Lebanon’s finance minister assesses the impact of this year’s political turbulence on the economy and maps out his plan to balance public finances as the country gears up for another donor conference.
E How badly were the country’s public finances affected by this year’s political upheaval?
It had a negative impact on public finances, although the political upheaval had already started making itself felt on the economy before the assassination of [former premier] Rafik Hariri. His death and the ensuing events exacerbated them. The impact manifested itself in a reduction in revenues due to the reduction in economic activity. The various governments at the time did not take the necessary measures to keep the level of the budget deficit stable, i.e. they did not correct the reduction in revenues with a reduction in expenditures. What I did after I became minister of finance was to stabilize the public finances in a bid to improve the primary balance of the budget, that is to say all the government’s operations outside debt. I improved the collection of revenues and I programmed the expenditures, with an objective of improving the primary surplus. In three months, we were able to improve the primary surplus by 300 billion Lebanese pounds, which represents 1.1% of GDP. The other problem which emerged after the assassination of Hariri was a financing problem. Severe pressure was exerted on our currency and the treasury has problems financing itself, so it had to turn to the central bank. Therefore, interest rates went up and an abnormal situation was created by the fact that the treasury was financing itself through the central bank. I took the decision to pre-fund all the treasury’s needs in order to avoid an increase in interest rates. This created greater confidence in the market as the treasury was again perceived as being liquid enough. It also reduced any pressure on interest rates and the Lebanese pound.
E Which sectors of the economy suffered the most from it and what do you think their chances are of a rapid recovery?
Expectations for tourism were very high this year and this sector was badly hit. Still, we have witnessed a recovery of the sector during the last three months. In fact, economic activity in the last three months has compensated for the first half of the year, which was very difficult for all sectors, mainly tourism, but also other sectors linked to internal consumption. For instance, the balance of payments, which was showing a deficit of $1 billion, recovered substantially during the last few months – we will be almost in a balance by the end of the year. Exports also went up in the third quarter, as did certain other activities. So we have started recovering progressively most of our lost economic opportunities and we are expecting a slight growth of less than 1% for the year. The Lebanese economy demonstrated a tremendous level of resilience this year.
E Did the events of 2005 ultimately serve as a political shock more than an economic shock to the country?
It was a severe political shock that had an economic impact. However, because of the improvements we had in 2003 and 2004, where we witnessed strong improvements in growth, in public finances and in the monetary indicators, we were able in 2005, to overcome one of the strongest earthquakes we have had on the political level in the last 15 years. Had those events not happened, we would have had an excellent 2005, in terms of growth, investments, a reduction in the budget deficit – in all the economic indicators basically.
E Looking forward to 2006, what are the three biggest challenges the ministry intends to face down?
The first one is to seize this window of opportunity that is the donor conference and to transform it into a program of reform, which will stabilize the economy by reducing the level of deficits. This will be achieved by making the economy grow faster. It is a challenge that requires that we convince the Lebanese of the necessity of undergoing a major transformation program, which will aim at meeting the objectives I just mentioned, as well as strengthening social stability in this country. The second challenge is to finalize a new vision for the ministry, which will articulate all of our reform plans, ranging from completing the modernization of the process for customs, to land registry, public finances and debt. We aim at not only completing the reforms but also improving the management practices of the ministry and to increase its level of accountability and good governance. The third challenge is to strengthen partnerships with the private sector, the NGOs and other parts of the community, most notably youth. We have created a joint commission with the private sector to go over all the problems it faces and to address them with clear targets. For instance with regards to exports, our new motto is: “Multiply by two, divide by two.” We want to multiply our exports by two over the next two years, and divide the costs and clearance time by two. We are also working with youth to develop an economic agenda for them, so as to give them the incentive to stay in Lebanon.
E To what extent is this program influenced by Prime Minister Fouad Seniora’s plan from last year, which proposed large spending cuts? Will any of this be exhumed for future use?
Of course it is influenced by it. But you can’t ask people to make additional efforts if you are not doing your homework yourself. We have to make the government more efficient and effective. We have to increase productivity. We have to reduce the waste in spending. And for that purpose, we at the ministry of finance have launched a new initiative with NGOs that are experts in fighting corruption. We are also working with the World Bank on an agenda for good governance. We have to reform the expenditure system in this country, we have to modernize the way the government functions and reduce unnecessary spending, before we can ask people for any additional contributions.
E Does this include promoting e-governance to slim down the bloated bureaucracy and make it more efficient?
Absolutely. For instance this ministry launched three months ago a new service for the taxation process, whereby you can download declarations and send in your declaration electronically. We have also automated all our payments, using modern payment techniques. With regards to customs, we are introducing a new system that will enable all clearance procedures to be done electronically. Additional services, especially e-services, will help people save time and money.
E E-governance also has the added benefit of eliminating the middleman between the citizen and the state, thereby reducing the risks of corruption. Does fighting corruption figure prominently on your agenda or do you view it as a necessary evil for now?
No, I don’t view it as a necessary evil at all. As I mentioned, we started this commission with experts on corruption to figure out how we can reduce it, how we can improve the level of accountability, as well as governance. In addition to this we are taking immediate measures at the ministry. We have issued circulars internally to remind the civil servants of their duties and to not accept any corruption. If there is any act of corruption, we will take immediate action. However one also needs to take into consideration the fact that fighting corruption requires long-term motivation. It is by changing processes, by automating transactions, by strengthening the control over your employees, by changing laws, that you will make a difference.
