VZCZCXRO0202
RR RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHLB #1627/01 3181531
ZNR UUUUU ZZH
R 131531Z NOV 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 3559
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 001627 
 
SENSITIVE 
 
SIPDIS 
 
STATE FOR NEA/ELA, EEB/IFD/ODF, EEB/CIP/BA 
STATE PASS USTR 
TREASURY FOR PARODI/BLEIWEISS/AHERN 
USDOC FOR 4520/ITA/MAC/ONE 
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT 
STATE PASS USAID FOR BEVER/LAUDATO/SCOTT 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID PGOV LE
SUBJECT:  LEBANON:  CHATAH DISCUSSES BUDGET, ECONOMIC REFORM WITH 
TREASURY DAS MENDELSOHN 
 
SUMMARY 
---------- 
 
¶1. (SBU) In a November 11 meeting with Treasury Deputy Assistant 
Secretary for Intelligence and Analysis Howard Mendelsohn, Finance 
Minister Mohammad Chatah said that despite differences between the 
U.S. and Lebanese definitions of terrorism, there is ample room for 
terror finance and anti-money laundering cooperation between the two 
countries.  He said his ministry was focused on the passage of the 
2009 budget, as well as the rollover of USD 14 billion of debt over 
the next fourteen months.  Chatah reiterated his previous statements 
that Lebanon's economy and banking sector have so far weathered the 
international financial crisis well, but said the largest threat to 
the Lebanese economy is a potential slowdown in the Gulf. 
 
¶2. (SBU) Chatah noted that the IMF was expected to approve a second 
Emergency Post-Conflict Assistance (EPCA) program for Lebanon on 
November 14.  He said the GOL had begun collecting its gas excise 
tax as a result of falling oil prices, and though the tax rate is 
currently not as high as the one called for in Lebanon's first EPCA, 
it still showed the GOL's will to reform in the face of political 
pressure.  He said he expected electricity tariff reform to be 
presented and passed by the end of the year.  He claimed there was 
strong political will across the political spectrum to complete 
mobile telecom privatization, but that current market and political 
conditions might delay the actual sale until after the 2009 
parliamentary elections.  End summary. 
 
COMMON OBJECTIVES IN TERROR FINANCE 
---------- 
 
¶3. (SBU) Visiting Treasury DAS Mendelsohn and the Ambassador called 
on Finance Minister Chatah in his ministry office November 11. 
Chatah advisors Huda Saigh, and Nadine Abukhaled, as well as 
Treasury analyst Kristofer Doucette, Regional Treasury Attach Alex 
Severens, and EconOff also attended the meeting.  DAS Mendelsohn 
described the role of his office within the Treasury Department and 
its priorities in terms of terror finance, particularly in Lebanon. 
Chatah noted that terror finance is a sensitive area in Lebanon (as 
well as in Palestine) because of what he called its "greyness," i.e. 
lack of agreement with the U.S. on what constitutes a terrorist 
organization.  He noted that Hizballah is part of the national unity 
government in Lebanon, and has a significant number of seats in 
parliament, which obviously excludes GOL cooperation with the U.S. 
on issues relating to the party. 
 
¶4. (SBU) Nonetheless, he said, the USG and GOL share many common 
objectives.  He mentioned that the Special Investigation Commission 
(SIC), the autonomous financial intelligence unit under the auspices 
of the central bank, had been set up after September 11, 2001 to 
monitor banks and investigate activity related to terror finance and 
money laundering.  He said that while the Finance Ministry did not 
usually have direct involvement in such cases, it was always ready 
to be helpful in any way possible. 
 
DOMESTIC FINANCIAL ISSUES 
---------- 
 
¶5. (SBU) Chatah stated that while the U.S. was preoccupied with the 
current financial crisis, the GOL was mostly focused on passing a 
budget for 2009 and ensuring that it is financed.  He said he was 
currently reviewing the budgets for the various ministries, and 
expected the budget to pass at the end of the week of November 17. 
He noted that the Lebanese cabinet had already approved a new EPCA, 
and that the IMF board would meet in Washington November 14 to 
approve it.  He said the Lebanese banking sector, certainly of 
particular interest to DAS Mendelsohn, was of huge importance to the 
GOL, since the banks are a substantial source of funding to the 
government.  Chatah said that USD 14 billion in government loans 
will come to maturity over the next fourteen months, and the GOL is 
counting on banks to accommodate a rollover. 
 
