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A Medium-Term Reform Program for Lebanon with International Support. PRELIMINARY DRAFT. BEIRUT March 10, 2006. Presentation Overview. I. Objective of the reform program II. Pillars of the reform program - Growth-enhancing reform measures - Privatization program

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slide1

A Medium-Term Reform Program for Lebanon with International Support

PRELIMINARY DRAFT

BEIRUT

March 10, 2006

presentation overview
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

where would lebanon be in 2010 with no reforms
Where Would Lebanon Be in 2010 With No Reforms?

If Lebanon undertakes no economic reforms, the economic situation will return to

Pre Paris II Crisis conditions:

1

Monetary

  • Pressure on the exchange rate
  • Weakened banking sector, due to increased exposure to sovereign risk

2

Real growth rates

  • Starting this year, real growth will stagnate at 1% similar to 2005 level, leading to increased unemployment

3

Interest rates

  • With difficult financing conditions, interest rates will rise dramatically to reach, on average, 13% on LL & 11% on FX by 2008

4

Debt Service

  • Debt Service alone will absorb 100% of total government revenues by 2010

5

Fiscal Deficit

  • Fiscal Deficit will grow back to levels higher than 20% of GDP by 2010 (today's deficits level are lower than 10%, 8% in 2005), with an immediate jump to 11% starting this year

6

Gross Public Debt

  • Gross Public Debt will skyrocket to 214% of GDP in 2010 from 174%GDP in 2005 (which today is considered the highest in the world)
achieving growth and extending prosperity overcoming macroeconomic vulnerability
ACHIEVING GROWTH AND EXTENDING PROSPERITY OVERCOMING MACROECONOMIC VULNERABILITY

Macroeconomic

policies – including debt sustainability and fiscal consolidation

Macroeconomic

Policies – including debt sustainability & fiscal consolidation

Job

creation

Social Safety Nets

Standards of living

Economic competitiveness, built on trade liberalization, investment promotion, and privatization

Strengthening Social safety net and improving social services

Growth & Development

objectives of the economic program of lebanon
OBJECTIVES OF THE ECONOMIC PROGRAM OF LEBANON
  • Modernizing the economy and stimulating growth:
  • Creating an environment conducive to growth and achieving real growth rates of 4-6 % in MT
  • Creating employment while improving social indicators and social assistance to protect the poor:
  • Creating job opportunities for Lebanon’s youth
  • Improving social indicators & creating social safety nets
  • Achieving economic stabilization, to place Lebanon's large public debt on a downward path in order to eliminate a major source of vulnerability:
  • Reducing overall fiscal balance in the MT to less than 3% of GDP
  • Gradually increasing the primary surplus from 2 percent in 2005 to about 8% of GDP in 2010
  • Reducing debt / GDP ratio steadily over the medium and long term
presentation overview1
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

slide7

GOVERNMENT REFORM PROGRAMECONOMIC REFORMS ACHIEVABLE IN MEDIUM TERM

Fiscal Policy, Governance and Public sector reform

Economic Policy and Growth Agenda

2

1

PROMOTING ECONOMIC STABILITY & GROWTH

Privatization and Market Liberalization

Social Program

5

3

Prudent Monetary Policy and Financial Sector Reform

4

pillars of the economic program of government
PILLARS OF THE ECONOMIC PROGRAM OF GOVERNMENT

Economic Policy

Growth-enhancing reforms, including developing financial markets and promoting good governance

Privatization

Improving the quality and expanding the scope of services, and reducing their cost. Increasing investment, spurring on economic growth. Expanding the participation of the general public in the ownership of the privatized companies

Social sector reform

Improve social indicators, strengthen social safety nets to protect the most vulnerable segments of the population and improve the social returns from social expenditures

Fiscal Consolidation

Fiscal adjustment that is aiming to reduce deficit and public debt to a sustainable level

Monetary policy

Maintaining price stability, facilitating credit to the private sector, and maintaining a sound banking system

