VZCZCXRO4323
PP RUEHBC RUEHDE RUEHDH RUEHKUK RUEHROV
DE RUEHLB #0920/01 2291353
ZNR UUUUU ZZH
P 171353Z AUG 09
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 5544
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUEHFR/AMEMBASSY PARIS 3540
RUCNDT/USMISSION USUN NEW YORK 4071
RUEHNO/USMISSION USNATO 4016
RHMCSUU/CDR USCENTCOM MACDILL AFB FL
RHEHAAA/NSC WASHDC
RUEKJCS/SECDEF WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 000920 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR NEA/FO, NEA/ELA 
EEB/IFD/ODF RDEMARCELLUS 
F FOR RNAPOLI 
IO FOR A/S BRIMMER 
P FOR DRUSSELL, RRANGASWAMY 
DRL/NESA FOR WHITMAN, BARGHOUT 
STATE PASS TO USAID ESCOTT 
TREASURY FOR SAHERN AND CKNOWLES 
COMMERCE FOR CLOUSTOUNAU/TSAMS/NWIEGLER 
PARIS FOR JMILLER 
USUN FOR WOLFF/GERMAIN/SCHEDLBAUER 
NSC FOR SHAPIRO/MCDERMOTT 
OVP FOR HMUSTAFA 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EIND ECPS PGOV KCOR LE
SUBJECT: CENTRAL BANK GOVERNOR: DESPITE BOOMING ECONOMY, 
LEBANON STILL NEEDS A GOVERNMENT TO MOVE FORWARD ON REFORM 
 
REF: A. BEIRUT 899 
     ¶B. STATE 81177 
 
SUMMARY 
------- 
 
¶1. (SBU) The Lebanese economy is booming, with tourists 
pouring in, hotel occupancy rates high, bank deposits rising, 
and growth set to beat all forecasts.  Nonetheless, Central 
Bank of Lebanon (CBL) Governor Riad Salameh told the 
Ambassador August 14 that Prime Minister-designate Saad 
Hariri needs to form a government that can take on the 
fundamental economic problems facing the country, including 
electricity provision, water management, telecom 
privatization, and environmental protection.  Salameh 
described the efforts the CBL had undertaken to promote 
growth and development, but said the new government should 
take advantage of record capital inflows to finance 
infrastructure development that would increase job creation 
and promote growth.  He believed turning over state assets to 
Lebanon's resilient private sector would benefit Lebanon, but 
said political buy-in is crucial, though difficult, because 
of the political class's dependence on the patronage 
state-owned institutions provide it.  He asked that the 
United States be patient with Lebanon in its demands for 
increased budget transparency.  End summary. 
 
ECONOMY BOOMING THIS SUMMER... 
------------------------------ 
 
¶2. (SBU) Salameh began his meeting with the Ambassador, 
PolOff, and EconOff with a dizzying run-down of Lebanon's 
strong economic indicators as the summer tourist season 
progresses.  He declared that consumer confidence is high, 
tourists are still arriving, and the Gulf tourists who would 
normally return home for Ramadan (which begins around August 
21) are indicating they will stay for part or all of the 
fasting month.  Hotel occupancy rates are at 70% across 
Lebanon, and approaching 100% in Beirut, said Salameh. 
Because of the strong summer season, Salameh announced he had 
increased his GDP growth estimate for 2009 to 6%, which would 
bring GDP to approximately $32 billion at the end of the 
year.  He saw inflation running at a modest 3%. 
 
¶3. (SBU) Meanwhile, depositors are still placing more capital 
in Lebanese banks, Salameh affirmed, and he predicted the 
growth in deposits could reach an astonishing 20% in 2009. 
High interest rates on Lebanese pounds (LL) have resulted in 
the conversion of $13 billion in deposits into LL, according 
to the Governor, and the banks have $25 billion in cash 
deposited at the CBL.  He added that the Saudi government 
still has $1 billion in reserves at the CBL, and the Kuwaitis 
$500 million.  With so much liquidity in the banking system, 
Slameh explained that the CBL had issued circulars o allow 
banks to offer subsidized interest on stdent loans, loans 
for investment schemes to create jobs, as well as for 
environmentally friendly projects. 
 
...BUT WE STILL NEED A GOVERNMENT 
TO TAKE ON LEBANON'S PROBLEMS 
--------------------------------- 
 
¶3. (SBU) Despite the booming economy, Salameh stressed that 
Lebanon needs a government to take on the important reforms 
and infrastructure upgrades necessary for economic growth. 
The huge tourist influx this summer merely highlights the 
country's needs, in Salameh's view, as electricity, water, 
and telecommunications infrastructure are stretched to the 
limit.  "We cannot take one more tourist," he said, noting 
that in addition to power outages and dropped cell phone 
 
BEIRUT 00000920  002 OF 003 
 
 
calls, polluted water and environmental degradation can cause 
health problems that will drive tourists away.  Salameh 
believed PM-designate Saad Hariri was intelligent to take his 
time in forming a cabinet that can tackle these problems, 
rather than caving to political pressures that could result 
in a do-nothing government.  He saw Hariri as "aggressively 
pro-business and pro-reform," but worried that most of the 
other politicians in Lebanon would not be so anxious to move 
forward on reform initiatives. 
 
