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Troubled financial waters

Overcoming the country’s problems requires cash injection and smart financing

by Jeremy Arbid

The complications posed by the refugee crisis and stagnant legislature found Lebanon’s public finances in troubled waters. There have, however, been some positive developments. The Ministry of Finance has again issued Eurobonds – the purchasing of which has demonstrated a local appetite to continue financing public expenditures; it moved closer to reconciling public accounts and Lebanon’s bid to join the European Bank for Reconstruction and Development may soon be approved. Executive sits down with the director general of the Ministry of Finance, Alain Bifani, to discuss the impact of these developments on state finances.

In April 2015, you met with the United States Under Secretary of State for Economic Growth, Energy and the Environment. Can you tell us about your talking points for the meeting and if there were any practical results from that meeting?

We were at the spring meetings of the [International Monetary Fund] (IMF) and the World Bank and Lebanon had already bid to join the [European Bank for Reconstruction and Development] EBRD. We had some countries that immediately provided support and others that needed to discuss the issue and reasons why we wanted to join and how Lebanon intends to use the financing of the institution. The purpose of the meeting on the American side was to talk precisely about the reasons Lebanon was bidding to join EBRD and whether they could be supportive of our bid or not.

E   What are the potential benefits of joining the EBRD?

There are many. Firstly, Lebanon is a country that needs money for development – we are always looking for new money to be injected into the system. The second reason is that when you have an institution [like EBRD] it’s always better to be inside, to be on the board, and to know what the topics of interest are and what is happening at the institution. The third reason is that when the Deauville Partnership [with Arab Countries in Transition – launched by the G8 in 2011 to support democratic reforms] started, Lebanon was left [out]. For a very long time, Lebanon was one of the few, if not the only, democracies in the region and it paid a very high price for that. Last but not least, EBRD is not an institution that only finances public projects; its expertise is related to the structure of the corporate, the ownership, access to financing [and] access to market.

E   The Ministry of Finance has been working on the closure of public accounts – an exact accounting of public spending – for years. Do you have an update?

Eight out of 10 financial accounts are completely finished which means we have been able to reconstitute accounts where possible from 1993 and from 1997 to the penny until 2011 because the stock was before 2011 and [now] the flow is being dealt with normally. For the first time ever Lebanon has accounts with absolutely no question marks against them from January 1, 1997, to date.

E   When you listen to the political rhetoric, everyone seems to be accusing the other of stealing public funds – but you’re saying this information is actually largely available now?

This information is becoming available but technically speaking before we finish the two remaining accounts – which are well advanced – it is not possible to reproduce all of the series from any given date. So what will happen now is we’ll finish the two remaining accounts and then we will produce the accounts. The reason I say 1993 to 1996 is that more than 50 percent of the documents [from that period] were lost or had disappeared.

Since January 1, 1997, we had hundreds of thousands of mistakes in each account – things that were not appropriately accounted for [or missing entirely]. The magnitude of that was extremely great. We no longer have any reconciliation accounts – we used to throw figures [out] because we had no clue what they were. This has all been [reconciled] to the penny. Then in 2014 we found the opening balance for January 1, 1993, while in 1995 people would have thought it impossible to find the opening balance [from] two years ago.

E   Were there any anomalies?

Enormous ones. The number of anomalies, the number of mistakes, of misreporting was huge. Now it is not my duty to say why this happened. My duty is to provide the country with what is needed and to build on that and continue to produce regularly. It is not the duty of the Ministry [of Finance] to make it accessible. First, this is a draft law by nature so it has to be finalized by the ministry, approved by cabinet and sent to Parliament. Normally this closure happens when it goes to Parliament because the Council of Ministers, as long as it is a draft law, is always going to say [it] does not want this to be presented and it must be changed. But of course it requires [action at the] political level to decide how to [disclose].

E   Ziad Hayek of the Higher Council for Privatization recently advised that Lebanon needed $6.2 billion for infrastructure investment. Are there any tools that the government can use to get past not having Public-Private Partnership (PPP) legislation but still investing in this much needed infrastructure?

PPP is one way of doing things and having a law that organizes and gives a framework to that kind of financing is always reassuring to investors. This does not mean that things cannot happen in the meantime – sometimes there is direct involvement by private corporates. It is not necessarily a PPP per se but this idea of mobilizing funds now even before legislation goes through is absolutely possible.