International Support

International financial assistance to complement domestic adjustment efforts

presentation overview2
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

- Prudent monetary policy and financial sector reform

III. Medium-term framework and international support

growth enhancing reform agenda
GROWTH-ENHANCING REFORM AGENDA

Support to growing sectors

Small & Medium

Enterprises

Dialogue with the

Private Sector

Export Promotion Strategy

State Owned

Enterprises

Legal and business environment

Capital Markets

Reforms

GROWTH AGENDA

Tax & Customs modernization

Building a

21st Century

Administration

Implementing

EU Association

Agreement

Social Security and Pension Reforms

Accessing WTO

slide11
Lowering minimum capital requirements & cost of registration of businesses – end-06

Reducing time it takes to have a business license, & the cost of opening and closing a business (promoting ease of both entry and exit for businesses)– end 08

Simplifying requirements in relation with nationality of shareholders, guarantee shares or an additional auditor for limited companies– end-06

Simplifying further the tax procedures & reducing the number of separate taxes and fees, including by adopting the Tax Procedures Code– 2006

Ratifying modern competition law and anti-dumping laws, which would increase competition and reduce prices, by early 2007

Ratifying the insurance draft law to regulate the sector, galvanize the stock market and attract new investors, by mid-2006

Implementing a Global Income Tax, by 2007-08

Expediting the clearance of imports, including by increasing further automation, and reducing the cost of export at the Port of Beirut (2006)

IMPROVING BUSINESS ENVIRONMENT

help the private sector in leading growth
New consumer protection law - ratified

Anti-dumping, WTO compatible draft law - in Parliament

New competition law - in the process of finalization by GOL

Automation & revamping of Trade Registry & reduction of registration cost - work underway

Basket of E-Commerce draft laws - in Parliament

HELP THE PRIVATE SECTOR IN LEADING GROWTH

Improving Investment Climate

Support for SMEs

  • SME Unit - already set up
  • SME Observatory - QI '06
  • Guarantee fund to facilitate credit access - already set up
  • Doubling ceiling of guaranteed loans, eliminating other guaranty required by the banks and extending it to start ups - QI '06
  • Facilitating regulation of non performing loans for SMEs
  • Subcontracting 4 incubators to private consortiums - '06
slide13

FOSTERING GROWTH THROUGH TRADE LIBERALIZATION

EU-MED

Lebanon is now committed to the European Neighborhood Policy

The Association Agreement will inter fully into effect on April 1st 06 after its ratification of all EU members

A National Indicative Program (NIP) for 2005-2006 covering a series of bilateral activities between the EU and Lebanon signed in Nov 05

Improve Export

Conformity assessment technical center and national quality one-stop center expected to be set up in 06.

GoL will equip labs to permit them to get international accreditation

GoL passed a law in February 2005 calling for the establishment of a National Accreditation Board to regulate labs & permit the recognition of Lebanese laboratories by European & international bodies.

WTO

Lebanon now advancing towards membership in WTO

The 4th working group meeting has been held on March 2 & 3 in Geneva, to accelerate accession process

Lebanon is expected to accede to the WTO by the end of '06

Lebanese authorities are finalizing the legislative reform agenda for accession

dialogue with the private sector

ILLUSTRATIVE

DETAILS OF SELECT INITIATIVES

ISSUE

PROPOSAL

MEASURES TAKEN

SOLVING ISSUES FACED BY PRIVATE SECTOR

  • Identify Major Concerns of the Private Sector
  • Propose solutions in coordination with private sector participants
  • In MOF, more than 50 measures to reduce impediments to business sectors are being implemented, including revision of laws, decrees and procedures

DIALOGUE WITH THE PRIVATE SECTOR

IMPROVING BUSINESS CLIMATE IN LEBANON

  • Expedite the process of creation of businesses
  • Improve investment climate
  • MOET initiates with IFC and EU on improving business climate
  • BADER initiative to promote entrepreneurship spirit for the youth

