Repor No. 11 06-LE Lebanon Stabi'lizationand Reconstruction (InTwo Volurnes) Volumel: Textand StatisticalAppendix Public Disclosure Authorized March1, 1 "3 MiddleEast and North Africa CountryDepartment II
FOR OFFICIALUSE ONLY
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> . o , t>~'''','4 ,;;+, Report No. :11406-LE Type: (ECO) misl.,i,.9'5*'* | ' '''t' +'tTitle: STABILIZATIONAND RECONSTRUCTI ;-4?; Public Disclosure Authorized T, Author: 3V>ANEEGHAN,W. H53Det. P Public Disclosure Authorized Public Disclosure Authorized ABBREVIATI0N
BCCI Beirut Chamber of Commerce and Industry RdL Banque du Liban, Bank of Lebanon CDR Council of Development and Reconstruction EC European Community EdL Electricite du Liban ERRP Emergency Recovery and Rehabilitation-Project ICOR Incremental Capital Output Ratio kWh Kilowatt-Hours LL Lebanese Pound NERP National Emergency Reconstruction Program NGO Nongovernmental Organization PMU Program Management Unit RSNM-X Revised Minimu Standard-Extended Model SIU Sector Implementation Unit UNDP United Nations Development Programs WAT Weighted Average Tariff
This report is based on the findings of economic missions that visited Lebanon in April and October 1992.> The missions werw led by Messrs. Laurens Hoppenbrouwer (Principal Country- Officer) and Willem van Behen (Economist), respectively. Mission.members included Messrs. Marcelo Giugale (Macroeomie, Rd 8afadi (International Trade), Christian de Clercq (UMARDOL, Public administration), BEsa Montasser (Consultant, Banking), Abdel Ayaxi (FAO Consultantf Agriculture) and Badrul Haque (Consultant, Macroeconamics). The final version of the report, based on the earlier version completed by Mr. Willem van Reghen (Task Manager), was preparsd by Messrs. Yuzuru Ozeki (Country Econimist) and Laurens Hoppenbrouwer, with Mr. Druve Courtney providing the design of the macroeconomic model and projections., FOROFMICLAL USE ONLY
TABLE OF CONTENTS
VOLUMEONE Text and Statistical Appendlz
Lebanon Country Data ...... v
Chapter 1 Ezecutive Summary and Introduction ...... 1
Report Format ...... 4
Chapter 2 Overview of The Economy and Recent Developments. . . . . 7
Background ... 7..7 Current Economic Situation .. 7 Sectoral Situation ...... 8 Agriculture ...... 8 Industry ...... 9 Energy...... 9 Infrastructure...... 10 Financial Services ...... 11 HumanResources ...... 11 Poverty Conditions ...... 12 Developmentsin 1991 ...... 12 Output .. . 1.2...... 12 Balance of Payments ...... 12 Fiscal Devolopments . .13 The 1991 StabilizationPolicy . .13 The 1992 Economic Crisis ...... 14
Chapter 3 Mey Issues ...... 17
The Paramount Importance of the Fiscal Deficit . . 17 Structural Features of Lebanon's Fiscal Deficit . . 18 Weaknesses in Revenue Collection ...... 19 Low Income Taxation ...... 20 Nontax Revenues ...... 20 Problems in ExpenditureControl ...... 21 Containingthe Wage Bill ...... 21 Large Transfers to the ElectricityCompany . . 21 Controlling Extrabudgetary Expenditures . . . 22 Monetary Policies .23 Trade Policies . .24 FinancialSector . .24 Public Administration...... 25 Social Policies . .. 26
This document has a restrictoddistdbution andmay be usedby recipiats onbyin the peformance, of their offcl duties.Its contents maynot othrise be disclsed without Wot1dBank authorIzation. Chapter 4 Key Policy Reoumendationst...... 9. 29
Introduction ...... 29 ImmediateMeasures. . . . . 30 IncreasingFi.scal Revenues ...... 30 Import Taxation ...... 30 Removal of the Customs Dollar . . . . 30 Tariff Regime Simplification ...... 31 Taxation of Real Estate Transactions . . . . . 32 Petroleum Taxes ...... 32 Other Taxes ...... 32 Controlling the. Growth of Current Public Expenditures ...... 33 Wage Bill ,...... 33 Extrabudgetary Transfers ...... 33 Credit and Monetary Policies . . .34. Exchaige Rate and Foreign Reserve Policies . . . . 35 Protecting the Poor During the Transition. . . . . 36 Reconstruction Program and Policies ...... 36 Agenda for Future Reforms ...... 41 PublicFinance ...... 42 PublicExpenditures ...... 42 Civil ServiceReform ...... 42 SocialPolicies ...... 42 Deepening of the Financial sector ...... 43