E   And are we seeing that type of mobilization of funds in the electricity sector?

The debate is biased by the fact that there is a lot of frustration. The country feels that nothing can be done – it’s been [that way] since the end of the [civil] war, a very long time, that we are not seeing significant improvement. The electricity issue is not about bringing resources in one way rather than another – the issue is that first we need to mobilize a big chunk of money that needs to be invested in production. Second, we have a major issue with distribution and the plan that was approved unanimously in 2010 takes into consideration those steps. Third, the issue of governance at the level of the company is important because it is very unfair to say that the public sector has failed in its duties here and at the same time has not provided the company with what it needs in terms of human resources, governance and capacity to act [accordingly].

E   Steering clear of the allegations of corruption in the electricity sector coming from the minister of finance – with the decline in oil prices, do you see that deficits for Electricité du Liban (EDL) will be sustained?

There is definitely an effort to be done on the pricing of utilities. The subsidies that we are providing are massive and we are losing money. The state decides on the expenditure – whether it is the operating expenditure or the buying of fuel or new investments – and the state decides on the pricing. This decision has to be changed; we are simply unable to continue to subsidize the sector in the same way. The fact that oil prices have dropped provides some breathing space. If we look at our non-existing budget we have salaries, transfers to EDL and debt servicing. This is by far the largest part of the budget – roughly more than 80 percent of the expenditure. We do not know when oil prices, or commodity prices in general, will go up again. So we have various sources of uncertainty that should be pushing us for immediate action whilst we have this breathing space.

In layman’s terms can you elaborate on why you consider loans to be a negative source of financing the refugee crisis?

It’s not a negative source of financing – it is a totally inappropriate way of financing. There is an issue that is short term and a lot of it is long term. A displaced person remains a refugee for an average of 17 years. So when you talk about an issue like that it cannot be only humanitarian. Of course the immediate relief is important – it is short term. [There]is also a security issue which is short and long term, and economic issues that are long term. So you have an answer that needs to be timely [and that is fitting to the] massive crisis. We are rendering a service to the world – this is called a global public service. Instead of being a reasonable cost in Lebanon, it will be much more costly outside [of Lebanon]. To put it bluntly we are presenting a bill [and] this is how much it costs. If you want us to be able to continue to do that, then you have to pay and contribute; otherwise we will reach a point where it is going to become impossible for us.

E   With the recent issuance of Eurobonds, can you elaborate how those are structured and what the impact is for state finances?

We had from the beginning a legal cap so we knew how much we wanted and we got the amount. We were able to keep very low yields given Lebanon’s rating and situation. Because of the legal situation now (early November 2015), we have a parliamentary session but at that time we didn’t know if we were going to have one. We have also started an exchange on the 2016 amounts. We [also] have issued three [bonds]: one for nine years at 6.25 percent, one for 13 years at 6.65 percent and one for 20 years – the first long maturity Eurobond for Lebanon ever, and that is very interesting knowing that it is always good to lock in as much money as you can in the long run.

E The purchasing of the Eurobonds has been driven more by local banks rather than foreign institutions – is that because of Lebanon’s credit rating?

This time we didn’t have a lot of external appetite for many reasons. Looking at the region as a whole is not very reassuring – it is not only Lebanon [but also] everywhere else – [and because of the] magnitude of the Syrian displacement issue in Lebanon. The perception [is] that nowadays Lebanon is offering interest rates that are below what it could have and therefore to go to the same level of risks investors could go somewhere that is providing [higher returns]. This is good for us because it means we succeeded in bringing in a lot of money at a very low cost. The final point is one of the most important points – we are in the midst of a situation where capital is flying toward big economies and fleeing the emerging world. We have issued [bonds] at a time when most of the big emerging economies were dying for capital to stay in the system – Latin America and Brazil in particular, but also Asia, Africa, the Gulf and here [in Lebanon].

E   Executive recently published an interview with Paul Donovan from UBS Investment Bank – he argued that there will be a global war for capital in the future. Do you agree, and how will Lebanon fare?

There are two threats that are now very significant to Lebanon; this is one of them. The reason is that we rely on a lot of our own resources. Those are large enough whether talking locally or worldwide to protect Lebanon from that kind of development in the world. Where it is going to hurt most is in countries where they have been relying on foreign financing for their immediate needs. This is not our case and never has been.

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Jeremy Arbid

Jeremy is Executive's former economics and policy editor.

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