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Cablegate: Lebanon: Chatah Discusses Budget, Economic Reform With

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RR RUEHBC RUEHDE RUEHKUK RUEHROV
DE RUEHLB #1627/01 3181531
ZNR UUUUU ZZH
R 131531Z NOV 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 3559
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 001627

SENSITIVE

SIPDIS

STATE FOR NEA/ELA, EEB/IFD/ODF, EEB/CIP/BA
STATE PASS USTR
TREASURY FOR PARODI/BLEIWEISS/AHERN
USDOC FOR 4520/ITA/MAC/ONE
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT
STATE PASS USAID FOR BEVER/LAUDATO/SCOTT

E.O. 12958: N/A
TAGS: ECON EFIN EAID PGOV LE
SUBJECT: LEBANON: CHATAH DISCUSSES BUDGET, ECONOMIC REFORM WITH
TREASURY DAS MENDELSOHN

SUMMARY
----------

1. (SBU) In a November 11 meeting with Treasury Deputy Assistant
Secretary for Intelligence and Analysis Howard Mendelsohn, Finance
Minister Mohammad Chatah said that despite differences between the
U.S. and Lebanese definitions of terrorism, there is ample room for
terror finance and anti-money laundering cooperation between the two
countries. He said his ministry was focused on the passage of the
2009 budget, as well as the rollover of USD 14 billion of debt over
the next fourteen months. Chatah reiterated his previous statements
that Lebanon's economy and banking sector have so far weathered the
international financial crisis well, but said the largest threat to
the Lebanese economy is a potential slowdown in the Gulf.

2. (SBU) Chatah noted that the IMF was expected to approve a second
Emergency Post-Conflict Assistance (EPCA) program for Lebanon on
November 14. He said the GOL had begun collecting its gas excise
tax as a result of falling oil prices, and though the tax rate is
currently not as high as the one called for in Lebanon's first EPCA,
it still showed the GOL's will to reform in the face of political
pressure. He said he expected electricity tariff reform to be
presented and passed by the end of the year. He claimed there was
strong political will across the political spectrum to complete
mobile telecom privatization, but that current market and political
conditions might delay the actual sale until after the 2009
parliamentary elections. End summary.

COMMON OBJECTIVES IN TERROR FINANCE
----------

3. (SBU) Visiting Treasury DAS Mendelsohn and the Ambassador called
on Finance Minister Chatah in his ministry office November 11.
Chatah advisors Huda Saigh, and Nadine Abukhaled, as well as
Treasury analyst Kristofer Doucette, Regional Treasury Attach Alex
Severens, and EconOff also attended the meeting. DAS Mendelsohn
described the role of his office within the Treasury Department and
its priorities in terms of terror finance, particularly in Lebanon.
Chatah noted that terror finance is a sensitive area in Lebanon (as
well as in Palestine) because of what he called its "greyness," i.e.
lack of agreement with the U.S. on what constitutes a terrorist
organization. He noted that Hizballah is part of the national unity
government in Lebanon, and has a significant number of seats in
parliament, which obviously excludes GOL cooperation with the U.S.
on issues relating to the party.

4. (SBU) Nonetheless, he said, the USG and GOL share many common
objectives. He mentioned that the Special Investigation Commission
(SIC), the autonomous financial intelligence unit under the auspices
of the central bank, had been set up after September 11, 2001 to
monitor banks and investigate activity related to terror finance and
money laundering. He said that while the Finance Ministry did not
usually have direct involvement in such cases, it was always ready
to be helpful in any way possible.

DOMESTIC FINANCIAL ISSUES
----------

5. (SBU) Chatah stated that while the U.S. was preoccupied with the
current financial crisis, the GOL was mostly focused on passing a
budget for 2009 and ensuring that it is financed. He said he was
currently reviewing the budgets for the various ministries, and
expected the budget to pass at the end of the week of November 17.
He noted that the Lebanese cabinet had already approved a new EPCA,
and that the IMF board would meet in Washington November 14 to
approve it. He said the Lebanese banking sector, certainly of
particular interest to DAS Mendelsohn, was of huge importance to the
GOL, since the banks are a substantial source of funding to the
government. Chatah said that USD 14 billion in government loans
will come to maturity over the next fourteen months, and the GOL is
counting on banks to accommodate a rollover.