MODERNIZING LAWS AND REGULATIONS ON BUSINESS

  • Revise Laws, decrees and procedures related to business activities
  • Mapping of all the impediments to economic activities
  • Creation of joint committee to solve these impediments on fast track
presentation overview3
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

- Prudent monetary policy and financial sector reform

III. Medium-term framework and international support

privatization program and asset management
PRIVATIZATION PROGRAM AND ASSET MANAGEMENT

Improving efficiency in delivery of services, reducing cost, improving competitiveness, and fostering growth

Progress Along Privatization Steps (end 2005)

  • Two new GSM companies expected to take place at end-September 2006
  • Privatizing the fixed line (Liban Telecom) is expected by mid-2007
  • Other plans include the sale of BDL’s shares of MEA and Intra (which includes Casino du Liban) by 2008
  • Optimizing public assets management in all sectors, including transportation sector (ports, airports), and services such water and hospitals

Telecom

(Fixed)

Telecom (Mobile)

EDL

Water

Airport

MEA

Ports

1

Sector Strategy

2

Privatization Strategy

3

Sector Laws

4

Regulatory Authority

5

Regulatory Decree

6

Licensing

7

Corporatization

N/A

8

Privatization

N/A

Not started

Completed

presentation overview4
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

monetary and exchange rate policies
Maintaining macroeconomic stability through a proper monetary and exchange rate policy

Focusing monetary policy on price stability using short-term monetary instruments

Reducing interest rates through a narrowing of the spreads following an improvement in the level of confidence and the expected international financial assistance

Maintaining a stable exchange rate policy and improving competitiveness through structural reforms included in the reform program

Maintaining a sound and profitable banking sector with possible voluntary contribution of banks to the reform efforts

Selling BDL's shares in the Middle East Airlines (MEA), and Intra which includes Casino du Liban over the next three years [by end-2006?], which will strengthen the financial position of BDL

MONETARY AND EXCHANGE RATE POLICIES

Monetary & exchange rate policy aims at maintaining price stability, facilitating private sector credit & maintaining a sound banking system

capital market development

MAJOR REFORMS UNDERWAY

Area

Reform Measures Undertaken by Government of Lebanon

Article 201 of By-laws of the BSE

  • Eliminate commission fees paid on securities transactions since September 2004

Enhancing Dialogue with Market Participants

  • Various workshops on themes of interest to MOF & market participants
  • Establish “Capital Markets Advisory Team"

CAPITAL MARKET DEVELOPMENT

Listing of Republic’s Eurobonds on Beirut Stock Exchange

  • Approved listing of sovereign Eurobonds on BSE, March 2004
  • BSE involved in public debt transactions, September 2004
  • Since August 2004, listed every Eurobond issued by Republic on BSE

Remote Trading

And Accessibility to Information

  • A decree was signed to allow remote trading
  • BSE is creating a new website and will be listing real time market prices for all traded instruments on its website

Tax Incentive

  • Continue to offer a tax incentive for companies listing on the BSE, by reducing the dividend tax from 10 % to 5 %
capital market development cont d

MAJOR REFORMS UNDERWAY

Area

Reform Measures Undertaken by Government of Lebanon

Development of Market Supervision & Regulation

  • Received technical assistance from FIRST Initiative to assess market & existing legislative framework & make recommendations on appropriate regulations
  • Capital Market Draft Law has been approved by the Council of Ministers submitted to Parliament

CAPITAL MARKET DEVELOPMENT (cont’d.)

Enactment of Financial Legislation

  • Enacted: Securitization of assets & Investments Funds Laws (enacted in December 2005)
  • In-Progress: Dematerialization of Securities Law (since 2002), the Securities Lending Law (since 2003) and the Insider Trading Law (since 2005)

Develop Secondary Market Liquidity

  • Develop secondary market liquidity by introducing longer maturity instruments with a low frequency of auctions. (e.g. The 5-year T-bills)
  • Establish a DVP system for the LBP market starting with the new 5-year t-bill issue
  • Increase trading hours at the BSE

Establishing a Specialized Court

  • Establishing a specialized courts to deal with matters related to the capital markets and will staff these courts with judges who have the right expertise
presentation overview5
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

social sector reform program
SOCIAL SECTOR REFORM PROGRAM

Global Objectives

Commitment to achieve

the MDG’s

Mainly in the areas of poverty eradication, improving education and Health indicators

Increase efficiency

of social spending

While maintaining the same level of spending, considered as sufficient in international and regional norms, reallocate resources to have a better yield.

