Fundamentals of the Lebanese Economy -Lebanon’s debt is around US$40.5 billion or about 180% of GDP (Ministry of Finance)

-Unofficial figures put it at US$44 billion, that is 195% of GDP

-The rate of growth of real GDP forecasted at 5% for 2006, has ended the year with a negative 5%

-This represents a loss in output in the order of US$2.2 billion (Ministry of Finance)

-The primary surplus was expected at 3% of GDP for 2006, but has now shifted to a deficit of 0.4% of GDP after four years of consecutive surpluses

-The overall fiscal deficit reached 14% of GDP by the end of 2006 (Ministry of Finance)

-Close to US$16 billion of the debt outstanding as of mid-2006 matures in 2007 and 2008 alone (Ministry of Finance)

Fundamentals of the Lebanese economy cont’

-The government’s suggested reform plan for the Paris 3 Conference aims primarily at

Stimulating GDP growth

Creating employment

Putting Lebanon’s large public debt on a downward trend

-In the absence of adjustment, and taking into account the impact of the July war by 2010 (Ministry of Finance)

Debt service alone would absorb more than 85% of government revenues

Debt-to-GDP ratio would increase to about 215%

Given the above Macroeconomic conditions, Paris 3 constitutes a last resort to avoid an imminent fiscal crisis

This will be achieved by:

-Reducing Primary Expenditures: Government intends to rationalize current expenditures

-Raising the primary surplus through the introduction of various indirect taxes with the objective of reducing the debt-to-GDP ratio

-Tax on interest income will be raised from 5% to 7% beginning 2008

-The VAT will be increased from 10% to 12% in 2008 and from 12% to 15% in 2010

-Gasoline excise tax will be adjusted gradually beginning 2007 until it reaches its pre-cap rate by 2011

-No changes are perceived in the income tax rates

-Critics of the above government plan raise the following issues:

1) How will the government stimulate the rate of growth of GDP and increase taxes at the same time?

2) Is the increase in taxes justified when in the past 15 years nothing was done to reduce government expenditures or fight corruption ?

The government should first restructure all public entities before proceeding with their sale The government should reduce expenditures and improve tax collection before resorting to further tax increases

-Privatization program: Privatize the following sectors

TelecommunicationPower and Water Middle East Airline (MEA)