VZCZCXRO5649
RR RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV RUEHSR
DE RUEHLB #0325/01 0791603
ZNR UUUUU ZZH
R 201603Z MAR 09
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 4489
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

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