beirut march 10, 2006 preliminary draft a medium-term reform program for lebanon with international...

BEIRUT

March 10, 2006

PRELIMINARY DRAFT

A Medium-Term Reform Program for Lebanon with International Support

Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

Where Would Lebanon Be in 2010 With No Reforms?

If Lebanon undertakes no economic reforms, the economic situation will return to

Pre Paris II Crisis conditions: Pressure on the exchange rate

Weakened banking sector, due to increased exposure to sovereign risk

Pressure on the exchange rate

Weakened banking sector, due to increased exposure to sovereign risk

Debt Service alone will absorb 100% of total government revenues by 2010

Debt Service alone will absorb 100% of total government revenues by 2010

Fiscal Deficit will grow back to levels higher than 20% of GDP by 2010 (today's deficits level are lower than 10%, 8% in 2005), with an immediate jump to 11% starting this year

Fiscal Deficit will grow back to levels higher than 20% of GDP by 2010 (today's deficits level are lower than 10%, 8% in 2005), with an immediate jump to 11% starting this year

Gross Public Debt will skyrocket to 214% of GDP in 2010 from 174%GDP in 2005 (which today is considered the highest in the world)

Gross Public Debt will skyrocket to 214% of GDP in 2010 from 174%GDP in 2005 (which today is considered the highest in the world)

Starting this year, real growth will stagnate at 1% similar to 2005 level, leading to increased unemployment

Starting this year, real growth will stagnate at 1% similar to 2005 level, leading to increased unemployment

MonetaryMonetary

Debt ServiceDebt Service

Fiscal DeficitFiscal Deficit

Gross Public Debt

Gross Public Debt

Real growth rates

Real growth rates

11

44

55

66

22

With difficult financing conditions, interest rates will rise dramatically to reach, on average, 13% on LL & 11% on FX by 2008

With difficult financing conditions, interest rates will rise dramatically to reach, on average, 13% on LL & 11% on FX by 2008 Interest ratesInterest rates33

ACHIEVING GROWTH AND EXTENDING PROSPERITY OVERCOMING MACROECONOMIC VULNERABILITY

MacroeconomicPolicies – including debt

sustainability & fiscal consolidation

Macroeconomicpolicies – including debt sustainability

and fiscal consolidation

Economic competitiveness, built on

trade liberalization, investment promotion,

and privatization

Strengthening Social safety

net and improving

social services

Standards of living

Growth & Development

Social Safety Nets

Job creation

OBJECTIVES OF THE ECONOMIC PROGRAM OF LEBANON

Modernizing the economy and stimulating growth: Creating an environment conducive to growth and achieving real growth

rates of 4-6 % in MT

Creating employment while improving social indicators and social assistance to protect the poor:

Creating job opportunities for Lebanon’s youth

Improving social indicators & creating social safety nets

Achieving economic stabilization, to place Lebanon's large public debt on a downward path in order to eliminate a major source of vulnerability:

Reducing overall fiscal balance in the MT to less than 3% of GDP

Gradually increasing the primary surplus from 2 percent in 2005 to about 8% of GDP in 2010

Reducing debt / GDP ratio steadily over the medium and long term

Fiscal Policy, Governance and

Public sector reform

Fiscal Policy, Governance and

Public sector reform

22

GOVERNMENT REFORM PROGRAMECONOMIC REFORMS ACHIEVABLE IN MEDIUM TERM

Privatization and Market

Liberalization

Privatization and Market

Liberalization33Social ProgramSocial Program55

Economic Policy and Growth

Agenda

Economic Policy and Growth

Agenda11

PROMOTING ECONOMIC STABILITY

& GROWTH

Prudent Monetary Policy and Financial

Sector Reform

Prudent Monetary Policy and Financial

Sector Reform44

PILLARS OF THE ECONOMIC PROGRAM OF GOVERNMENT

Maintaining price stability, facilitating credit to the private sector, and maintaining a sound banking system

Improving the quality and expanding the scope of services, and reducing their cost. Increasing investment, spurring on economic growth. Expanding the participation of the general public in the ownership of the privatized companies

Improve social indicators, strengthen social safety nets to protect the most vulnerable segments of the population and improve the social returns from social expenditures

International financial assistance to complement domestic adjustment efforts

Growth-enhancing reforms, including developing financial markets and promoting good governance

Fiscal adjustment that is aiming to reduce deficit and public debt to a sustainable level

Economic PolicyEconomic Policy

Fiscal Consolidation

Fiscal Consolidation

Social sector reform

Social sector reform

PrivatizationPrivatization

Monetary policyMonetary policy

International Support

International Support

Legal and business

environment

Legal and business

environment

Tax & Customs modernization

Tax & Customs modernization

Support to growing sectors

Support to growing sectors

Accessing WTOAccessing WTO

Social Security and Pension

Reforms

Social Security and Pension

Reforms

Building a 21stCentury

Administration

Building a 21st Century

Administration

Capital Markets Reforms

Capital Markets Reforms

State Owned EnterprisesState Owned Enterprises

Small & Medium

Enterprises

& SmallMedium

Enterprises

ImplementingEU Association

Agreement

ImplementingEU Association

Agreement

Export Promotion Strategy

Export Promotion Strategy

GROWTH AGENDAGROWTH AGENDA

Dialogue with the

Private Sector

Dialogue withthe

Private Sector

GROWTH-ENHANCING REFORM AGENDA

Lowering minimum capital requirements & cost of registration of businesses – end-06