Chapter 5 A Macroeconomic Framework for Stabilization and Reconstruption. . 49
Introduction ...... 49 Pase Case Scenario ...... 50 ProjectedDevelopments in 1993 ...... 50 FiscalDevelopments ...... 50 MonetaryDevelopments and Prices...... ,51, Reconstruction and Inflow of Capital . . . . . 51 GDP Growth ...... 52 Balance of Payments ...... 52 Projected Developments after 1993 ...... 53 Extent of Fiscal Adjustment ...... 54 Financing Requirements ...... 55 Debt Service Payments and Creditworthiness . . . . 56 Alternative Scenarios ...... 56 Alternative Scenario 1: Low CapitalInflows ...... 57 AlternativeScenario 2: Higher Levels of Official Capital Flows . . 57 Conclusion...... 58 Map IBRD 24699
- ii - in Text
3.1 Fiscal IndicatorsIn SelectedCountries, 1989 . . . 19 3.2 Import Taxationin SelectedCountrLes, 1989 . . . . 20 3.3 Compositionof Govermuent"venues, 1989 . . . . . 21 4.1 Nationalbtergency Reconstruction Program (NERP): CapLtal Investment. Credit and Technical AssistanceCosts, 1993-95 ...... 38 4.2 Policy Matrix ...... 44 5.1 Base Case Sconario: Key Macroeconomic Indicators 53 S.2 Base Case Scenario: Fiscal Projections . . . . . 54 5.3 Base Case Scenario: FinancingRequirements . . . . 55 5.4 Key Debt Servi¢e Indi¢ators ...... 56 5.5 Selected IndicatorsUnder Different Scenarios . . . 58
2.1 LebanonStabilization: Beforeand After December1991 TreasuzyBills, Currency, ForeignExchange Reserves ...... 15 2.2 Lebanon Stabilization: Before and After December 1991 Foreign Exchange, Dollarization," onsuerPrices . 16
Projections Appe;nud
1. Balaice of Payments ...... 63 2. Consolidated Central Government Operations . . . . 64 3. National Accounts, Estimates and Projections . . . 66 4. Key Indicators ...... 68
- iii L Statistical Appendim
1. Supply and Use of Resourcesat Current Market Prices ...... 73 2. National Accounts Summary at Current Prices . . . . 74 3. National Accounts Summary at Constant 1990 Prices . 75 4. Estimated Output by Sector, 1974, 1988-1992 . . . . 76 5. Balance of Payments Summary at Current Prices, 1989-1992 ...... 77 6. External Trade, 1989-1992 ...... 78 7. ConsolidatedCentral Government Operations, 1989-1992 ...... 79 8.1 Monetary Survey, 1989-1992 ...... 80 8.2 Balance Sheet of Baxk of Lebanon,1988-1992 . . . . 81 8.3 Balance Sheet of CommercialBanks, 1988-1992 . . . 82 9. The Structureof Deposits at Comercial Banks, 1988-1992 ...... 83 10. CommercialBank Credit by Economic Sector, 1988-1992...... 84 11. Term Structure of Interest Rates on Treasury Securities, 1988-1992 ...... 85 12. Commercial Bank Interest Rates on Lebanese Pound Loans and Deposits, 1988-1992 ...... 86 13. Recent Movements in Selected Monetary Data, January 1989-June 1992 ...... 87 14. Public and Publicly-Guaranteed External Debt, end-1991 ...... 88
VOLtUE TVO Sectoral Annexes
Annex 1.: Power Sector
Annex 2: Telecommunications Sector
Annex 3: Water Supply and Wastewater Sector
Annex 4: Housing Sector
Annex 5: Agriculture Sector
Annex 6: The Maeroeconomic Model
- iv - LebanonCoutry Data - - ~~1666 1060 110 106 1tl60 1061 iOU1,
GOPsaltktpdse NA -1A.4 S2 100.0 10w0 10 1O0.0 GOP "ANtA -17.9 461 106.0 14 $?A W7I
Aoubattlu NA NA 61.8 6.7 T7 NA "A a_§hwwg 1NA NA 460 20am NA WI. omieliuetlmi NA NA Su.6 6* 7.2 NA NA Trft NA NA MAt4 $1. 2a"0 MA M NanPInemSs NMA NA 81 21* 10.7 MA NA ftesamodwmme NA NA VA. "*6A NA FblS_*an MA NA 16.4 NA K%
%ILr4uw**m.87 1424 14. 160 1s" _O bWmt NA -14 a"2 20.0 29.0 3* 10.7 EOWN0PW NA -67 2a4 S6 6a" 2a"4 2a" ih.,e_F "A 0.7 81.1 97.2 Su 604 704
a_ Oum.USahp -12. -70. -4. -4 -4.0 .2
19 1000 101 1OU2!
