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Cablegate: Lebanon: World Bank Middle East Director On Paris

VZCZCXRO0782
PP RUEHAG RUEHBC RUEHDE RUEHDF RUEHIK RUEHKUK RUEHLZ RUEHROV
DE RUEHLB #3563/01 3101536
ZNR UUUUU ZZH
P 061536Z NOV 06
FM AMEMBASSY BEIRUT
TO RUEHC/SECSTATE WASHDC PRIORITY 6363
INFO RUEHEE/ARAB LEAGUE COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHNO/USMISSION USNATO 0474
RHMFISS/CDR USCENTCOM MACDILL AFB FL
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BEIRUT 003563

SIPDIS

SIPDIS

NSC FOR ABRAMS/DORAN/MARCHESE/HARDING

E.O. 12958: N/A
TAGS: ECON PREL PTER LE
SUBJECT: LEBANON: WORLD BANK MIDDLE EAST DIRECTOR ON PARIS
III

SUMMARY
-------

1. (U) World Bank Middle East Department Director Joseph Saba
noted Nasrallah's October 31 ultimatum as disturbing and a
challenge to the confidence that holds up Lebanon's fiscal
house of cards, but views awareness of the need for essential
economic reforms as recognized across the Lebanese political
spectrum. Saba is still expecting a late January conference,
and hopes for a core group preparatory meeting in December.
GOL Paris III conference documents are nearly ready, and the
World Bank's sectoral analysis of expenditures is revving up
and expected to be available by the beginning of December.
Based on its analysis of the economic and social impact of
the conflict, Lebanon's debt dynamic is back - and its
primary surplus is gone. Saba opined that, even if Lebanon
undertook all the necessary, critical reforms over the next
five years, its debt picture would not be sustainable (though
the reforms would have a positive effect). End Summary.

THE STATE OF PLAY
-----------------

2. (U) World Bank Middle East Department Director Joseph Saba
began his conversation with embassy officers by noting
Nasrallah's disturbing speech on 31 October, in which he gave
an ultimatum that dialogue between the March 14 coalition and
Hizballah and its allies progress or else Hizballah will
mount street demonstrations. Any reform program will require
major government consensus, Saba stated, and political
divisions are not helpful. Saba has asked the GOL for a core
group meeting ahead of Paris III, possibly as early as
December, and says a small group with "political and economic
firepower" would be more effective.

3. (U) According to Saba, the GOL paper is essentially ready,
but the data is of such poor quality that at some point it is
all conjecture. The GOL has had an economic reform plan and
conference paper in process for some time. The program and
paper are essentially sound, close to what the World Bank
would like to see, but the GOL's major obstacle is building
consensus and political will for reform. The Bank is
finishing its economic and social impact statement, and is
working on a sectoral expenditure analysis, to be published
in December. The Bank is providing technical and financial
assistance in support of the GOL reform program with the hope
of achieving early results ahead of Paris III. Its sectoral
assessment of expenditures is scheduled for GOL review later
this month and publication in early December.

DEBT IS UNSUSTAINABLE
---------------------

4. (U) The Bank believes that in the short term there is
sufficient money for reconstruction, claiming the Council for
Development and Reconstruction has $1 billion on hand. While
the physical damage can all be repaired, Saba advised that
the indirect economic and public finance outlook is
"depressing." The Bank's impact assessment will conclude
that the debt situation will continue to worsen as businesses
seek tax relief, revenues continue to fall, and expenditures
related to the conflict rise. Saba noted the debt situation
is only sound as long as everyone believes that the
government can roll it over (no one expects it to be repaid);
but should confidence in the government's ability to roll
over its debt evaporate, then a debt crisis could ensue. (50
percent of total Lebanese public debt is owned by Lebanese
commercial banks.) Saba emphasized that, and even if all
needed reforms were taken during the next five years, these
reforms still would not bring the debt down to a
"sustainable" level.

PARIS III
---------

5. (U) Saba declared that the World Bank is much more
committed to being involved in Lebanon now than it had been
during Paris II, and the Bank has a far better working
relationship with the GOL. Saba expects that the Bank will
be able to say in Paris that it agrees with the GOL program.
The Bank would like to see fiscal and structural reforms
beyond what the GOL is considering in its reform and recovery
plan for the Paris III conference (scheduled for late January
2007), but Saba realizes they are politically impossible at
the current time. The major difference between the GOL and
World Bank relates to "burden sharing" (debt restructuring)

BEIRUT 00003563 002 OF 002


and inadequate GOL consensus on the need for increased social
protection. Saba believes there is a large national
consensus for social programs and basic reforms, so the World
Bank is helping the GOL focus on these for the conference.
Saba also described a growing populist movement against Paris
III - those that remember the "belt tightening" that followed
Paris I and II. These people anticipate only pain from Paris
III. They look back at the massive cash inflows following
earlier donor conferences that had little or no impact on the
social situation or public finance; they blame the GOL and
corrupt politicians for wasting the money. Saba hopes that
Paris III will address these "populist" issues. He pointed
out that, while the GOL is spending at OECD levels in health
and education, it is not getting the impact it needs to
satisfy its citizens. The problem is the GOL's delivery
system -- it is unable to use its resources quickly or
efficiently (what Saba called the problem of
"implementation"). The World Bank is providing USD 1 mllion
of its recently announced $70 million grant to the GOL to
help it improve its ability to provide Government services in
a transparent, accountable, and efficient way. The Bank
believes the population needs to see its government "doing
something."

6. (U) The Bank is also providing technical and financial
assistance in the priority areas of power, fiscal management,
and social protection ahead of Paris III. When asked about
the commitment of the GOL to privatization of the electricity
utility, which consumed $1.1 billion of GOL revenues last
year, Saba reported that the Energy and Water Minister,
Mohamed Fneish, has asked for a "service" management
contract, a first step toward corporatizing the national
power utility. The World Bank is providing technical
assistance and preparing the tender documents. The Bank has
also created a small (USD 20-25 million) multi-donor trust
fund in advance of Paris III, and will donate USD 3-5 million
as a political inducement to donors to back key early
reforms. Saba expects that such a fund could also have the
effect of imposing a kind of conditionality on the GOL, since
donors would supervise operation of the fund through periodic
meetings and a continuing relationship with the GOL.

LEBANON NEEDS "AN ADULT IN THE ROOM"
------------------------------------

7. (U) Asked about the prospects for reform, Saba lamented
that structural reforms in the power, social, and economic
sectors are acknowledged across the political spectrum as
necessary, but no one wants to see another confession gain
from changes. Saba commented that no other Lebanese
government would have a greater level of commitment to
reform; every group seems to know what changes are needed,
rather, it is political reality of individuals unwilling to
see their political rivals benefit from change that blocks
reform. Saba described Fneish as a professional committed to
his own well-articulated reform program and to the plans of
his predecessors. The real obstacles to reform in the energy
sector are the wide variety of politicians who refuse to work
with the World Bank "on its terms" (i.e., in a transparent
manner). For that reason it is important to have "an adult
in the room" to fix things, because the health and the
welfare of the "kids" is in danger. Saba viewed Hizballah
constituents as having suffered most under previous rounds of
fiscal tightening and the group most prone to oppose the
current reform plan.

FELTMAN

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