Improve

the targeting system

By improving service delivery and minimize the leakages given the current targeting mechanisms

Designing and strengthening social safety nets that would offset any potential impact of economic and fiscal reform upon the poor

Strengthen

Social Safety nets

Minimize

regional disparities

By re- channeling funds into disadvantaged areas

social strategy global measures
SOCIAL STRATEGY: GLOBAL MEASURES

Designing a comprehensive social strategy

Designing Sector strategies

Improving statistics and information

The foundation of A Ministerial Committee that have as members the different Ministries involved in the social sectors with the following objectives:

  • Design the sector strategies
  • Implementation of strategies
  • Follow up andmonitoring

Improve the production of statistics on the living conditions of the households and on other macro-economic issues, by pressing ahead with the following

  • Finalize the multi-purpose survey
  • Empower the statistical capacity of Ministries concerned with the social sector
  • Implement the statistical master plan.

The sector strategies will be designed within the framework of the comprehensive social strategy and will target :

  • Improving Health indicators
  • Improving Education Indicators
  • Rationalizing cost
slide24
Establishing an Inter-Ministerial Committee for Social Development Policy, comprising the ministries of social affairs, health, and education to design, coordinate, monitor the implementation of the social strategy, and reduce overlap in the provision of social services across ministries - (by 2006)

Preparing a comprehensive medium-term social strategy to be finalized (by mid-2006)

Reforming existing social safety nets and possibly piloting new safety net programs and possibly a social pension (as part of the pension reform)

Introducing short-term pilot programs targeting the poor (students, poor senior citizens, poor households headed by women)

Piloting also the introduction of a non-contributory social pension for poor elderly (in 2008) as part of the pension reform program.

Assessing the incidence of the existing subsidies, such as wheat, sugar, and tobacco, and consider alternative income support if warranted, (by end-2006)

Reducing cost, improving efficiency and quality of health and education services

IMPROVE SOCIAL POLICY MAKING

PRELIMINARY

The aim is to redirect expenditures in social sectors to better target lower income groups and disadvantaged areas without increasing cost

slide25
Integrating the three existing systems into one modern scheme (End of Service Indemnity-NSSF, Army scheme, and Civil Servants scheme)

Relieve fiscal burdens in terms of reducing contingent liabilities

Promote equity among contributors, given that current operating systems having different eligibility criteria and different pension benefits

Provide social protection for a wider segment of population, as current systems cover limited segment of population

Pave the way for a more flexible labor market as the private sector scheme restricts labor mobility

PRELIMINARY

SOCIAL SECTOR REFORM PROGRAM

Increase efficiency in Health & Education

Pension reform

Social Safety Nets

  • Strengthening existing safety nets and creating new ones
  • Marginalized groups -orphans, women-headed households, handicapped, and ex-detainees
  • Micro-credits
  • Community development initiatives
  • Public Works in disadvantaged areas (improve infrastructure and generate employment)
  • Better targeting mechanisms and eligibility criteria
  • Undertake analysis of incidence of subsidies, & consider alternative programs
  • Revising the cost and reallocating resources
  • Insure affordability
  • Improve quality
  • Increase outreach
  • Improve the social return of government expenditure on major social services (health, education and social affairs)
  • Achieve universal coverage of basic health and education services

… WITHIN A COMPREHENSIVE SOCIAL STRATEGY

slide26

SOCIAL SECTOR REFORM PROGRAM

Existing Social Safety Nets in Lebanon

Ministries of Finance and Economy

  • Producer subsidy of wheat, tobacco and sugar beat
  • Subsidy of contributions to the NSSF for some specific groups (taxi drivers, Mayors,..)
  • Ex-detainees
  • Fuel Subsidy during winter-time