E At the end of the day though, the biggest drainage on public finances does not come from small-scale corruption at the level of civil servants, but from the large money swindling operations that politicians engage in, such as what we have seen with Casino du Liban. Do you believe that the passing of a new election law that would change the political map of the country and make politicians more directly accountable to their electorate, could be an efficient measure to reduce corruption at the political level?
Corruption takes place at various levels and comes in many forms. Some are related to small transactions, others are more organized. Therefore, the way to fight corruption is to focus on the types of risks you have. You need to be serious about it, which is why we set up this commission of corruption experts. In principle, any improvements of our institutions are favorable. This reform is very important, as is changing other laws as well, in order to improve the level of accountability. But changing laws is not enough, it’s also a matter of culture. It goes beyond the regulatory framework. People have to put more weight on economic issues when evaluating an MP. They also have to ask their MPs for more accountability. And thirdly, the government needs to provide them with basic services, to prevent people from going to their MPs to ask for personal favors. So it’s a comprehensive change that is required, and the government is working on it.
E We’ve talked about cutting down on public expenditures and waste, let’s look at potential revenues for the government. Will the gas price cap be done away with? And if not, how can the ministry justify letting a potentially major source of state revenue slip away due to political calculations?
Firstly, it is very important for people to know that the government is presently providing approximately $1 billion in subsidies, especially to the energy sector, to compensate for the weak management of EDL and to make up for rising oil prices. The government subsidized gas prices to maintain them at a certain level and lost a lot of revenue due to this. Taxpayers are paying for these subsidies, because at the end of the day, the government has no other resources but fees and taxes. Secondly, we should not look at any one element of these subsidies on its own – it’s all part of a package. The program the government is working on has various pillars. The first pillar is to improve the macro-economic situation by reducing the debt over GDP. For that you have to reduce interest rates and the stock of debt over the reserves and you have to improve your primary balance. There are two ways of going about this: either you reduce your expenditures or you increase your revenues. We are focusing on cutting down expenditures and on increasing revenues by improving the management of the tax system. But the bottom line is that this is a social choice. If we are not able to achieve our objectives only by reducing expenditures, we will be forced to increase taxes. And if we have to do this, our objective is to have a balanced tax burden, not to focus on one type of taxpayer or one type of services. It will broaden in order to reduce the burden on the individual citizen. The second pillar is to liberalize the economy. However, economic privatization is going to be done differently this time. We will not transfer any monopoly from the public to the private sector. It will be done in a participatory manner, giving people the opportunity to invest. And we want these sectors to create jobs. The third pillar is a growth agenda: we need to improve the business environment by modernizing the laws, streamlining the procedures and supporting fast growing sectors, such as IT and tourism where you have value-added.
E Is there no social aspect to the government’s program?
There is. The fourth pillar of our program is strengthening the social safety net. The government is spending more and more money on social services every year. On the other hand, social services are deteriorating and social indicators are going down. To correct this, we have to reform social spending, improve its efficiency and create social safety nets. This will require mapping out where we have vulnerable groups and see how we can help them. We have high levels of leakages. For instance, the government is spending a lot of money on wheat subsidies, but when studying the system more closely, you find that only 15% goes to the farmers. The problem is if you stop giving subsidies, you create social problems. That is why an improvement of social management needs to be undertaken. So to go back to the initial question about gas subsidies, it all falls under the deal that various parts of society need to make. If we agree that we want to improve the stability of our macro-economic situation, to improve growth, to seize the opportunity to get international support, then we all need to share the burden of reform.
E By postponing the donor conference, Seniora suggested that the world is not ready for another round of lending to Lebanon. The list of possible demands is long, but what absolutely must be done before any such conference can be held?
First of all, we need to [engage in] dialogue more over the vision we have in the cabinet, in order to transform it from a vision into a program. We also need to consult with the various stakeholders to develop a national agenda, so that the majority of the Lebanese and the political groups will back the political reforms. The reforms will take at least five years, so this requires commitment. On the other hand, the dialogue with the international community needs to continue. We’ve had a series of meetings with government representatives, we are coordinating regularly with international institutions such as the World Bank and the IMF, and we may have a gathering of experts in Beirut in January to prepare for the February donor conference.
E What lessons will you take from the Paris II round so as to avoid falling into the same pitfalls?
Firstly, we are taking several technical lessons on how to use all this money and conduct the operations in themselves. The second lesson is the great reaction of the market and the economy. After Paris II, even before any payment had arrived in Lebanon, we witnessed a major shift in the economic outlook: interest rates went down, capital inflows became substantial – very important changes were brought about. This is why we must view this opportunity as a turning point in Lebanese political history. It is remarkable how quickly people react to positive news in this country. Thirdly, this must not be viewed as a government program. It must be perceived as an economic agenda for the whole nation, from which everybody will benefit. That is why everybody should fight for making it happen. And last but not least, is the issue of credibility. We have to show that we are credible, as much to ourselves, as to the investors and to the international community. We must show that if we commit to something, we will deliver.