Reducing time it takes to have a business license, & the cost of opening and closing a business (promoting ease of both entry and exit for businesses)– end 08

Simplifying requirements in relation with nationality of shareholders, guarantee shares or an additional auditor for limited companies– end-06

Simplifying further the tax procedures & reducing the number of separate taxes and fees, including by adopting the Tax Procedures Code– 2006

Ratifying modern competition law and anti-dumping laws, which would increase competition and reduce prices, by early 2007

Ratifying the insurance draft law to regulate the sector, galvanize the stock market and attract new investors, by mid-2006

Implementing a Global Income Tax, by 2007-08

Expediting the clearance of imports, including by increasing further automation, and reducing the cost of export at the Port of Beirut (2006)

IMPROVING BUSINESS ENVIRONMENT

HELP THE PRIVATE SECTOR IN LEADING GROWTH

New consumer protection law - ratified

Anti-dumping, WTO compatible draft law - in Parliament

New competition law - in the process of finalization by GOL

Automation & revamping of Trade Registry & reduction of registration cost - work underway

Basket of E-Commerce draft laws - in Parliament

Improving Investment Climate Support for SMEs

SME Unit - already set up

SME Observatory - QI '06

Guarantee fund to facilitate credit access - already set up

Doubling ceiling of guaranteed loans, eliminating other guaranty required by the banks and extending it to start ups - QI '06

Facilitating regulation of non performing loans for SMEs

Subcontracting 4 incubators to private consortiums - '06

sherines

Explain ?

WTO

Lebanon now advancing towards membership in WTO

The 4th working group meeting has been held on March 2 & 3 in Geneva, to accelerate accession process

Lebanon is expected to accede to the WTO by the end of '06

Lebanese authorities are finalizing the legislative reform agenda for accession

EU-MED

Lebanon is now committed to the European Neighborhood Policy

The Association Agreement will inter fully into effect on April 1st 06 after its ratification of all EU members

A National Indicative Program (NIP) for 2005-2006 covering a series of bilateral activities between the EU and Lebanon signed in Nov 05

FOSTERING GROWTH THROUGH TRADE LIBERALIZATION

Improve Export

Conformity assessment technical center and national quality one-stop center expected to be set up in 06.

GoL will equip labs to permit them to get international accreditation

GoL passed a law in February 2005 calling for the establishment of a National Accreditation Board to regulate labs & permit the recognition of Lebanese laboratories by European & international bodies.

sherines

Siniora has put a question mark on the whole slide

DIALOGUE WITH THE PRIVATE SECTOR

ISSUE PROPOSAL MEASURES TAKEN

SOLVING ISSUES FACED BY PRIVATE SECTOR

Identify Major Concerns of the Private Sector

Propose solutions in coordination with private sector participants

In MOF, more than 50 measures to reduce impediments to business sectors are being implemented, including revision of laws, decrees and procedures

IMPROVING BUSINESS CLIMATE IN LEBANON

Expedite the process of creation of businesses

Improve investment climate

MOET initiates with IFC and EU on improving business climate

BADER initiative to promote entrepreneurship spirit for the youth

MODERNIZING LAWS AND REGULATIONS ON BUSINESS

Revise Laws, decrees and procedures related to business activities

Mapping of all the impediments to economic activities

Creation of joint committee to solve these impediments on fast track

DETAILS OF SELECT INITIATIVES

ILLUSTRATIVE

PRIVATIZATION PROGRAM AND ASSET MANAGEMENT

Two new GSM companies expected to take place at end-September 2006

Privatizing the fixed line (Liban Telecom) is expected by mid-2007

Other plans include the sale of BDL’s shares of MEA and Intra (which includes Casino du Liban) by 2008

Optimizing public assets management in all sectors, including transportation sector (ports, airports), and services such water and hospitals

Improving efficiency in delivery of services, reducing cost, improving competitiveness, and fostering growth

Telecom(Fixed)

Telecom(Fixed)

Telecom (Mobile)Telecom (Mobile)

N/AN/A

EDLEDL WaterWater AirportAirport MEAMEA PortsPorts

N/AN/A

Progress Along Privatization Steps (end 2005)

Not started Completed

Sector StrategySector Strategy

Privatization Strategy

Privatization Strategy

Sector LawsSector Laws

Regulatory Authority

Regulatory Authority

Regulatory Decree

Regulatory Decree

LicensingLicensing

CorporatizationCorporatization

PrivatizationPrivatization

2

1

3

4

5

6

7

8

MONETARY AND EXCHANGE RATE POLICIES

Maintaining macroeconomic stability through a proper monetary and exchange rate policy