Ministry of Social Affairs

  • Social Development Centers
  • Non-governmental education, targeting:
    • Elderly
    • Orphans
    • Delinquents
    • Disabled

Social Funds (ESFD and CDP)

  • Community development
  • SME support
  • Employment generation

Ministry of Displaced

  • Grants for housing for the displaced
  • Other socio-economic assistance for displaced
  • Ministry of Health
  • Discounts on Medications
  • Waive co-hospital fee for poor patients

Other Ministries

  • Social allowances

In addition to other informal subsidy schemes including transfers, family networks, charity organizations and others

slide27
Alleviate poverty

Increase efficiency of spending

Better targeting mechanisms based on means-tested

Minimize regional disparities

SOCIAL SECTOR REFORM PROGRAM

Social Safety Nets reform

Problems with current system

Reformed System

  • Inefficient targeting mechanism and weak service delivery
  • Leakages to non-poor
  • Limited coverage
  • Lack of data and statistics on the localization and profile of the poor
  • Overlapping of services among the different Ministries and agencies

Strengthening existing social safety nets

Introducing new Social Safety nets*

* New safety nets will include: cash transfers to selected segments (poor senior citizens, poor female-headed households,..), in-kind transfers to improve education and health indicators for poor families, small scale development projects, and others.

slide29
Promote equity among contributors

Relieve fiscal burdens in terms of reducing contingent liabilities

Provide social protection for a wider segment of population

Pave the way for a more flexible labor market

PENSION REFORM PROGRAM

Expected application in 2008

Current System

Reformed System

  • Inequity of benefits among and within the systems, mainly in terms of:
    • Contribution rates
    • Income replacement rates
    • Accrued rate
  • High fiscal cost
  • Limited coverage of social protection
  • Questionable financial sustainability
  • Restrict labor mobility

Integrating the three existing systems into one modern scheme

presentation overview6
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

slide31

GOVERNMENT MEDIUM TERM TARGETSOVERALL IMPROVEMENT IN FISCAL BALANCES

Evolution of Primary Balance and Budget Deficit

1993 - 2010

MEDIUM TERM FISCAL BALANCE

STRONG ADJUSTMENT

Primary @

8% of GDP

Overall @

-3 % of GDP

PERIOD OF RISING DEFICITS

Primary @

5%/GDP

Overall @

-10%/GDP

Primary @

-10%/GDP

Overall @

-19% of GDP

slide32

PRE-PARIS II

POST-PARIS II

MEDIUM TERM TARGETS

185%

138%

DOMESTIC ADJUSTMENT EFFORTS LEAD TO DECLINING DEBT RATIO IN MEDIUM TERM But WITHOUT INTERNATAION SUPPORT THIS WOULD NOT BE SUSTAINED AS THE DEBT-TO-GDP RATIN WOULD REVERT BACK TO AN ASCENDING TREND BEYOUND 2010.

134%

50%

slide33

FISCAL ADJUSTMENT – EXPENDITURE MEASURES

  • Rationalizing current expenditures through:
  • Containing the wage bill in MT by limited hiring, freezing real wages & & reducing overstaffing => Wage bill / GDP will decrease by 1.5% by 2010
  • Minimizing transfers to public entities and revisiting spending patterns
  • Reforming public spending and reducing waste and redundancies
  • Increasing working hours in public sector and improving productivity
  • Providing for adequate public investment through:
  • Slightly increasing capital expenditures over 2005-2010 to invest in some important infrastructure projects & provide for adequate maintenance
  • Reducing cost of public investment through participation of private sector in public investment and increasing share of foreign-financed projects