O99vs"hdex(I100) 82 100 181.7 Emitm. Rats0ulsPi Wre U.RIU so6" 702* 879.2 Ism6
Em9oudagNetsi Smdat-pulat±j 86. 62.0 67.0162.
Fa_I_a, e La 7.1 1IA 10 OmetSpeniro 41.a 42. S a" 0UsdhmiA. 4 -661 -104 -1.1 w 2erh_oii 6tw 2A 4.6 6 F~R A tIdhwt 0. * 0.6 -1.'
OdgmefPsmeftliuso a - of
PNsowf. 9dom. -1807* -1i6n" 470.0 4100.0 Ee.F48 6s0. 867.0 100.0 12a0 I aetsofiPN 2946. hi60" 8647 4426.2
NPal, b I WA 47900 4600 466* N.t wuwtTwhm 6so"0 6. 400 400.
Bie aspAsW __klgras 3. -0. -1887.0 .36 06IS0NeU_ 0.0 0.0 70. ¢00 eifldi great -600 426* -176* 42A
Oaplmismtld 277.0 02* 8.6
Owdam -40 -. 8 24.7 NetaF a hwwsC-. h-r) 46.0 7. -666. 414.
oNsbdmmU
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U*66mMUIS0N16fWMTW CHAPTER I
EXECUTIVESUHKhIY AND INTRODUCTION
1.1 This report presents the findings of World Bank economic missions that visited Lebanon in April and October 1992. The purpose of this report is to provide an assessmentof the Lebanese economy and to examine where it stands after 16 years of devastatingwar and 2 years of fragile peace.
1.2 The damages from years of civil war, estimated by the United Nations at some US$25 billion in destroyed infrastructureand property alone, are considerable. Nevertheless,in the wake of the prolonged hostilities,the Lebanese economy has displayed remarkableresilience. External public debt is currentlyestimated at about US$360 million (8.4 percent of GDP), which is low by any standard. External reserves (foreign exchange and gold) amount to almost US$4.5 billion, equivalent to about US$1,200 per capita, higher in relative terms than in virtually any other country in the region. In addition, it is estimated that substantialassets are being held abroad by Lebanese nationals.
1.3 With the cessationof hostilities,the economy initially made impressive gains. In 1991, GDP grew an estimated 50 percent from the depressed 1990 level. Spurredby large inflows of private capital in response to political and economic stabilization,activity took off in virtually every sector of the Lebanese economy. Although the external circumstancesfacing Lebanon are substantially different from conditions that prevailedduring the pre-war era, there are reasons to be hopeful that traditionalliberal and investor-friendlypolicies could lead to a speedy recovery and once again bring prosperity to Lebanon.