Focusing monetary policy on price stability using short-term monetary instruments Reducing interest rates through a narrowing of the spreads following an

improvement in the level of confidence and the expected international financial assistance

Maintaining a stable exchange rate policy and improving competitiveness through structural reforms included in the reform program

Maintaining a sound and profitable banking sector with possible voluntary contribution of banks to the reform efforts

Selling BDL's shares in the Middle East Airlines (MEA), and Intra which includes Casino du Liban over the next three years [by end-2006?], which will strengthen the financial position of BDL

Monetary & exchange rate policy aims at maintaining price stability, facilitating private sector credit & maintaining a sound banking system

CAPITAL MARKET DEVELOPMENTCAPITAL MARKET DEVELOPMENT

AreaArea Reform Measures Undertaken by Government of LebanonReform Measures Undertaken by Government of Lebanon

Article 201 of By-laws of the BSE

Article 201 of By-laws of the BSE Eliminate commission fees paid on securities transactions since September 2004 Eliminate commission fees paid on securities transactions since September 2004

Various workshops on themes of interest to MOF & market participants Establish “Capital Markets Advisory Team"

Various workshops on themes of interest to MOF & market participants Establish “Capital Markets Advisory Team"

Enhancing Dialogue with Market Participants

Enhancing Dialogue with Market Participants

Approved listing of sovereign Eurobonds on BSE, March 2004 BSE involved in public debt transactions, September 2004 Since August 2004, listed every Eurobond issued by Republic on BSE

Approved listing of sovereign Eurobonds on BSE, March 2004 BSE involved in public debt transactions, September 2004 Since August 2004, listed every Eurobond issued by Republic on BSE

A decree was signed to allow remote trading BSE is creating a new website and will be listing real time market prices for all traded

instruments on its website

A decree was signed to allow remote trading BSE is creating a new website and will be listing real time market prices for all traded

instruments on its website

Listing of Republic’s Eurobonds on Beirut

Stock Exchange

Listing of Republic’s Eurobonds on Beirut

Stock Exchange

Remote Trading

And Accessibility to Information

Remote Trading

And Accessibility to Information

Tax IncentiveTax Incentive Continue to offer a tax incentive for companies listing on the BSE, by reducing

the dividend tax from 10 % to 5 %

Continue to offer a tax incentive for companies listing on the BSE, by reducing the dividend tax from 10 % to 5 %

MAJOR REFORMS UNDERWAY

CAPITAL MARKET DEVELOPMENT CAPITAL MARKET DEVELOPMENT (cont’d.)

AreaArea Reform Measures Undertaken by Government of LebanonReform Measures Undertaken by Government of Lebanon

Development of Market Supervision &

Regulation

Development of Market Supervision &

Regulation

Received technical assistance from FIRST Initiative to assess market & existing legislative framework & make recommendations on appropriate regulations

Capital Market Draft Law has been approved by the Council of Ministers submitted to Parliament

Received technical assistance from FIRST Initiative to assess market & existing legislative framework & make recommendations on appropriate regulations

Capital Market Draft Law has been approved by the Council of Ministers submitted to Parliament

Enacted: Securitization of assets & Investments Funds Laws (enacted in December 2005)

In-Progress: Dematerialization of Securities Law (since 2002), the Securities Lending Law (since 2003) and the Insider Trading Law (since 2005)

Enacted: Securitization of assets & Investments Funds Laws (enacted in December 2005)

In-Progress: Dematerialization of Securities Law (since 2002), the Securities Lending Law (since 2003) and the Insider Trading Law (since 2005)

Enactment of Financial Legislation

Enactment of Financial Legislation

Develop secondary market liquidity by introducing longer maturity instruments with a low frequency of auctions. (e.g. The 5-year T-bills)

Establish a DVP system for the LBP market starting with the new 5-year t-bill issue

Increase trading hours at the BSE

Develop secondary market liquidity by introducing longer maturity instruments with a low frequency of auctions. (e.g. The 5-year T-bills)

Establish a DVP system for the LBP market starting with the new 5-year t-bill issue

Increase trading hours at the BSE

Develop Secondary Market Liquidity

Develop Secondary Market Liquidity

Establishing a specialized courts to deal with matters related to the capital markets and will staff these courts with judges who have the right expertise

Establishing a specialized courts to deal with matters related to the capital markets and will staff these courts with judges who have the right expertise

Establishing a Specialized Court

Establishing a Specialized Court

MAJOR REFORMS UNDERWAY

SOCIAL SECTOR REFORM PROGRAM

Global Objectives

Commitment to achieve the MDG’s

Commitment to achieve the MDG’s

Increase efficiency of social spending

Increase efficiency of social spending

Improve the targeting system

Improve the targeting system

StrengthenSocial Safety nets

StrengthenSocial Safety nets

Minimize regional disparities


Mainly in the areas of poverty eradication, improving education and Health indicators

While maintaining the same level of spending, considered as sufficient in international and regional norms, reallocate resources to have a better yield.

