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Cablegate: Lebanon: New Salary Measures Could Break the Budget

VZCZCXRO7566
RR RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV RUEHSR
DE RUEHLB #1763/01 3511515
ZNR UUUUU ZZH
R 161515Z DEC 08
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC 3796
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RHEHAAA/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 03 BEIRUT 001763

SENSITIVE

SIPDIS

STATE FOR NEA/ELA
STATE PASS USTR FRANCESCKI
STATE PASS USAID BEVER/LAUDATO/SCOTT
TREASURY FOR MNUGENT AND SBLEIWEISS
USDOC FOR 4520/ITA/MAC/ONE
NSC FOR ABRAMS/RAMCHAND/YERGER/MCDERMOTT

E.O. 12958: N/A
TAGS: ECON EFIN PREL PGOV LE
SUBJECT: LEBANON: NEW SALARY MEASURES COULD BREAK THE BUDGET
(ECONOMIC WEEK IN REVIEW, DECEMBER 8 - 14, 2008)

CONTENTS
--------

-- MPS APPROVE COSTLY MEASURES THAT COULD BREAK THE BUDGET
-- ENERGY MINISTER WORKING ON NEW ELECTRICITY TARIFF
-- WORLD BANK DELEGATION PRAISED BUDGETARY REFORM
-- TELECOM MINISTRY WILL TAP DIASPORA FOR ICT EXPERTS
-- INDUSTRIAL EXPORTS RISE IN FIRST NINE MONTHS OF 2008
-- IIF: LEBANESE BANKS REMAIN WELL-CAPITALIZED AND HIGHLY LIQUID
-- BYBLOS BANK ACQUIRES LEBANESE BRANCH OF BANCA DI ROMA
-- MOODY'S RAISES LEBANON'S OUTLOOK TO POSITIVE

MPS APPROVE COSTLY MEASURES
THAT COULD BREAK THE BUDGET
--------------------

1. (SBU) On December 11, a parliamentary committees approved a set
of measures which, if implemented, will put a significant additional
burden on state finances. While the measures still require approval
by the full parliament, their passage would dramatically increase
Lebanon's already huge budget deficit, and prevent the government
from meeting its Paris III budget commitments.

2. (SBU) The committees approved the minimum wage and across the
board public sector salary increase, as passed by the cabinet
September 9. The full parliament is likely to vote on and approve
this law early next week. Finance Minister Chatah told us
previously that this measure will cost the Treasury approximately
$500 million annually, and though the cabinet approved four measures
meant to cover half of this additional cost, Chatah acknowledged
that this measure will increase the deficit.

3. (SBU) In addition, the committees approved the payment, over
three years, of $800 million in salary arrears for civil servants
and members of the armed forces who did not receive an authorized
salary increase during the period 1996-1998. Opposition MP Yassin
Jabir told us December 12 that Opposition Leader Michel Aoun
proposed the draft law on this issue, and March 14 decided not to
object in an election year, despite the fiscal pressure it would put
on the state. The committees also approved a five percent salary
increase for teachers, and a 20 percent salary increase for army
soldiers deployed outside their barracks. These measures will cost
the treasury an additional $53 million annually.

ENERGY MINISTER IS WORKING ON NEW
ELECTRICITY TARIFF STRUCTURE
--------------------

4. (SBU) On December 11, national power utility Electricite du Liban
(EDL) Chairman Kamal Hayek told us Minister of Energy and Water
(MEW) Alain Tabourian is in the process of fine-tuning a new
electricity tariff structure after receiving some recommendations on
it from PM Siniora and Finance Minister Chatah. Hayek said
Tabourian's proposal was well-structured, would be acceptable to
different socioeconomic groups, and would provide much-needed income
to the treasury. He added, "If this proposal does not pass in the
cabinet, then it means there is no political will to improve EDL's
financial situation." The current tariff structure dates back to
1994, when oil prices were 15-16 dollars a barrel, he said. A
senior source at the Finance Ministry confirmed that Tabourian was
finalizing the new tariff structure and will hopefully submit it to
the cabinet this month. (Note: A revised tariff structure is one of
the benchmarks in the new IMF Emergency Post Conflict Assistance
(EPCA) program. The USG will soon condition part of its Paris III
budgetary support on the implementation of this reform. End note.)

WORLD BANK DELEGATION PRAISED
BUDGETARY REFORM
--------------------

5. (U) After meeting with Finance Minister Mohammad Chatah on
December 5, a World Bank (WB) delegation praised the progress
achieved in budgetary reform and indicated that the WB plans to
expand support at a later stage to include reforms in the field of
higher education, linking it to the job market, according to local
press reports.