1.4 The coming year will be critical and decisive for the Lebanese economy as the Government faces the challengeof mounting a large investmentprogram for reconstructionand maintainiageconomic stability. During 1992, the growth in output that had taken place as a direct result of the cessationof hostilitieswas seriouslybeing undermined by galloping inflation. The root cause of this inflationwas monetary expansion necessitated to finance the large governmentbudget deficit and its interaction with highly sensitive expectationsand speculative capital movements, including currency substitution. During 1991, the Government had some success in defending the value of the Lebanese pound and in financing the public sector through the issuance of treasury bills. However, the large retroactive civil servant salary increase granted in late 1991 precipitated a crisis and a subsequent speculative attack on the domestic currency. The salary increase spurred a substantialincrease in the Government'sgross borrowing requtirements,which could only be financed through domestic money expansion. This, in turn, imediately put pressure on domestic prices and brought about a precipitousfall in the value of the Lebanese pound vis-a-vis major foreign currencies. In an attempt to defend the value of the pound, the Lebanese centralbank, Banque du Liban (BdL), lost about US$450 million in reserves in two months - - January and February 1992. Inflationand exchange rate depreciationproceeded at a rapid pace throughout 1992. The macroeconomic imbalances, reflected in price and exchange rate instability, had negative effects on the real economy in 1992. As a consequence,the surge in output that had begun shortly after the signing of the Taif accord in October 1990 decelerated considerably. Nonetheless,overall GDP for 1992 rose by some 10 percent, as did the.volumeof imports reflectingthe initial reconstructionefforts.
1.5 The confidence inspiredby the completion of the Parliamentaryelection process and the appointmentof a new Government in November 1992 led to a significantinflow of short-termcapital, including the conversion of US$ to LL deposits. The centralbank used this opportunityto replenishits nongold reserve holdings, adding about US$1.0 billion during November. The exchange rate appreciatedto about US$1-LL 1,850 by the end of 1992, compared with LL 2,500 in September, which, in turn, led to a moderationof inflationand, indeed, to the emergence of disinflation,with a decline in prices of about 15 percent in the last quarter. The central bank also took the occasion to sharply lower the treasury bill rate, thus moderatingthe negative fiscal impact of these inflows, which has lead to an increase in the stock of treasury bills through the reserve requirementsof commercialbanks. The Governmentwas able to switch from centrai bank to domestic debt financing of its deficit. However, given the speculativenature of these inflows, as was dramaticallyevident in 1991 and early 1992, the current stability is vulnerableto changes in expectations,and will not be lasting until fundamentalmacroeconomic imbalances, in particularthe fiscal deficit, are corrected.
1.6 The Lebanese authorities,which have inheriteda legacy of 17 years of war and macroeconomic imbalances, now face an extremely daunting task. On the ov habnd, there is an urgent need, within the context of a comprehensive stabilization program, to restore fiscal discipline in order to control increasesin the money supply and resultant inflation. On the other hand, the institutional mechanisms to implement strong fiscal policies are virtually absent. At the same time, demands for high priority, government-managedreconstruction programs are huge and will put considerablestrain on scarce public resources. In addition, even though the country has experienced more than a year of relative calm, security and political considerations continue to require the full attention of the authorities. Moreover, social and income distributionissues are high on the policy agenda. All these factors make the current stability tenuous in nature, and the economy potentially vulnerable, and give the authorities limited room to maneuver.
1.7 Consequently,there is a great need for well-focused, properly timed and clearly prioritizedeconomic policies. Such policies presuppose a solid and implementableprogram with the following objectives: (i) to restore economic stabilitythrough the adoption of a credible, comprehensivestabilization program, includingconsistent fiscal,monetary, exchange rate, income, and debt-managementpolicies;
- 2 - (il) to begin the reconstructionof the economy, emphasizingthe role of the private sector and the restorationof basic public goods and services;and (iii) to address the concerns and needs of thsepoor, who have been left destituteby the war, who have been severely affected by gallopinS inflationand who are most vulnerableto the effects of the stabilizationprocess.
1.8 This report argues that the immediateLocus of government policies should be on revenue-enhancingmeasures that yield quick results; these measures should be combinedwith stringentand monitorablecontrols on extrabudgetarytransfers, central bank credit to the Government and the expansionof the domestic money supply. To increase public revenues, it is suggestedthat the Government,in the short run: (i) abolish the customs dollar and use the market value of imports and the Lebanese pound for the computationof import duties; (ii) increase taxes on petroleumand bring domestic retai'lprices in line with prices charged in neighboringcountries; (iii) increase electricityand other utility prices to their economic cost; and (iv) base taxes on real estate transactionson the actual value of these transactions. In terms of public expenditures,this report suggests that: (i) the nominal wage bill should be contained and that future salary increases should be combined with a retrenchment and civil service reform; and (ii) extrabz 'o,etary transfers should be restricted.