By improving service delivery and minimize the leakages given the current targeting mechanisms

Designing and strengthening social safety nets that would offset any potential impact of economic and fiscal reform upon the poor

By re- channeling funds into disadvantaged areas

SOCIAL STRATEGY: GLOBAL MEASURES

Designing a comprehensive social strategy

Designing Sector

strategies

Improving statistics and information

The foundation of A Ministerial Committee that have as members the different Ministries involved in the social sectors with the following objectives:

Design the sector strategies Implementation of strategies Follow up and monitoring

The sector strategies will be designed within the framework of the comprehensive social strategy and will target :

Improving Health indicators Improving Education IndicatorsRationalizing cost

Improve the production of statistics on the living conditions of the households and on other macro-economic issues, by pressing ahead with the following Finalize the multi-purpose survey Empower the statistical capacity of Ministries concerned with the social sectorImplement the statistical master plan.

Establishing an Inter-Ministerial Committee for Social Development Policy, comprising the ministries of social affairs, health, and education to design, coordinate, monitor the implementation of the social strategy, and reduce overlap in the provision of social services across ministries - (by 2006)

Preparing a comprehensive medium-term social strategy to be finalized (by mid-2006)

Reforming existing social safety nets and possibly piloting new safety net programs and possibly a social pension (as part of the pension reform)

Introducing short-term pilot programs targeting the poor (students, poor senior citizens, poor households headed by women)

Piloting also the introduction of a non-contributory social pension for poor elderly (in 2008) as part of the pension reform program.

Assessing the incidence of the existing subsidies, such as wheat, sugar, and tobacco, and consider alternative income support if warranted, (by end-2006)

Reducing cost, improving efficiency and quality of health and education services

The aim is to redirect expenditures in social sectors to better target lower income groups and disadvantaged areas

without increasing cost

IMPROVE SOCIAL POLICY MAKING PRELIMINARY

Integrating the three existing systems into one modern scheme (End of Service Indemnity-NSSF, Army scheme, and Civil Servants scheme)

Relieve fiscal burdens in terms of reducing contingent liabilities

Promote equity among contributors, given that current operating systems having different eligibility criteria and different pension benefits

Provide social protection for a wider segment of population, as current systems cover limited segment of population

Pave the way for a more flexible labor market as the private sector scheme restricts labor mobility

Pension reform Social Safety Nets Increase efficiency in Health & Education

Strengthening existing safety nets and creating new ones

Marginalized groups -orphans, women-headed households, handicapped, and ex-detainees

Micro-credits

Community development initiatives

Public Works in disadvantaged areas (improve infrastructure and generate employment)

Better targeting mechanisms and eligibility criteria

Undertake analysis of incidence of subsidies, & consider alternative programs

Revising the cost and reallocating resources

Insure affordability

Improve quality

Increase outreach

Improve the social return of government expenditure on major social services (health, education and social affairs)

Achieve universal coverage of basic health and education services

… WITHIN A COMPREHENSIVE SOCIAL STRATEGY

SOCIAL SECTOR REFORM PROGRAM PRELIMINARY

Ministry of Social Affairs Social Development CentersNon-governmental education,

targeting:Elderly OrphansDelinquentsDisabled

Ministries of Finance and Economy

Producer subsidy of wheat, tobacco and sugar beat

Subsidy of contributions to the NSSF for some specific groups (taxi drivers, Mayors,..)

Ex-detainees

Fuel Subsidy during winter-time

Existing Social Safety Nets in Lebanon

Ministry of Health Discounts on Medications Waive co-hospital fee for poor

patients

Ministry of Displaced

Grants for housing for the displaced

Other socio-economic assistance for displaced

Other Ministries

Social allowances

Social Funds (ESFD and CDP)

Community development

SME support

Employment generation


In addition to other informal subsidy schemes including transfers, family networks, charity organizations and others

Alleviate poverty

Increase efficiency of spending

Better targeting mechanisms based on means-tested


Social Safety Nets reform


Inefficient targeting mechanism and weak service delivery

Leakages to non-poor

Limited coverage

Lack of data and statistics on the localization and profile of the poor

Overlapping of services among the different Ministries and agencies

Problems with current system Reformed

System

Strengthening existing social safety nets

Introducing new Social Safety nets *

* New safety nets will include: cash transfers to selected

segments (poor senior citizens, poor female-headed

households,..), in-kind transfers to improve education and health indicators for poor families, small scale development projects, and

others.

Target Group Immediate Measures

Responsible Party

Estimated Cost Performance

Indicators Impact & Justification

Low Income households (Single women headed-households, elderly living alone or with dependant without resources, large families with numerous children witnessing child labor)

Time Frame: October 2006

unconditional cash transfers to benefit the poorest households targeting 35,000 households (1200$ / year)

MoSA ~ $ 42 mn

Poverty Indicators: 7% of the Lebanese households have severe living conditions Improving basic living conditions

Poor Senior Citizens

Scale up the cash transfer offered by MoSA to the elderly after reforming the current mechanism (targets 1,000 senior citizens with a $200/annum) to 5,000 citizens in 1 year

MoSA ~ $4 mn

< 65 years 14% of the elderly (7% of the Lebanese population) are very poor.