As a result, expenditures / GDP will decrease from 30% by end 2005 to 26% by 2010

expenditure measures reform of edl
Expenditure Measures – Reform of EDL

Restructuring Initiatives

Timing

PRELIMINARY

  • Transformation Strategy:
  • Adopt long-term sector plan
  • Entrust auditing of EDL financial statements 2001-2005 to external auditor
  • Supporting Enablers:
  • Appoint new board of directors for EDL
  • Establish Electricity Regulatory Authority, and design its bylaws
  • Introduce potentially necessary amendments to Law 462
  • Implementation:
  • Corporatize EDL
  • Design new bylaws for EDL
  • Unbundle generation, transmission and distribution functions
  • Complete the establishment of a National Control Center

Sep 06

Jan 07

Jun 06

Jun 06

Dec 06

Mar 07

Mar 07

Sep 06

Mar 08

Long Term Initiatives

Timing

  • Inputs:
  • Secure supply of liquefied natural gas to Zahrani
  • Network:
  • Complete 220 KV network

Dec 06 (Decision)

Jun 07

expenditure measures reform of edl cont d
Expenditure Measures – Reform of EDL (cont’d.)

Short Term Initiatives

Timing

PRELIMINARY

  • Inputs:
  • Modify restrictive oil specifications based on 2003 study
  • Negotiate additional bilateral contracts for fuel oil and gas oil to reduce high premiums
  • Loss Reduction:
  • Install remote meters
  • Obtain support from security forces and the justice department to reduce illegal network connections
  • Obtain support from security forces and the justice department to increase the bill collection rate
  • Pricing:
  • Revise tariff structure
  • Study lowering connection and installation costs to make legal connectivity more affordable to low-income households

Jun 06

Ongoing

Ongoing

Ongoing

Ongoing

Mar 07

Mar 07

=> Savings of [2-3] % of GDP - This is crucial for reducing expenditures and achieving a sustainable fiscal position

slide36

STRUCTURAL EXPENDITURE REFORMS

Transparency

Accountability

Pension

Debt Mgt

Establishing a medium term expenditure framework '06

Improving budget coverage (CDR, EDL, etc.) 2006

Solving the issue of appropriations and carryovers, complementary period and treasury advances

  • Enacting modern debt management law (2006)
  • Setting up a modern debt management office (2006-07)
  • Improving quality of financial reporting (06-07)
  • Establishing a Higher Council for Debt Management

Integrating the three systems into one modern fully-funded (FF-DC) scheme by (2008) while preserving the acquired rights

Reforming Public pension system

Adopting a Fiscal Accountability Act

Implementing Treasury Single Account 2006

Adopting new Public Accounting Law 2006

New Public Procurement Law 2007

As a result, public expenditure management will be greatly enhanced with more accountability and transparency

government medium term targets expenditure reducing measures

WAGE BILL REDUCTION (% of GDP)

CUT DOWN TRANSFERS TO PUBLIC ENTITIES (incl. NSSF)

9.5%/GDP

7.9%/GDP

1.03 %/GDP

GOVERNMENT MEDIUM TERM TARGETSEXPENDITURE REDUCING MEASURES

1.70 %/GDP

LIMIT TRANSFERS TO EDL

PRESERVE CAPITAL SPENDING

3%/GDP

2%/GDP

evolution of public expenditures in the medium term
EVOLUTION OF PUBLIC EXPENDITURES IN THE MEDIUM TERM

Primary Expenditures Reduction in the Next 5 Years

(2005 - 2010)

slide39

FISCAL ADJUSTMENT – REVENUE MEASURES

Revenues measures

  • Raising the VAT to 15 percent either in one step (July 2006) or in two steps (July 2006 and beginning 2008) depending on potential savings on EDL. A 15 percent VAT would generate about 2.5 percent of GDP in additional revenue
  • Introducing a global income tax (GIT) by 2007-2008, which would generate about 1 percent of GDP of additional revenue over three years, 2007-09
  • Settling seashore violations, generating LL 135 billion in penalties in 2006 and about LL 45 billion a year in rent
  • Aligning domestic and international fuel prices by lifting cap on gasoline price and raising gradually gasoline excise tax on quarterly basis starting July 2006 until reaching pre-cap rate by end-2008
  • Raising tax on interest income from 5% to 8% in July 2006, generating about 0.7- 0.8 percent of GDP in additional revenues