¶6. (SBU) In response to the Ambassador's inquiry about the budget 
for the Lebanese Army and the Internal Security Forces, Chatah said 
security took up a large percentage of the budget, and there had 
been concerns in the past that the government was not getting "bang 
for the buck" in those areas.  That said, he insisted there was 
consensus in the cabinet about the importance of support to the 
security services, and though Interior Minister Ziyad Baroud had not 
given Chatah estimates for the cost of a new border security 
 
BEIRUT 00001627  002 OF 003 
 
 
program Chatah said he had included reserves in the budge to cover 
it.  (Chatah also noted that Baroud had not yet forwarded the 
ministry's 2009 parliamentary elections budget to the cabinet.) 
 
SO FAR IMMUNE FROM THE CRISIS, 
BUT FEAR ABOUT IMPACT ON THE GULF 
---------- 
 
¶7. (SBU) Chatah reiterated what he has said numerous times both in 
public and in private:  that the international financial crisis had 
so far not had a significant impact on Lebanon.  He said any effect 
might be felt later, if the crisis brought about a serious slowdown 
in the Gulf region. 
 
¶8. (SBU) Chatah stated that the Gulf is Lebanon's "safety valve," 
with remittances and investment from the region cushioning political 
and economic crisis in Lebanon.  He said there are 250,000 Lebanese 
working in the Gulf, which represents one-fourth of the workforce in 
Lebanon itself.  Given that these expatriate workers earn four to 
five times what they would in Lebanon, Chatah said the "Lebanese 
economy in the Gulf" is actually larger than domestic GDP.  Because 
of links between the two, any slowdown in the Gulf would be damaging 
to Lebanon itself.  While Chatah worried that a liquidity squeeze in 
the Gulf might hurt investment, he believed the flight from 
financial to real assets might actually cause some Gulf investors to 
increase investments in Lebanon, so any net effect would be small. 
 
¶9. (SBU) Chatah also stated that bank assets in Lebanon have been 
increasing at a rate of 12-15 percent in recent years, even through 
various political crises and a war.  Moreover, they have continued 
to increase during the financial crisis, he said, adding that a 
liquidity squeeze in Lebanon therefore appeared unlikely. 
 
STATUS OF CASH TRANSFER CONDITIONS 
----------- 
 
¶10. (SBU) The Ambassador and EconOff asked Chatah about the status 
of the two remaining conditions for the disbursement of the USG's 
Paris III cash transfer pledge.  Econoff noted that Embassy contacts 
claimed the electricity tariff restructuring was on track for 
passage by the end of the year, although they were increasingly 
pessimistic on mobile telecom privatization.  EconOff explained that 
Washington was considering using the cash transfer funds for other 
purposes, and therefore would be particularly interested in any 
change of timing on the telecom license sale. 
 
¶11. (SBU) Chatah pointed out that even though the USG abandoned the 
cash transfer condition of increasing the gasoline excise tax, the 
GOL is now once again collecting the tax as oil prices fall.  He 
admitted that the tax rate currently is not at the 300 Lebanese 
pounds per liter that was mandated by the original condition, but 
noted that the GOL was insistent on collecting some tax now, in the 
face of political pressure.  This, he said, demonstrates the GOL's 
commitment to reform in the sector. 
 
¶12. (SBU) Chatah said Energy Minister Alain Tabourian had made 
reform of the electricity tariff one of the priorities of his 
mandate as minister, and was due to present a plan shortly.  Chatah 
believed the new tariff structure would be approved by the end of 
the year. 
 
¶13. (SBU) The minister noted that telecom privatization was 
mentioned in the ministerial statement, and has support across the 
political spectrum in the cabinet. He said the sale would take 
place, with the only question about timing and market conditions. 
He observed that parliament must pass a law authorizing the sale of 
the licenses, and most other donors had put passage of that law as a 
condition for any contribution as a sincere step by the GOL toward 
reform. 
 
¶14. (SBU) Chatah said the government wanted to do the sale before 
the elections, but market conditions have deteriorated to the point 
where if the sale took place, the government could be accused of 
cheating the people out of getting fair value for the mobile 
licenses.  "No one says it shouldn't happen," he said, "It is just a 
question of timing."  He said he expected the sale would take place 
either in the spring, as originally planned, or in the fall, after 
the spring parliamentary elections. 
 
¶15. (SBU) Minister Chatah reiterated his wish to see the remaining 
 
BEIRUT 00001627  003 OF 003 
 
 
cash transfer funds used to pay off high-interest Eurobonds held by 
the central bank, rather than World Bank loans. 
 
SISON