Improving basic living conditions

Scale up the already existing “full in-house service” provided to 6,700 special cases (children, mentally challenged, etc.) in-order to target 7,500 case

MoSA ~ $3mn

Increase coverage to 7,500 and funds to improve monitoring of NGOs by MoSA

The poor Disabled Continue providing 15 types of proximity services (e.g., chairs, beds, and health services) to about 55,000 registered disabled citizens. Note: they also benefit from tax exemptions

MoSA ~$ 2mn/ year

Maintain and increase coverage of this project

Poor Students

Establishing centers for remediation (extra curricular work and tutorial), developing an education support program for each cycle (Pilot Project)

MoSA, MEHE

~$ 10.8 mn/school yr -5,000 Student (7-11 years) -5,000 Student (12-14 years)

Drop-out rates 22%.

- Ensure that all poor children will be able to complete primary schooling. - Help in skills improvement

Low Income households, vulnerable groups: children not enrolled in schools, child labor under legal age, or poor households caring for orphans.

Time Frame: January 2007

Pilot Project 1: Implement a donation in kind program by providing meals, books and stationary (clothes, transport facilities) to the household on condition that children remain in school until the end of compulsory educational stage (until age 14)

NGO’s under the supervision of: MoSA, MEHE

Using BIS

~ $ 26 mn (50% for school feeding

program)

Poverty Indicators Drop-out rate: 22% Enrollment rate: 71% in

2005

- improving the living conditions of the very poor households - Increase access to education through alleviating the income obstacle _ Promoting children’s human capital development - reduce drop-outs rates

Low Income households, vulnerable groups: Poor Infants & Poor Pregnant Women

Time Frame: January 2007

Pilot Project 2: Scale up the already existing health program (clinic health visits and screening) aiming at promoting health well being of children (under five) and women (pregnant mothers-Pre and Post natal).

MoSA, MoPH

~ $ 12 mn - ~ $ 450/women

- ~ $ 55/ child

This Pilot Project will Target:

- ~ 20,000 Households

-Maternal Mortality: 104/100,000 MoPH (figure

not updated since 1996)

-Infant Mortality 18.6/1,000 2000 CAS

-Vaccination % : 1- measles 43% 2- polio 88.7%

- improving the living conditions of the very poor households - Increase access to health services through alleviating the income obstacle - increase access to vaccines and medicines - Decrease infant & maternal mortality rates - improve preventive health care

Poor children enrolled at schools Provide basic First Aid Kits and weight measurement equipments to public schools

MEHE, MoPH ~ $0.14 mn

Source of Social Indicators: - MDG Goals- MDG Costing Lebanon 2005; Social & Municipal Development – Poverty Targeting System, CRI, 2002; MOSA, UNDP, CAS National Household survey, preliminary results 2004 Social Outlook; .PAPFAM(Pan Arab Project for Family Health) 2005;

Time Frame for Introducing Social Safety Net System

A Fully fledged Social Safety Net system will be implemented (January 2007)

Implementations of Pilot Projects with a parallel training of concerned staff (October 2006)

Completion of the Proxy Means Test for effective targeting & identification of low income households (September 2006)

Completion of the Multi Purpose Household Survey (June 2006). (Helps in developing a proper targeting system of the poor and vulnerable groups)

IMPROVE SOCIAL CONDITIONS THROUGH TARGETED PROGRAMS

Promote equity among contributors

Relieve fiscal burdens in terms of reducing contingent liabilities

Provide social protection for a wider segment of population

Pave the way for a more flexible labor market

PENSION REFORM PROGRAM

Inequity of benefits among and within the systems, mainly in terms of:Contribution ratesIncome replacement ratesAccrued rate

High fiscal cost

Limited coverage of social protection

Questionable financial sustainability

Restrict labor mobility

Current System Reformed System

Integrating the three existing

systems into one modern scheme

Expected

application in 2008

PERIOD OF RISING DEFICITS

STRONG ADJUSTMENT

MEDIUM TERM FISCAL BALANCE

GOVERNMENT MEDIUM TERM TARGETSGOVERNMENT MEDIUM TERM TARGETSOVERALL IMPROVEMENT IN FISCAL BALANCES

- 3 0 %

- 2 5 %

- 2 0 %

- 1 5 %

- 1 0 %

- 5 %

0 %

5 %

1 0 %

1 9 9 3 1 9 9 4 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

P r i m a r y O v e r a l l B a l a n c e

Primary@ -10%/GDP

Overall@ -19% of GDP

Primary@ 5%/GDP

Overall@ -10%/GDP

Primary@ 8% of GDP

Overall@ -3 % of GDP

Evolution of Primary Balance and Budget Deficit1993 - 2010

DOMESTIC ADJUSTMENT EFFORTS LEAD TO DECLINING DEBT RATIO IN MEDIUM TERM But WITHOUT INTERNATAION SUPPORT THIS WOULD NOT BE SUSTAINED AS THE DEBT-TO-GDP RATIN WOULD REVERT BACK TO AN ASCENDING TREND BEYOUND 2010.

