VZCZCXRO0782
PP RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHLB #3563/01 3101536
ZNR UUUUU ZZH
P 061536Z NOV 06
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 6363
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHNO/USMISSION USNATO 0474
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIRUT 003563 
 
SIPDIS 
 
SIPDIS 
 
NSC FOR ABRAMS/DORAN/MARCHESE/HARDING 
 
E.O. 12958: N/A 
TAGS: ECON PREL PTER LE
SUBJECT: LEBANON:  WORLD BANK MIDDLE EAST DIRECTOR ON PARIS 
III 
 
SUMMARY 
------- 
 
¶1. (U) World Bank Middle East Department Director Joseph Saba 
noted Nasrallah's October 31 ultimatum as disturbing and a 
challenge to the confidence that holds up Lebanon's fiscal 
house of cards, but views awareness of the need for essential 
economic reforms as recognized across the Lebanese political 
spectrum.  Saba is still expecting a late January conference, 
and hopes for a core group preparatory meeting in December. 
GOL Paris III conference documents are nearly ready, and the 
World Bank's sectoral analysis of expenditures is revving up 
and expected to be available by the beginning of December. 
Based on its analysis of the economic and social impact of 
the conflict, Lebanon's debt dynamic is back - and its 
primary surplus is gone.  Saba opined that, even if Lebanon 
undertook all the necessary, critical reforms over the next 
five years, its debt picture would not be sustainable (though 
the reforms would have a positive effect).  End Summary. 
 
THE STATE OF PLAY 
----------------- 
 
¶2. (U) World Bank Middle East Department Director Joseph Saba 
began his conversation with embassy officers by noting 
Nasrallah's disturbing speech on 31 October, in which he gave 
an ultimatum that dialogue between the March 14 coalition and 
Hizballah and its allies progress or else Hizballah will 
mount street demonstrations.  Any reform program will require 
major government consensus, Saba stated, and political 
divisions are not helpful.  Saba has asked the GOL for a core 
group meeting ahead of Paris III, possibly as early as 
December, and says a small group with "political and economic 
firepower" would be more effective. 
 
¶3. (U) According to Saba, the GOL paper is essentially ready, 
but the data is of such poor quality that at some point it is 
all conjecture.  The GOL has had an economic reform plan and 
conference paper in process for some time.  The program and 
paper are essentially sound, close to what the World Bank 
would like to see, but the GOL's major obstacle is building 
consensus and political will for reform.   The Bank is 
finishing its economic and social impact statement, and is 
working on a sectoral expenditure analysis, to be published 
in December.  The Bank is providing technical and financial 
assistance in support of the GOL reform program with the hope 
of achieving early results ahead of Paris III.  Its sectoral 
assessment of expenditures is scheduled for GOL review later 
this month and publication in early December. 
 
DEBT IS UNSUSTAINABLE 
--------------------- 
 
¶4. (U) The Bank believes that in the short term there is 
sufficient money for reconstruction, claiming the Council for 
Development and Reconstruction has $1 billion on hand.  While 
the physical damage can all be repaired, Saba advised that 
the indirect economic and public finance outlook is 
"depressing."  The Bank's impact assessment will conclude 
that the debt situation will continue to worsen as businesses 
seek tax relief, revenues continue to fall, and expenditures 
related to the conflict rise.  Saba noted the debt situation 
is only sound as long as everyone believes that the 
government can roll it over (no one expects it to be repaid); 
but should confidence in the government's ability to roll 
over its debt evaporate, then a debt crisis could ensue.  (50 
percent of total Lebanese public debt is owned by Lebanese 
commercial banks.)  Saba emphasized that, and even if all 
needed reforms were taken during the next five years, these 
reforms still would not bring the debt down to a 
"sustainable" level. 
 
PARIS III 
--------- 
 
¶5.  (U) Saba declared that the World Bank is much more 
committed to being involved in Lebanon now than it had been 
during Paris II, and the Bank has a far better working 
relationship with the GOL.  Saba expects that the Bank will 
be able to say in Paris that it agrees with the GOL program. 
The Bank would like to see fiscal and structural reforms 
beyond what the GOL is considering in its reform and recovery 
plan for the Paris III conference (scheduled for late January 
2007), but Saba realizes they are politically impossible at 
the current time.  The major difference between the GOL and 
World Bank relates to "burden sharing" (debt restructuring) 
 
BEIRUT 00003563  002 OF 002 
 
 
and inadequate GOL consensus on the need for increased social 
protection.  Saba believes there is a large national 
consensus for social programs and basic reforms, so the World 
Bank is helping the GOL focus on these for the conference. 
Saba also described a growing populist movement against Paris 
III - those that remember the "belt tightening" that followed 
Paris I and II.  These people anticipate only pain from Paris 
III.  They look back at the massive cash inflows following 
earlier donor conferences that had little or no impact on the 
social situation or public finance; they blame the GOL and 
corrupt politicians for wasting the money.  Saba hopes that 
Paris III will address these "populist" issues.  He pointed 
out that, while the GOL is spending at OECD levels in health 
and education, it is not getting the impact it needs to 
satisfy its citizens.  The problem is the GOL's delivery 
system -- it is unable to use its resources quickly or 
efficiently (what Saba called the problem of 
"implementation").  The World Bank is providing USD 1 mllion 
of its recently announced $70 million grant to the GOL to 
help it improve its ability to provide Government services in 
a transparent, accountable, and efficient way.  The Bank 
believes the population needs to see its government "doing 
something." 
 
¶6.  (U)  The Bank is also providing technical and financial 
assistance in the priority areas of power, fiscal management, 
and social protection ahead of Paris III.  When asked about 
the commitment of the GOL to privatization of the electricity 
utility, which consumed $1.1 billion of GOL revenues last 
year, Saba reported that the Energy and Water Minister, 
Mohamed Fneish, has asked for a "service" management 
contract, a first step toward corporatizing the national 
power utility.  The World Bank is providing technical 
assistance and preparing the tender documents.  The Bank has 
also created a small (USD 20-25 million) multi-donor trust 
fund in advance of Paris III, and will donate USD 3-5 million 
as a political inducement to donors to back key early 
reforms.  Saba expects that such a fund could also have the 
effect of imposing a kind of conditionality on the GOL, since 
donors would supervise operation of the fund through periodic 
meetings and a continuing relationship with the GOL. 
 
LEBANON NEEDS "AN ADULT IN THE ROOM" 
------------------------------------ 
 
¶7. (U) Asked about the prospects for reform, Saba lamented 
that structural reforms in the power, social, and economic 
sectors are acknowledged across the political spectrum as 
necessary, but no one wants to see another confession gain 
from changes.  Saba commented that no other Lebanese 
government would have a greater level of commitment to 
reform; every group seems to know what changes are needed, 
rather, it is political reality of individuals unwilling to 
see their political rivals benefit from change that blocks 
reform.  Saba described Fneish as a professional committed to 
his own well-articulated reform program and to the plans of 
his predecessors.  The real obstacles to reform in the energy 
sector are the wide variety of politicians who refuse to work 
with the World Bank "on its terms" (i.e., in a transparent 
manner).  For that reason it is important to have "an adult 
in the room" to fix things, because the health and the 
welfare of the "kids" is in danger.  Saba viewed Hizballah 
constituents as having suffered most under previous rounds of 
fiscal tightening and the group most prone to oppose the 
current reform plan. 
 
FELTMAN