WHILE DEBT IS BAD, 
GOVERNMENT INVESTMENT CAN REAP PROFITS 
-------------------------------------- 
 
¶4. (SBU) Salameh lamented that since Fouad Siniora took over 
as Prime Minister in 2005, the GOL has run an average annual 
budget deficit of $3 billion.  Such spending is 
unsustainable, he pronounced, and absolute debt levels 
continue to increase.  Nonetheless, he believed the GOL 
should take advantage of the current abundance of liquidity 
in the banking system to partner with the private sector and 
undertake desperately needed infrastructure projects in the 
electricity and water sectors.  With the attractive interest 
rates available to the private sector under the previously 
mentioned CBL investment programs, the GOL could reap 
benefits from investing now, said Salameh, while setting up 
the economy for further growth.  If the GOL does not use the 
excess liquidity to invest in Lebanon, thought the Governor, 
then Lebanese banks would simply start lending abroad. 
 
PRIVATIZATION: 
BRINGING THE POLITICIANS ON BOARD 
--------------------------------- 
 
¶5. (SBU) Salameh pointed to the resilience of Lebanon's 
private sector, and said the GOL should not delay in turning 
its assets over to it.  He found it essential that the 
private sector be brought into electricity generation to 
break the monopoly of state-owned Electricite du Liban, whose 
production capacity does not meet Lebanon's needs.  He 
believed the GOL should move forward on privatization of the 
two mobile telecom licenses by floating the companies on the 
Beirut Stock Exchange (BSE), which would "make the people 
feel involved," and avoid the difficulties of selling to 
foreign companies in the depressed international market. 
Likewise, he announced his plan to sell 25% of CBL-owned 
Middle East Airlines (MEA) on the BSE, hopefully in the first 
quarter of 2010. 
 
¶6. (SBU) The main obstacle to privatization in Lebanon, 
opined Salameh, remains the political class, which uses 
state-owned institutions as patronage instruments.  He noted 
that he had looked into divesting the CBL of its 35% share in 
Intra, the holding company which runs the Casino du Liban 
(CdL), but ran into problems because Amal leader Nabih Berri 
had staffed the Casino with his followers, and did not want 
to lose the ability to employ his supporters.  Other 
politicians had similar interests in other sectors, noted 
Salameh.  He also noted Druze leader Walid Jumblatt's recent 
statements against privatization as a sign of the 
difficulties of building political consensus on offloading 
state assets.  He said he had worked hard to build the 
political support necessary to float 25% of MEA on the stock 
exchange, but would have to make further efforts if he wished 
to sell more of it. 
 
BUDGET TRANSPARENCY 
------------------- 
 
¶7. (SBU) The Ambassador discussed Ref B demarche on 
 
BEIRUT 00000920  003 OF 003 
 
 
encouraging central budget transparency with Salameh, noting 
that CBL-owned assets such as MEA and the Casino du Liban do 
not issue public financial statements.  Salameh responded 
that MEA announces its results at an annual assembly, but 
that it runs as a private company, not a public entity.  He 
reiterated that the Casino was part of a holding company of 
which CBL is merely a minority shareholder.  In any event, he 
stressed, it was his intention to remove these entities from 
the CBL's books as soon as practicable.  Meanwhile, on budget 
transparency generally speaking, Salameh asked that the USG 
be "patient" with Lebanon, with its intractable political 
problems which make initiatives like budget reform difficult. 
 He stressed that U.S. support for Lebanon and its 
institutions inspires confidence in the GOL among investors 
and lenders, which is essential to keeping the country afloat. 
 
COMMENT 
------- 
 
¶8. (SBU) For those of us used to dealing with Lebanon's 
unruly political leaders, the Governor is always refreshingly 
on point.  Though his complaining about deficit spending 
seems to contradict his assessment that the GOL should take 
on more debt for infrastructure spending in the current 
liquidity glut, it is true medium-term investment that could 
bring improvements that would ultimately reduce GOL spending. 
 His plea for "patience" on budget transparency likely 
reflects a long experience and deep understanding of the 
political motivations behind the lack of transparency in the 
current system.  Nonetheless, he remains one of our key 
allies in promoting reforms and is expected to be one of the 
experts PM-designate Hariri will hopefully rely on for 
economic advice.  End comment. 
 
SISON