PRE-PARIS II

0.00%20.00%40.00%60.00%80.00%

100.00%120.00%140.00%160.00%180.00%200.00%

Gross domestic debt Foreign debt

POST-PARIS II MEDIUM TERM TARGETS

138%138%

185%185%

50%50%

134%134%

FISCAL ADJUSTMENT – EXPENDITURE MEASURES

Rationalizing current expenditures through:

Containing the wage bill in MT by limited hiring, freezing real wages & & reducing overstaffing =< Wage Wage bill / GDP will decrease by 1.5% by bill / GDP will decrease by 1.5% by 20102010

Minimizing transfers to public entities and revisiting spending patterns

Reforming public spending and reducing waste and redundancies

Increasing working hours in public sector and improving productivity

Rationalizing current expenditures through:

Containing the wage bill in MT by limited hiring, freezing real wages & & reducing overstaffing =< Wage Wage bill / GDP will decrease by 1.5% by bill / GDP will decrease by 1.5% by 20102010

Minimizing transfers to public entities and revisiting spending patterns

Reforming public spending and reducing waste and redundancies

Increasing working hours in public sector and improving productivity

Providing for adequate public investment through:

Slightly increasing capital expenditures over 2005-2010 to invest in some important infrastructure projects & provide for adequate maintenance

Reducing cost of public investment through participation of private sector in public investment and increasing share of foreign-financed projects

Providing for adequate public investment through:

Slightly increasing capital expenditures over 2005-2010 to invest in some important infrastructure projects & provide for adequate maintenance

Reducing cost of public investment through participation of private sector in public investment and increasing share of foreign-financed projects

As a result, expenditures / GDP will decrease from 30% by end 2005 to 26% by 2010

Expenditure Measures – Reform of EDL

Transformation Strategy: Adopt long-term sector plan Entrust auditing of EDL financial statements 2001-2005 to

external auditor

Supporting Enablers: Appoint new board of directors for EDL Establish Electricity Regulatory Authority, and design its

bylaws Introduce potentially necessary amendments to Law 462

Implementation: Corporatize EDL Design new bylaws for EDL Unbundle generation, transmission and distribution

functions Complete the establishment of a National Control Center

Sep 06

Jan 07

Jun 06

Jun 06

Dec 06

Mar 07

Mar 07

Sep 06

Mar 08

Restructuring Initiatives Timing

PRELIMINARY

Long Term Initiatives Timing

Inputs: Secure supply of liquefied natural gas to Zahrani

Network: Complete 220 KV network

Dec 06

(Decision)

Jun 07

Expenditure Measures – Reform of EDL (cont’d.)

Inputs: Modify restrictive oil specifications based on 2003 study Negotiate additional bilateral contracts for fuel oil and gas

oil to reduce high premiums

Loss Reduction: Install remote meters Obtain support from security forces and the justice

department to reduce illegal network connections Obtain support from security forces and the justice

department to increase the bill collection rate

Pricing: Revise tariff structure Study lowering connection and installation costs to make

legal connectivity more affordable to low-income households

=> Savings of [2-3] % of GDP - This is crucial for reducing expenditures and achieving a sustainable fiscal position

Jun 06

Ongoing

Ongoing

Ongoing

Ongoing

Mar 07

Mar 07

Short Term Initiatives Timing

PRELIMINARY

STRUCTURAL EXPENDITURE REFORMS

Transparency

Establishing a medium term expenditure framework '06

Improving budget coverage (CDR, EDL, etc.) 2006

Solving the issue of appropriations and carryovers, complementary period and treasury advances

Adopting a Fiscal Accountability Act

Implementing Treasury Single Account 2006

Adopting new Public Accounting Law 2006

New Public Procurement Law 2007

Integrating the three systems into one modern fully-funded (FF-DC) scheme by (2008) while preserving the acquired rights

Reforming Public pension system

Enacting modern debt management law (2006)

Setting up a modern debt management office (2006-07)

Improving quality of financial reporting (06-07)

Establishing a Higher Council for Debt Management

As a result, public expenditure management will be greatly enhanced with more accountability and transparency

Accountability Pension Debt Mgt

GOVERNMENT MEDIUM TERM TARGETSGOVERNMENT MEDIUM TERM TARGETSEXPENDITURE REDUCING MEASURES

WAGE BILL REDUCTION (% of GDP) CUT DOWN TRANSFERS TO PUBLIC ENTITIES (incl. NSSF)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2005 2006 2007 2008 2009 2010Military & Security Education Other Civil Service Transfers Retirement & End of Service

0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 1.80%

1

2

3

4

5

6

PRESERVE CAPITAL SPENDING

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

2005 2006 2007 2008 2009 2010

Other Capital Expenditure CDR Foreign Financed Displaced Fund & Council of the South

LIMIT TRANSFERS TO EDL

9.5%/GDP9.5%/GDP7.9%/GDP7.9%/GDP

1.70 %/GDP1.70 %/GDP

1.03 %/GDP1.03 %/GDP

2%/GDP2%/GDP

3%/GDP3%/GDP

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

2005 2006 2007 2008 2009 2010

EDL (include TA for water auth and budget trans)