TELECOM MINISTRY WILL TAP
DIASPORA FOR ICT EXPERTS

BEIRUT 00001763 002 OF 003


--------------------

6. (SBU) Minister of Telecommunications Gebran Bassil will hold a
conference, called "Telecom for Lebanon- Tapping the Diaspora," to
include telecom experts from the Lebanese diaspora. The event,
which Bassil conceived as a way to attract homegrown talent back to
Lebanon, is meant to be a forum for expatriates to share their
knowledge on telecom liberalization, as well as to help develop
strategic telecom projects to stimulate economic growth and turn
Lebanon into a hub for the MENA. The conference, to be held
December 29 in Beirut, is co-organized by Berytech Technology Pole
(an incubator for ICT start-ups), the Partnership for Lebanon (a
U.S. private sector initiative), and the Telecommunications
Regulatory Authority (TRA).

IPR TRAINEES EXPRESS
SATISFACTION WITH USPTO PROGRAMS
--------------------

7. (SBU) On November 26, EconOff and staff met with Dr. Colette
Raidy and Rasha Hamra from the Ministry of Public Health (MOPH),
following their participation in the USPTO IPR Patent Advanced and
Patent Basic programs respectively. While both were very satisfied
with their programs, Hamra wished that her program had focused more
on pharmaceutical issues. They also suggested the training could
include time at the Food and Drug Administration (FDA), which would
be more specific to the MOPH's needs and highly beneficial for them
in terms of registration and pricing of drugs. Raidy and Hamra
noted that one obstacle to effective drug registration and IPR
enforcement in Lebanon was the lack of any link between the
databases of the MOPH and the Ministry of Economy and Trade, where
patents must be registered.

8. (SBU) Meanwhile, Judge Ziad Abou Haidar, who attended the USPTO
Enforcement Program for Prosecutors in October 2008, considered that
attending live proceedings was the most beneficial part of his
training.

INDUSTRIAL EXPORTS RISE IN
FIRST NINE MONTHS OF 2008
--------------------

9. (U) According to the Ministry of Industry (MOI), industrial
exports rose by 31.2 percent to $2.27 billion during the first three
quarters of 2008 compared to the same period in 2007. Metallurgical
products comprised 20 percent of exports, followed by machinery (17
percent), and chemical products (14.4 percent). Imports of
industrial equipment rose by 8.6 percent to $134.5 million during
the first three quarters of 2008 compared to the same period in
2007. Germany was the main source of imports for industrial
equipment (25 percent), followed by Italy (23.32 percent), and China
(15.54 percent).

IIF: LEBANESE BANKS REMAIN
WELL-CAPITALIZED AND HIGHLY LIQUID
--------------------

10. (U) In its most recent report on Lebanon, the Institute of
International Finance (IIF) indicated that there have been no
noticeable repercussions of the global economic crisis on Lebanon,
noting that sovereign spreads increased less than in other emerging
markets in October and November 2008. The banking sector's
regulatory framework limited banks' exposure to structured products,
and remains well-capitalized and highly liquid. The IIF warned that
the main risk to Lebanon's outlook was the potential for instability
in the run-up to the parliamentary elections in 2009. The report
projected GDP growth at 5.5 percent in 2008, 3.5 percent in 2009,
with inflation to average 12 percent in 2008. It estimated the
primary surplus to exceed two percent in 2008. The IIF also
indicated that the GOL will face financing needs of around $5.5
billion in 2009, but would meet them mostly from the market and
donors.

BYBLOS BANK ACQUIRES LEBANESE
BRANCH OF BANCA DI ROMA
-------------------

11. (U) Local financial pres reported that on December 1 Byblos
Bank approved the acquisition of all the assets, equity, and

BEIRUT 00001763 003 OF 003


obligations of the Lebanese branch of Italy's Unicredit Banca Di
Roma (BDR) SpA. In 2007, the Lebanese branch of BDR posted total
assets of $80 million, compared to Byblos Bank's $10.86 billion at
end-September 2008. In 2006, BDR closed four of its five branches
in Lebanon. BDR was one of the first international banks to operate
in Lebanon in 1919.

MOODY'S RAISES LEBANON'S
OUTLOOK TO POSITIVE
--------------------

12. (U) On December 11, Moody's Investors Service changed its
outlook on Lebanon's sovereign debt rating to positive from stable.
To justify its improved outlook, Moody's cited the proven resilience
of Lebanon's public finances to shocks, as well as the achievement
of all the objectives endorsed at the Doha Conference (a new
president, a consensus cabinet, and a new electoral law). Moody's
indicated that Lebanon was one of the few countries so far actually
to benefit from the global economic crisis, as the Lebanese diaspora
has moved funds into Lebanon's seemingly safer banks. Nonetheless,
Moody's noted that the country still presents a substantial credit
risk, since the political situation remains fragile and tensions
could grow before the parliamentary elections in 2009.

SISON

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