As a result, revenues / GDP will increase from 22% by end 2005 to 24% by 2010 – taking into consideration revenue loss due to privatization of telecom sector

government medium term targets revenue enhancement to compliment expenditure cuts

INCREMENTAL TAX RATE CHANGES, GIT & TELECOM PRIVATIZATION LOSSES

INTRODUCTION OF VAT

INTRODUCTION 5% TAX ON INTEREST

2010 TARGET @ 24% of GDP

20%/GDP

GOVERNMENT MEDIUM TERM TARGETSREVENUE ENHANCEMENT TO COMPLIMENT EXPENDITURE CUTS

15%/GDP

slide41

REVENUE MEASURES- STRUCTURAL REFORMS

Structural Revenues Reforms

  • Modernizing tax services including electronic taxation (2006)

Modernizing business activity code, and ensuring accurate recording of taxpayers (2006)

Reforming property tax administration (2006-07)

Establishment of an Integrated Tax Administration (2007-08)

Expanding the Large Taxpayer Office (LTO) and Creation of MTO (Medium Taxpayer Office) (2006-07)

Modernizing Tax offices in Beirut and Mount-Lebanon (2006)

Unification of overall tax procedures under a unique ‘tax procedure code’, a prerequisite for the GIT (2006)

As a result, more transparency and more efficiency in revenue collection

governance reform major pillar in the program
GOVERNANCE REFORM: MAJOR PILLAR IN THE PROGRAM

Governance

  • Auditing public finances and government accounts since 1990 by an international reputable auditing firms—work should begin in (Q3- 2006)
  • Submit to Parliament a revised and modern public procurement law for more transparency (Q2 – 2006)
  • Reduce waste and corruption at the agency level starting with one or two ministries (or agencies) as pilot cases to be extended in time to other government agencies (2006)
  • Enhance the role of the Court of Accounts as an ex-post monitoring agency to ensure that public spending is in line with budgetary allocations (End 2006)
  • Continue the streamlining and automation of work procedures to reduce the citizen interface with public sector employees and reduce the risk of corruption (2007)
  • Adopting transparent, merit-based, and proper procedures for public sector recruitment to isolate recruitment from political considerations (started)
presentation overview7
Presentation Overview

I. Objective of the reform program

II. Pillars of the reform program

- Growth-enhancing reform measures

- Privatization program

- Prudent monetary policy and financial sector reform

- Social sector reform

- Fiscal adjustment and structural fiscal reforms

III. Medium-term framework and international support

slide44

We Are Aiming for a More Prosperous Future for Lebanon

and International Support Can Play a Key Role

More than ever, the Lebanese are determined to resolve the debt and fiscal challenge, triggering a virtuous cycle leading to economic and social stability

Renewed confidence in the Lebanese economy

Attraction of larger investments

Economic

&

Social

Stability

Improved overall risk profile

Higher levels of economic growth

More jobs

Lower fiscal deficits

government s turnaround strategy for lebanon in the next five years
GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS

Projected Macroeconomic Indicators

(2005-2010)

Nominal GDP

(In Billion LBP)

Deficit

(As % of GDP)

Public Debt

(As % of GDP)

GDP per Capita

(In million LBP)

Source: Ministry of Finance

government s turnaround strategy for lebanon in the next five years1
GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS

Projected Fiscal Deficit

(2005-2010)

With Reform

No Reform

Decreasing Deficit

(As % of GDP)

Rising Deficit

(As % of GDP)

Source: Ministry of Finance

government s turnaround strategy for lebanon in the next five years2
GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS

Projected Public debt

(2005-2010)

With Reform

No Reform

Public Debt

(As % of GDP)

Public Debt

(As % of GDP)

Source: Ministry of Finance

government s turnaround strategy for lebanon in the next five years3
GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS

Projected Growth Rates

(2005-2010)

With Reform

No Reform

Real Growth Rates

(In %)

Real Growth Rates

(In %)