EVOLUTION OF PUBLIC EXPENDITURES IN THE MEDIUM TERM

Primary Expenditures Reduction in the Next 5 Years(2005 - 2010)

-1

1

3

5

7

9

11

13

15

17

19

21

23

25

2005 Primaryspending

Current EDL Pension Capital 2010 Spending

FISCAL ADJUSTMENT – REVENUE MEASURES

Revenues measures

As a result, revenues / GDP will increase from 22% by end 2005 to 24% by 2010 – taking into consideration revenue loss due to

privatization of telecom sector

Raising the VAT to 15 percent either in one step (July 2006) or in two steps (July 2006 and beginning 2008) depending on potential savings on EDL. A 15 percent VAT would generate about 2.5 percent of GDP in additional revenue

Aligning domestic and international fuel prices by lifting cap on gasoline price and raising gradually gasoline excise tax on quarterly basis starting July 2006 until reaching pre-cap rate by end-2008

Introducing a global income tax (GIT) by 2007-2008, which would generate about 1 percent of GDP of additional revenue over three years, 2007-09

Raising tax on interest income from 5% to 8% in July 2006, generating about 0.7- 0.8 percent of GDP in additional revenues

Settling seashore violations, generating LL 135 billion in penalties in 2006 and about LL 45 billion a year in rent

0 . 0 0 %

5 . 0 0 %

1 0 . 0 0 %

1 5 . 0 0 %

2 0 . 0 0 %

2 5 . 0 0 %

3 0 . 0 0 %

T a x R e v e n u e s N o n - t a x r e v e n u e s T r e a s u r y r e v e n u e s

GOVERNMENT MEDIUM TERM TARGETSGOVERNMENT MEDIUM TERM TARGETSREVENUE ENHANCEMENT TO COMPLIMENT EXPENDITURE CUTS

2010 TARGET @ 24% of GDP

INTRODUCTION OF VAT

INTRODUCTION 5% TAX ON INTEREST

INCREMENTAL TAX RATE

CHANGES, GIT & TELECOM

PRIVATIZATION LOSSES

15%/GDP

20%/GDP

REVENUE MEASURES- STRUCTURAL REFORMS

Structural Revenues Reforms

As a result, more transparency and more efficiency in revenue collection

Expanding the Large Taxpayer Office (LTO) and Creation of MTO (Medium Taxpayer Office) (2006-07)

Modernizing Tax offices in Beirut and Mount-Lebanon (2006)

Modernizing tax services including electronic taxation (2006)

Modernizing business activity code, and ensuring accurate recording of taxpayers (2006)

Unification of overall tax procedures under a unique ‘tax procedure code’, a prerequisite for the GIT (2006)

Reforming property tax administration (2006-07)

Establishment of an Integrated Tax Administration (2007-08)

GOVERNANCE REFORM: MAJOR PILLAR IN THE PROGRAM

Auditing public finances and government accounts since 1990 by an international reputable auditing firms—work should begin in (Q3- 2006)

Submit to Parliament a revised and modern public procurement law for more transparency (Q2 – 2006)

Reduce waste and corruption at the agency level starting with one or two ministries (or agencies) as pilot cases to be extended in time to other government agencies (2006)

Enhance the role of the Court of Accounts as an ex-post monitoring agency to ensure that public spending is in line with budgetary allocations (End 2006)

Continue the streamlining and automation of work procedures to reduce the citizen interface with public sector employees and reduce the risk of corruption (2007)

Adopting transparent, merit-based, and proper procedures for public sector recruitment to isolate recruitment from political considerations (started)

Governance

We Are Aiming for a More Prosperous Future for Lebanon and International Support Can Play a Key Role

Higher levels of economic growth

More than ever, the Lebanese are determined to resolve the debt and fiscal challenge, triggering a virtuous cycle leading to

economic and social stability

Attraction of larger investments

Renewed confidence in the Lebanese economy

Lower fiscal deficits More jobs

Improved overall risk profile

Economic&

SocialStability

3 3 , 4 7 4 3 5 , 4 1 0 3 7 , 4 1 9 3 9 , 7 3 54 4 6 2 84 2 , 0 7 0

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

8,809 9,079 9,594 9,934 10,517 10,885

2005 2006 2007 2008 2009 2010

GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS

GDP per Capita (In million LBP)

Source: Ministry of Finance

Nominal GDP (In Billion LBP)

Projected Macroeconomic Indicators(2005-2010)

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2005 2006 2007 2008 2009 2010

Deficit (As % of GDP)

100%

120%

140%

160%

180%

2005 2006 2007 2008 2009 2010

Public Debt(As % of GDP)



Projected Fiscal Deficit(2005-2010)

- 1 0 . 0 %

- 8 . 0 %

- 6 . 0 %

- 4 . 0 %

- 2 . 0 %

0 . 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

Decreasing Deficit (As % of GDP)

- 2 1 . 0 %- 1 9 . 0 %- 1 7 . 0 %- 1 5 . 0 %- 1 3 . 0 %- 1 1 . 0 %

- 9 . 0 %- 7 . 0 %- 5 . 0 %- 3 . 0 %- 1 . 0 %1 . 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