1.9 The implementability of the proposed measures is of paramount importance. The restoration of public authority and the credibility of the announced policy measures are key to the success of the stabilization program and the restoration of confidence in the economy. Under current circumstances, the failure to inplementa coherent and convincing stabilization program would greatly undermine investor confidence and the speed of the Lebanese recovery. A delay in recovery would, in turn, exacerbate problems and make economic policies substantiallymore difficultto implementin the future.
1.10 The new Governmenthas already implementeda number of fiscal measures. It has eliminated the wheat subsidy, adopted a new valuation method for real estate transactions, adjusted utility rates (telephoneand water charges and electricityconnection fees), and taken a nmber of administrativemeasures to improve revenue collection. As a first step towards extensive customs reform, the Parliament has approved the eliminationof most import duty exemptionsand nontariff fees, and the Government is preparing to replace the customs dollar with the market exchange rate and implementa simplifiedtariff structure. A wide range of furthermeasures are under serious review, including bread-based indirect taxes. However, the timing of the implementation of further measures, and their magnitudes,are still undeterminedand will depend, inter alia, on the pace of economic recovery and political feasibility.
1.11 Lebanon requires substantial amounts of external assistance in support of both stabilizationand reconstruction. The first phase of the reconstruction program alone, as originally proposed, is estimated 3 - to cost US$2.2 billion over the period 1993-96. The Lebanese authoritiesneed time to attract private investors,to bring order to public finances, to eliminateunsustainable macroeconomic imbalances and to ensure the implementabilityof the stabilizationmeasures. External financialassistance is, therefore,particularly important in the initialphases of Lebanon'sadjustment program. Lebanon's reconstructionis intrinsicallylinked to fiscal adjustmentand external support. In the absence of fiscal adjustment, external support would be ineffectiveand would only lead to unsustainablelevels of future debt service payments. Similarly,fiscal adjustment in the absence of external supportwould lead to a sharp drop in consumptionlevels.
1.12 If the stabilizationmeasures are successfullyimplemented, it is expected that the current budget deficit will be reduced from about 10 percent of GDP in 1992 to 4 percent in 1993, and virtually eliminatedby 1994, and that the overall fiscal deficit,which stood at 13 percent of GDP in 1992, can be graduallyreduced, notwithstandingthe iharp rise in capital expenditures as the reconstruction program takes off. Long-term public debt will continue to be incurred beyond 1994 for the reconstructionof Lebanon's infrastructure,and external assistance will continue to be required for that purpose in order to keep inflation under control. However, it is expected that a large share of the external financingneeds vill be met by private capital as credibility in the Lebanese economy is restored. Lebanon'sdynamic private sector clearly possesses the human talents and resources to lead the postwar recovery and developmentefforts, and Lebanon could undoubtedly thrive again as a major growth center in the Middle Ea...
Renort Format
1.13 Chapter tI provides a summary overview of economic developmentsin Lebanon since the end of the war. Chapter III discusses a selected set of key issues that must be addressedif the Lebanese economy is to be stabilized: fiscal policy, monetary and exchange rate policies, the trade and financialsectors, public administrationand social sector policies. Chapter IV offers a set of economic policy recommendations,discussing policy prioritiesand timing. Chapter V concludesby presenting a short- and medium-termquantitative macroeconomicframework on the assumptionthat all the recommended policies are successfullyimplemented, that the reconstructionof the destroyed infrastructurecan take place and that private and official capital flows can be mobilized to finance the reconstruction. It highlights the interactionbetween fiscal adjustment,reconstruction and external support and illustrateshow the absence of strong fiscal measures would lead to a very undesirableoutcome, even with generous support from abroad.
1.14 A Statistical Appendix is attached to Volume I. It must be pointed out that, in the absence of public sector statistical services, various other sources of information had to be tapped to produce the tables contained in the Statistical Appendix. Often the information is
- 4 - partialand, sometimes,Contradictory. Based on the most plausible assumptions,an attempthas been made to presenta coherentpicture. Still,there is a likelihoodthat errorsand inconsistenciesremain. Care should,therefore, be appliedin the use of the statistical informationcontained in this report.
1.15 Volume II of this reportis a seriesof annexesthat provide background information on a number of sectors of the Lebaneseeconomy: power, telecommunications, water supply and wastewater, housing and agriculture. It also contains an anuex on the macroeconomic framevork.