Source: Ministry of Finance

evolution of gross public debt with and without reforms

Gross Public Debt

(% of GDP)

230.00%

210.00%

213.7%

190.00%

170.00%

150.00%

130.00%

136.6%

110.00%

90.00%

2004

2005

2006

2007

2008

2009

2010

BASELINE (No Fiscal + Higher i rates)

EVOLUTION OF GROSS PUBLIC DEBT WITH AND WITHOUT REFORMS

GVT REFORM PGM

towards higher gdp growth stable growth rate in medium term

MEDIUM TERM TARGETS

ECONOMIC REFORMS SPURS REBOUND

TOWARDS HIGHER GDP GROWTHSTABLE GROWTH RATE IN MEDIUM TERM

STAGNATION AMID RISING FISCAL CHALLENGES

6-8% Nominal Growth

ECONOMIC BOOM FOLLOWING END OF CIVIL WAR

9% Nominal Growth

-1% Nominal Growth

14% Nominal Growth

slide51

2009

2010

2008

2006

2007

TIME LINE OF MEDIUM TERM REFORMS2005-2010

EXPENDITURE MEASURES

ELIMINATE CARRY-OVERS on CURRENT EXPENDITURES & TREASURY ADVANCES

TREASURY SINGLE ACCOUNT

RAISE SLIGHTLY CAPITAL EXPENDITURES TO 3% of GDP & IMPROVE EFFICIENCY

REDUCE GASOLINE & COMMUNICATION SPENDING WASTE

CONTAIN WAGE BILL BY REPLACING ONLY PARTIALLY RETIRED EMPLOYEES

ADOPT PERFORMANCE BUDGETING

REDUCE OFFICIAL TRAVEL EXPENSES

CLOSE FUND for DISPLACED & COUNCIL of the SOUTH

TARGET for FINANCIAL ACCOUNTABILITY LAW

REVIEW SALARY & BENEFIT STRUCTURE IN PUBLIC ENTITIES

INCLUDE in BUDGET DONOR FINANCED CAPITAL SPENDING & EDL TRANSFERS

LIMIT CDR ROLE to LARGE SCALE INVESTMENTS

2006

2007

2008

2009

2010

REVENUE MEASURES

RAISE VAT ( range 12%-15%)

Arrive @ VAT 15%

GLOBAL INCOME TAX

RAISE TAX on INTEREST (7% or 8%)

ELECTRONIC FILING SYSTEM for LTO

GASOLINE EXCISE @ PRE-CAP LEVEL

TAX PROCEDURE CODE

STAFF & MODERNISE TAX ROLL UNIT

REVAMP PROPERTY & INHERITANCE TAX

SETTLE SEASHORE VIOLATION

MEA & CASINO du LIBAN PRIVATIZATION

REALIZATION of EURO-MED & FTA AGREEMENTS

PRIVATIZING MOBILE OPERATORS

PRIVATIZING FIXED LINE

STRUCTURAL & OTHER MEASURES

EDL: CREATION of PRODUCTION & DISTRIBUTION COMPANY

LAUNCH OF EDL PRIVATIZATION PROCESS

EDL: CREATION of ELECTRICITY REGULATORY AUTHORITY

international assistance
INTERNATIONAL ASSISTANCE
  • A debt-to-GDP ratio of 138% remains too high by any standard
  • Public debt in Lebanon is sustainable if the debt-to-GDP ratio declines noticeably over time
  • While fiscal adjustment over the next 5 years is significant, this could not be sustained in LT
  • The Debt-to-GDP ratio, after falling to about 138% in 2010, would increase to 152% by 2020 without international support

International support is crucial for a steady decline in the debt ratio over LT

  • Different forms of international support: grants, concessional loans, loans guarantees, etc,…
  • Grants would have the greatest impact on debt stock, while highly concessional loans would affect the debt ratio through a reduction in debt service
  • In addition, reform and International financial support would help boost growth
  • For every 1% increase in the growth rate, the debt-to-GDP ratio would decline by 1.7% a year