LEBANON: FINANCE MINISTER CHATAH: NATIONAL UNITY

UNCLAS SECTION 01 OF 02 BEIRUT 000325 SENSITIVE SIPDIS STATE FOR IFD/ODF R. DEMARCELLUS NEA/ELA K. ALLEN STATE PASS USTR FRANCESCKI STATE PASS USAID FOR BEVER/LAUDATO/SCOTT TREASURY FOR PARODI/BLEIWEISS/CORREA USDOC FOR 4520/ITA/MAC/ONE NSC FOR SHAPIRO, MCDERMOTT E.O. 12958: N/A TAGS: ECON EFIN PREL PGOV LE SUBJECT: LEBANON: FINANCE MINISTER CHATAH: NATIONAL UNITY GOVERNMENT BAD MODEL FOR REFORM REF: A. BEIRUT 321 ¶B. BEIRUT 272 SUMMARY -------------- ¶1. (SBU) In various public presentations in recent days, Finance Minister Mohammad Chatah has been blunt about his frustration with the GOL's progress on implementing structural reforms. At a Paris III donor meeting March 18, Chatah said the national unity government has proven an ineffective model, as even the smallest decisions are politicized. The resulting government paralysis has held back the disbursement of nearly $500 million in Paris III pledges that could have been invested across the Lebanese economy, particularly in the electricity sector, he complained. ¶2. (U) Chatah highlighted the IMF's positive feedback on GOL fiscal management in 2008, but expressed concern about the GOL's fnancing needs and ability to maintain a stable dbt/GDP ratio in 2009, given the global financial crisis and domestic political and security uncertainties. To counter these risks, the Finance Ministry has adopted a conservative pre-funding approach to spending, he noted, and just completed a debt exchange of $2.3 billion. Chatah said investors' interest in Lebanese sovereign bonds is a sign of confidence in Lebanon's economy. End summary. UNITY GOVERNMENT BAD FOR REFORM -------------- ¶3. (U) On March 18, the Ambassador, accompanied by EconOff and Econ Specialist, attended the GOL's sixth Paris III donor briefing. In his presentation, Finance Minister Chatah expressed his personal opinion that the current national unity government has been ineffective in decision-making and moving forward on economic and social reforms. Because the government includes all political factions, he said, it lacked the will to implement the policies and targets spelled out in its Ministerial Statement at the time of government formation, including power sector reform and telecom privatization. ¶4. (U) Chatah noted that the GOL still has not been able to pass the 2009 budget law, though he expected a compromise budget to pass cabinet soon, "in days, not in months." He pointed out that the government has done nothing to increase electricity generation, one of the most pressing infrastructure problems in the country, though it did complete a draft master plan. He said a new electricity tariff structure, meant to lower GOL subsidy payments and rationalize consumption, became politicized in this election year, and would be impossible to pass. "Even the smallest decision is politicized in this government," he said. ¶5. (SBU) Chatah called the national unity government "a bad experience," and hoped political actors would take that into consideration when the next cabinet is formed following the June 7 parliamentary elections. He said he felt strongly that whichever coalition wins the majority should form a government, with the opposition expressing its views in parliament, as in western parliamentary systems. (Note: Chatah also spoke out publicly about his dissatisfaction with the government in an interview published in the March issue of Lebanon's most important business publication, Lebanon Opportunities, as well as at a March 18 luncheon of prominent businesspeople. End note.) LACK OF REFORM COSTS MONEY HURTS INVESTMENT -------------- ¶6. (U) Chatah said the delay in reforms and in passage of legislation has held back disbursement of Paris III pledges. He noted that $490 million in additional Paris III money awaits disbursement that is conditional on reform implementation, mostly in the telecom, power, and social sectors. (Note: This includes the remaining $75 million in budgetary support pledged by the USG, which is linked to the privatization of the cellular network. End note.) He pointed out that the lack of infrastructure reform, particularly in the power and telecom sectors, as well as uncertainty about the strength of the central state and its legal system, have constrained BEIRUT 00000325 002 OF 002 Lebanon's growth potential following the financial crisis, when Lebanon's strong financial sector should be attracting investment money relocating from the Gulf. GOOD FISCAL MANAGEMENT, BUT PRE-ELECTION POLITICS THREATENS FISCAL POSITION -------------- ¶7. (U) Chatah reiterated most of the points made by a recent IMF mission about Lebanon's positive economic performance in 2008, and the GOL's fiscal and monetary management (Ref B). He noted that GOL and central bank policies kept the economy immune from the pressures of the global financial crisis in 2008. He also highlighted some reform actions taken by the GOL, such as setting a gasoline excise tax and uncapping the price of gasoline (one of the USG and EPCA benchmarks),submitting the global income tax law to the cabinet, and the completion of the draft electricity generation master plan, which should be sent to the cabinet soon, he said. ¶8. (SBU) Chatah noted that government fiscal management put the public debt on a more sustainable path, decreasing the debt to GDP ratio to 160% from 180% in 2006, despite an increase in public debt. (Note: Some economists argue that the improvement is partially due to an inflated 8.5% growth estimate for 2008. End note.) Nonetheless, Chatah warned that recent pre-election parliamentary proposals for lifting the gas excise tax and raising wages for teachers, if passed, would undermine any improvement in the fiscal situation. ¶9. (SBU) Noting that currently significant GOL spending happens off-budget, Chatah said the MOF recently signed a $4 million grant with the World Bank for a two-year project to reform fiscal administration, budget preparation, liquidity and debt management, and donor coordination. This reform measure is meant to create a more transparent framework for management of state resources and will help decision-makers in cabinet and parliament take appropriate policies. (Comment: Chatah advisor Chris de Clerq told EconOff that Chatah views this project as a way for him to leave a stamp on the budget process, hopefully imposing some transparency and accountability throughout the government on budget matters. End comment.) BORROWING TO FUND CONTINUING OPERATIONS -------------- ¶10. (U) Given Lebanon's extensive financing needs in 2009, Chatah said the GOL has followed a cautionary funding approach, pre-funding its spending by issuing more debt in local currency than needed, thus absorbing excess liquidity in Lebanese pounds held by banks due to a recent de-dollarization of deposits. ¶11. (U) Chatah was clearly proud of the GOL's recent completion of a $2.3 billion Eurobond exchange. He marveled that 83% of the holders of GOL-issued Eurobonds maturing in 2009 exchanged their bonds for longer-term maturities (2012 and 2017),while an additional $450 million-dollar issue was two times oversubscribed. This demand for Lebanese sovereign bonds reflects investors' confidence in Lebanon's fiscal management, he said. COMMENT -------------- ¶12. (SBU) With the June 7 parliamentary elections only eleven weeks away, Chatah's comment that even the smallest government decisions are being politicized is not surprising. Parliamentarians have presented 37 draft laws in an effort to show their constituencies they are doing their jobs. We believe, however, that Chatah, who is not running for office, sincerely believes the national unity government model is ineffective, and is not simply trying to spare the Siniora government from voters' wrath for lack of progress. End comment. SISON