-5- CRAPTER II
OVUVIEWOF THE ECOROMYAND RECENTDIVEW0ENTS
Backgr,ound
e.A Establishedin 1943 at the end of the Frenchmandate, the .public of Lebanon had developed into a prosperous, upper middle-income .untry by the mid-1970s. Economic growth averaged 5 percent per year during 1960-70 and then accelerated to 9 percent per year in 1970-76; the main source of growth was the services sector, in particular, tourism, banking, insurance and free port activities. Although smaller in size than the services sector, the export-oriented agricultural and manufacturing sectors also grew (at annual rates averaging between 4 and 6 percent), contributing to overall incomes. Having grown at an average rate of 3 percentpar year since1960, GNP per capitawas estisatedat US$1,070in 1974,just prior to the April1975 outbreakof full-scale civilwar.
2.2 Followingthe heavy roundof fightingin 1975/76,Lebanon's economyrecovered for a periodas its morchandiseexports (citrus, apples,grapes, wood products,jewelry, leather goods. textiles and garments),its servicesindustry and its migrantworkers (an important source of remittances) found ready markets anong the neighboring oil- exporting countries. However, the Israeli invasion of 1982 and the subsequent occupation of south Lebanon, together with the breakdown of central authority and the collapseof publicfinances, proved very major setbacks for Lebanon's economy, which has been marked by continuous financial instability, the destruction of physical assets, outflows of labor and capital and rising poverty. (A very rough estimate indicates GNP per capita in 1989 was between US$800 and US$9001.)
Current Economic Situation
2.3 Lebanon's economy, to this day, is an open one, exhibiting free market pricing for most goods and services and an unrestricted exchange and trade system. The country's basically liberal economic policy environment would appear to support reconstruction efforts, as, among other advantages, such an environment should favor an efficient mobilizationand allocationof resources.However, a very pressing problemfaces Lebanon's public sector at present,bearing directly on financing reconstruction: the virtualcollapse of revenuesover the past several years (to 2 percent of estimated GNP in 1988/89). This has led to huge deficits (20 percent of estimated GNP in 1989), financed
I/ Leba s not emled officalouatams Ia. aecoete_ since 175. Fow 14/S9. MUD-timmPaoed calt_ hae uled eastimat basd cn indcatos suc as inntUial outpet, *lelttcity yrutiAm sd expota. rsy drew attetica to th te bais of the nainl 1mm estimat the provide. 7 - entirely with bank borrowing; a pronouncedbanking crisis (18 out of 83 commercialbanks closed or bailed out in 1989/90);severe pressure on the Lebanese pound, which, given the free exchange system, translated into a rapid depreciation(from 18 per US dollar in 1985 to 752 in 1990); and disruptivelyhigh rates of inflation (averagingJust over 110 percent per year in 1985-90).
2.4 The substantial depreciation of the Lebanese pound In recent years has significantly influenced the country's trade balances and the management of international reserves by the central bank. In general, imports tended to decline (from US$2.2 billion in 1985 to US$1.8 blllion in 1990), reflectingthe effect of falling real incomes and the depreciatienof the pound. The latter also boosted exports in 1987/88 (to an average US$1.1 billion),when fightinghad subsided. However, in 1985/86 and in 1989/90, exports remained stagnant (at between US$0.6 billion and US$0.8 billion) despite the exchange rate depreciation. The rapid depreciationof the Lebanese pound prompted Banque du Liban to intervene more actively in the foreign exchange market, especially in 1986/87 and in 1990. In the process, gross reserves (excludinggold holdings)were drawn down from US$1,074 million at the end of 1985 to US$660 million at the end of 1990, which implied an import coverage of about four months.
Sectoral Situation
2.5 All principal sectors of Lebanon'seconomy are today characterizedby widespread damage to physical assets and the obsolescence of remaining facilities,given the reluctanceduring the years of conflict to invest in new capital and/or spend funds on maintenance. In addition, there has been a continuous outflow of professional and entrepreneurial skills from the country over a long period of time. The degradation and departure of both physical and human capital have, thus, cut production capacity for goods and services significantly and reduced social amenities (e.g., housing, hotels, restaurants). In addition, the politico-military fragmentation of the country tended to impede the flow of even the reduced levels of output and those factors of production that did remain in the country, leading to pockets of underutilized capacity and raising the costs of production and distributicn. In this regard, once Lebanon'sadministration is secured, the consolidation of its internal markets should form an important element of reconstruction.