Rising Deficit (As % of GDP)

With Reform No Reform



Projected Public debt(2005-2010)

1 0 0 %

1 2 0 %

1 4 0 %

1 6 0 %

1 8 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0



1 0 0 %

1 2 0 %

1 4 0 %

1 6 0 %

1 8 0 %

2 0 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0




Projected Growth Rates(2005-2010)

0 . 0 %

1 . 0 %

2 . 0 %

3 . 0 %

4 . 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

Real Growth Rates(In %)

0 . 0 %

1 . 0 %

2 . 0 %

3 . 0 %

4 . 0 %

2 0 0 5 2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0

Real Growth Rates(In %)


EVOLUTION OF GROSS PUBLIC DEBT WITH AND WITHOUT REFORMSEVOLUTION OF GROSS PUBLIC DEBT WITH AND WITHOUT REFORMS

Gross Public Debt(% of GDP)

213.7%

136.6%

90.00%

110.00%

130.00%

150.00%

170.00%

190.00%

210.00%

230.00%

2004 2005 2006 2007 2008 2009 2010

BASELINE (No Fiscal + Higher i rates) GVT REFORM PGM

TOWARDS HIGHER GDP GROWTHTOWARDS HIGHER GDP GROWTHSTABLE GROWTH RATE IN MEDIUM TERM

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

ECONOMIC BOOM FOLLOWING END OF

CIVIL WAR

STAGNATION AMID RISING FISCAL CHALLENGES

ECONOMIC REFORMS SPURS REBOUND

MEDIUM TERM TARGETS

14% Nominal Growth

-1% Nominal Growth

9% Nominal Growth

6-8% Nominal Growth

2006 2007 2008 20102009

TIME LINE OF MEDIUM TERM REFORMSTIME LINE OF MEDIUM TERM REFORMS 2005-2010

EXPENDITURE MEASURES

STRUCTURAL & STRUCTURAL & OTHER OTHER MEASURESMEASURES

REVENUE REVENUE MEASURESMEASURES RAISE VAT ( range 12%-15%)

GASOLINE EXCISE @ PRE-CAP LEVEL

REVAMP PROPERTY & INHERITANCE TAX

REVIEW SALARY & BENEFIT STRUCTURE IN PUBLIC ENTITIES

REDUCE GASOLINE & COMMUNICATION SPENDING

WASTE

ELIMINATE CARRY-OVERS on CURRENT EXPENDITURES & TREASURY ADVANCES

CONTAIN WAGE BILL BY REPLACING ONLY PARTIALLY RETIRED EMPLOYEES

REDUCE OFFICIAL TRAVEL EXPENSES

STAFF & MODERNISE TAX ROLL UNIT

TREASURY SINGLE ACCOUNT

GLOBAL INCOME TAX

ELECTRONIC FILING SYSTEM for LTO

Arrive @ VAT 15%RAISE TAX on INTEREST (7% or 8%)TAX PROCEDURE CODE

SETTLE SEASHORE VIOLATION

RAISE SLIGHTLY CAPITAL EXPENDITURES TO 3% of GDP & IMPROVE EFFICIENCY

INCLUDE in BUDGET DONOR FINANCED CAPITAL SPENDING &

EDL TRANSFERS LIMIT CDR ROLE to LARGE SCALE

INVESTMENTS

CLOSE FUND for DISPLACED & COUNCIL of the SOUTH

ADOPT PERFORMANCE BUDGETING

TARGET for FINANCIAL

ACCOUNTABILITY LAW

2006 2007 2008 2009 2010

PRIVATIZING MOBILE OPERATORS PRIVATIZING FIXED LINE

LAUNCH OF EDL PRIVATIZATION PROCESS

EDL: CREATION of PRODUCTION & DISTRIBUTION COMPANY

EDL: CREATION of ELECTRICITY REGULATORY AUTHORITY

MEA & CASINO du LIBAN

PRIVATIZATION

REALIZATION of EURO-MED & FTA

AGREEMENTS

INTERNATIONAL ASSISTANCE

A debt-to-GDP ratio of 138% remains too high by any standard Public debt in Lebanon is sustainable if the debt-to-GDP ratio declines

noticeably over time While fiscal adjustment over the next 5 years is significant, this could not

be sustained in LT The Debt-to-GDP ratio, after falling to about 138% in 2010, would

increase to 152% by 2020 without international support

International support is crucial for a steady decline in the debt ratio over LT

Different forms of international support: grants, concessional loans, loans guarantees, etc,…

Grants would have the greatest impact on debt stock, while highly concessional loans would affect the debt ratio through a reduction in debt service

In addition, reform and International financial support would help boost growth

For every 1% increase in the growth rate, the debt-to-GDP ratio would decline by 1.7% a year

beirut march 10, 2006 preliminary draft a medium-term reform program for lebanon with international...

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reform program growth

mediumterm reform program

public sector reform

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achieving growth

social indicators

structural fiscal reforms