶5. (SBU) Chami noted that the sector would benefit from the establishment of an agricultural bank, the law for which has been place since 1980, although it has not been implemented. Chami added that the MOA needed assistance in several other areas, including: establishment of a cooled storage facility in Beirut's international airport and a laboratory at the Beirut port to examine goods, BEIRUT 00000272 002 OF 002 assistance in complying with international exporting standards, and advice in seeking new markets for Lebanese products. AGRICULTURAL EXPORTS DECREASE -------------- ¶6. (U) According to the Investment Development Authority of Lebanon (IDAL),agricultural exports under its Export Plus Program (covering 98% of total agricultural exports) decreased by 5% to 446,778 tons in 2008, compared to a 27% increase in exports in 2007. The Export Plus program, launched in 2001, seeks to increase exports by subsidizing transportation of certain agricultural goods and supervising quality and compliance with international standards. Lebanon's main export destination under the Export Plus program was Syria, with 21% of total exports, followed by Saudi Arabia (20%), and Kuwait (15%). The main exported product was potatoes, followed by oranges, and apples. ¶7. (SBU) Acting Director General of the Ministry of Agriculture Samir Chami told us on March 5 that the GOL decided to gradually stop the Export Plus Program. Subsidies would decrease by 20% each year, so that in 2011, there would be no subsidies at all. Chami, who attended Lebanon's sixth WTO Working Party meeting in Geneva last week, said that Lebanon was able to clarify most agricultural-related questions, but was surprised at the U.S.'s insistence on the immediate end of Export Plus before Lebanon accedes into the WTO. RECORD BALANCE OF PAYMENTS IN 2008 -------------- ¶8. (U) According to the Central Bank of Lebanon (CBL),Lebanon's balance of payments (BOP) posted a record cumulative surplus of $3.5 billion in 2008, compared to a $2.04 billion surplus in 2007. This was mainly due to a historical rise in CBL net foreign assets of $7.28 billion, compared to a decrease of net foreign assets of banks and financial institutions of $3.8 billion. 2008 net capital inflows reached $16.3 billion (an increase of 48.3% from 2007), offsetting the $12.6 billion trade deficit and leaving a surplus balance of payments. FISCAL DEFICIT UP BY 14.7% IN 2008 -------------- ¶9. (U) According to the Ministry of Finance (MOF),Lebanon's fiscal deficit rose by 14.7% to $2.9 billion in 2008. The deficit represented 29.3% of total budget and Treasury expenditures, compared to 30.5% in 2007. GOL has exceeded spending through treasury advances and spending outside the budget. As a result, overall government expenditures rose by 19.2% in 2008, while total revenues increased by 21.2%. (Note: the GOL has not passed a budget for three consecutive years which should constrain spending. End note.) 10 (U) Meanwhile, debt servicing increased by 5.6% to $3.3 billion, or 44.9% of total expenditures and 33% of budgetary spending. Excluding debt servicing, the primary surplus reached $2.7 billion, compared to $1.97 billion in 2007. FPM SUPPORTS NEW REAL ESTATE ACQUISITION LAW -------------- ¶11. (U) On March 4, Gibran Bassil, Minister of Telecommunication and member of the Free Patriotic Movement (FPM),expressed concern about increased real estate acquisition by non-Lebanese, a result of the absence of proper implementation of existing legislation and a lack of transparency. Bassil discussed a new draft law -- submitted to parliament by his opposition party, the FPM -- to better regulate real estate acquisition by foreigners. He stressed FPM support of foreign investments in Lebanon, arguing that a fair and transparent legal framework would attract more investments. SISON