2.6 Axiculture. Approximately a third of Lebanon is arable, but much of the arable land is marginal. The most fertile areas are located along the coastal strip and in the Beka'a Valley, which, being relativelycalm in recent years, has contributed much of the locally grown cereals and potatoes. Agricultural value added constitutes an estimated 8 to 10 percent of Lebanon's CDP, and food and agricultural exports, which include forestry products, provide about 10 percent of merchandise export earnings. The sharply depreciating Lebanese pound had, in recent years, euabled the agricultural export subsector to
- a - withstand rising domestic transportcosts and external competition(from Turkey). However, sales to two importantmarkets, Iraq and Kuwait, were severely affected by the Gulf crisis.
2.7 Lebanon must renew its agriculturalassets to increase future production. General descriptionsof damage to agricultural assets point to the neglect of tree crops, large losses of livestockand the destructionof storage and supply depots. Little is known about the current state of Lebanon's irrigationfacilities, which cover close to a quarter of the cultivablearea. It is believed, though again not verified, that many farmlandsand plots were abandoned in the south of the country at the beginning of the 1980s by peasants fleeing from conflict along the border with Israel.
2.8 Industry. The industrialsector (producingfurniture, paper, cement, detergents,cosmetics, pharmaceuticals, batteries, garments and prc.cessedfoods) contributesabout 10 to 15 percent of GDP and still provides 80 to 90 percent of Lebanon'smerchandise exports. Virtually all industry is privatelyowned, and much of the manufacturing capacity is located in East Beirut, which was relatively free of violence until the 1989/90 hostilities. While the location of plants may have spared industrysubstantial physical damage prior to 1989/90, the general conditions in the country did affect the sector quite adversely: demand was weak due to decliningreal incomes and the lack of adequate long-term financing.
2.9 Estimates of damage to industry indicate that the value of direct losses in the 1975/76war equalled 20 to 30 percent of the total value of capital invested till that time. Many more plants (close to 200) were destroyed in 1989/90. However, by far the greatest setback to Lebanese industry has been the loss of its work force. Half the industrialworkers are said to have emigratedpermanently very early on, in 1975-77. The emigrationof skilledworkers and managers has continued to the extent that, by 1985, the sector was said to be operating at only 25 percent of its pre-war capacity (other constraints, e.g., the scarcity of raw materials, shortagesof working capital,weak demand, poor infrastructure,played a part as well).
2.10 Jnergv. Lebanon'senergy sector comprises, in the main, the two refineries,one in Tripoli and one in Zahrani near the port of Sidon, and the electric power company, Electricitedu Liban (EdL), whose network, supplying 90 percent of recorded power output, includes eight thermal generating plants and seven hydroelectric stations. Prior to the mid-1970s, the sector not only met domestic demand for petroleum products and electricity, but also earned Lebanon foreign exchange in the form of royalties for the oil pipelineserossing the country and payments for surplus power exported to Syria.
2.11 The energy sector has been plagued by various kinds of disruptions: damage to refineries,power stations and transmission lines; the dismemberment of the national power grid, as when plants in the south were disconnected from the grid during the 1982 Israeli 9- invasion (the southern plants have been reintegrated into the national grid); and the wholesale closure of power supplies by militias and armed forces to parts of cities controlledby rival forces. In addition to such physical damage, the general atmosphereof unrest and lawlessness has crippled the financialstatus of EdL. For example, despite low tariffs, only one half of consumerspaid their electricitybills in 1985-87; this rate of delinquencymay have increasedrecently. There are, moreover, very large system losses attributedto illegal connections. Power tariffs are far below cost, necescitatingtransfers from the Treasury to EdL for current expenses (such as fuel oil purchases and wages and salaries).
2.12 Infrastructure. As a major regional entrepot and financial center, Lebanon's infrastructurewas developed intensivelyprior to the second civil war. The country'sports (Beirut,Tripoli, Sidon and Juniyeh) and the Beirut internationalairport were especiallyproductive assets to the economy, operating,as they were, under a free market, a free port and no currency control. Catering to the prospering (pre- civil war) economy itself and to the large number of international visitors, residentsand businesses in the principal cities, t?- urban and housing sectors had been built up to significantly high standards. Serving the same market, as well as the thriving financial nexus, the Lebanese telecommunications facilities were also well advanced. The developmentof the road network had not, however, kept pace with the growth of the economy. Even before the second civil war, Lebanon's 7,000 or so km of roads (80 percent asphalt) were consideredoutdated and inadequate. By the early 1980s, despite some repairs and rebuilding followingthe fighting in 1975/76, it was thought that almost half the network badly needed renovation. Conditionshave deterioratedeven more since then, but the general unrest and lack of funds have preventedany significantupgrading and/or reconstruction.