6. (SBU) In response to the Ambassador's inquiry about the budget
for the Lebanese Army and the Internal Security Forces, Chatah said
security took up a large percentage of the budget, and there had
been concerns in the past that the government was not getting "bang
for the buck" in those areas. That said, he insisted there was
consensus in the cabinet about the importance of support to the
security services, and though Interior Minister Ziyad Baroud had not
given Chatah estimates for the cost of a new border security

BEIRUT 00001627 002 OF 003


program Chatah said he had included reserves in the budge to cover
it. (Chatah also noted that Baroud had not yet forwarded the
ministry's 2009 parliamentary elections budget to the cabinet.)

SO FAR IMMUNE FROM THE CRISIS,
BUT FEAR ABOUT IMPACT ON THE GULF
----------

7. (SBU) Chatah reiterated what he has said numerous times both in
public and in private: that the international financial crisis had
so far not had a significant impact on Lebanon. He said any effect
might be felt later, if the crisis brought about a serious slowdown
in the Gulf region.

8. (SBU) Chatah stated that the Gulf is Lebanon's "safety valve,"
with remittances and investment from the region cushioning political
and economic crisis in Lebanon. He said there are 250,000 Lebanese
working in the Gulf, which represents one-fourth of the workforce in
Lebanon itself. Given that these expatriate workers earn four to
five times what they would in Lebanon, Chatah said the "Lebanese
economy in the Gulf" is actually larger than domestic GDP. Because
of links between the two, any slowdown in the Gulf would be damaging
to Lebanon itself. While Chatah worried that a liquidity squeeze in
the Gulf might hurt investment, he believed the flight from
financial to real assets might actually cause some Gulf investors to
increase investments in Lebanon, so any net effect would be small.

9. (SBU) Chatah also stated that bank assets in Lebanon have been
increasing at a rate of 12-15 percent in recent years, even through
various political crises and a war. Moreover, they have continued
to increase during the financial crisis, he said, adding that a
liquidity squeeze in Lebanon therefore appeared unlikely.

STATUS OF CASH TRANSFER CONDITIONS
-----------

10. (SBU) The Ambassador and EconOff asked Chatah about the status
of the two remaining conditions for the disbursement of the USG's
Paris III cash transfer pledge. Econoff noted that Embassy contacts
claimed the electricity tariff restructuring was on track for
passage by the end of the year, although they were increasingly
pessimistic on mobile telecom privatization. EconOff explained that
Washington was considering using the cash transfer funds for other
purposes, and therefore would be particularly interested in any
change of timing on the telecom license sale.

11. (SBU) Chatah pointed out that even though the USG abandoned the
cash transfer condition of increasing the gasoline excise tax, the
GOL is now once again collecting the tax as oil prices fall. He
admitted that the tax rate currently is not at the 300 Lebanese
pounds per liter that was mandated by the original condition, but
noted that the GOL was insistent on collecting some tax now, in the
face of political pressure. This, he said, demonstrates the GOL's
commitment to reform in the sector.

12. (SBU) Chatah said Energy Minister Alain Tabourian had made
reform of the electricity tariff one of the priorities of his
mandate as minister, and was due to present a plan shortly. Chatah
believed the new tariff structure would be approved by the end of
the year.

13. (SBU) The minister noted that telecom privatization was
mentioned in the ministerial statement, and has support across the
political spectrum in the cabinet. He said the sale would take
place, with the only question about timing and market conditions.
He observed that parliament must pass a law authorizing the sale of
the licenses, and most other donors had put passage of that law as a
condition for any contribution as a sincere step by the GOL toward
reform.

14. (SBU) Chatah said the government wanted to do the sale before
the elections, but market conditions have deteriorated to the point
where if the sale took place, the government could be accused of
cheating the people out of getting fair value for the mobile
licenses. "No one says it shouldn't happen," he said, "It is just a
question of timing." He said he expected the sale would take place
either in the spring, as originally planned, or in the fall, after
the spring parliamentary elections.

15. (SBU) Minister Chatah reiterated his wish to see the remaining

BEIRUT 00001627 003 OF 003


cash transfer funds used to pay off high-interest Eurobonds held by
the central bank, rather than World Bank loans.

SISON

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