2.13 From all availableaccounts, the years of civil war and external conflictshave exacted a heavy toll from Lebanese infrastructure. Beirut's port and airporthave been practically destroyed;the port, virtually idle, handles less than 15 percent of the volume of freight it handled in 1974. Whole urban areas have been obliteratedin Beirut, Tyre, Sidon, Damour and Nabatiya, with damage to Beirut and Sidon particularly heavy. A 1985 survey estimatedthat 286,000 housing units in the country had been damaged over the preceding 10 years, with half of the damaged units, or 143,000 units, requiring complete reconstructionor extensive rebuilding. At a rough estimate of 5 persons per housing unit, that implies 715,000 persons (close to a quarter of the country'spopulation) were housed unsafely or not at all. Little is known about damage to water supply and sewerage facilities, except that a now-defunctreconstruction program drawn up in the early 1980s had indicatedthe financialneeds of the water supply and sewerage sector to be the third highest, after housing and roads and highways. In 1982, a third of Lebanon'stelephone facilitiesthat had worked in 1978 were consideredout of commission;more destructionhas occurred since. As a result of the poor service offered by the war-damaged public telecommunicationssystem, many businesseshave resorted to
- 10 - private satellitesystems, of which 85 were in use in early 1990. In addition, internationallinks are maintainedvia cellular phone systems operating through Cyprus, while private telephone systems are also in use for internal communications.
2.14 Financial Services. Despite some problems in recent years, the commercial banking sector remains a centerpiece of Lebanon's service-oriented economy. The Lebanese banking system consists of the Banque du Liban (BdL, the central bank), 83 commercial banks (including 16 foreign banks), 4 specialized banks for medium- and long-term finance and an agency (the Societe Financiere du Liban) handling government borrowing from the commercial banks. The banking system has been weakened considerablyover the years of conflict, with many borrowers going out of business. Fraud has increased;supervision is lax; and unrest and uncertainty are pervasive. The supervision of commercial banks is vested in the Banking Control Commission, which reports directly to the Governor of the BdL. The scope for effectivebank supervision has been limited, however, by the provisions of the Bank Secrecy Law and, in recent years, by the reduced capacity of the commission to supervise individualbanks.
2.15 Over the last few years, the difficultiesof the b.nking sector have intensified, resulting in the closure of a number of banks and the financial rescue of several others by the Bank of Lebanon. Consequently, total credit to the commercial banks from the Bank of Lebanon ballooned from 2 billion pounds at end-1988 to 145 billion pounds in September1990, the latter representing31 percent of reserve money. Much of this financingwas provided through the sale of real estate (with repurchase possibility) by the owners of troubled banks to the BdL.
2.16 Human Resources. Lebanon'shuman resourceshad been developedto well within -- and in some cases, above -- the comparators for lower middle-incomecountries. As examples,before the outbreak of the civil war of 1975, infant mortality in Lebanon was estimated at 48 per thousand live births (53 is the figure given for lower middle-income countries today); life expectancy at birth in Lebanon was 65 years, the same as the most recent estimate in comparator countries; and the literacy rate in Lebanon was 77 percent (75 percent in comparator countries today). Lebanon's general health infrastructure also compared very favorably with other countries both in similar income groups and in the region. In the mid-1970s, Lebanon averaged 500 persons per physician and 200 persons per hospital bed. The picture before the protracted civil strife, then, is one of a well-trained population and labor force, with adequate health facilitiesto serve the population.
2.17 The civil strife,however, bas resulted in considerable setbacks for human resources in Lebanon. In the mid-1980s, it was estimated that 1,200 schoolshad been damaged, while 7 of the country's 23 public sector hospitals had been destroyedby fighting or closed for lack of staff and funds. Over the years, as already noted in describing the industry sector, major shortages have developed in various sec ors
- 11 - of the economy due to death, disablementand emigration. Within two years of the outbreak of the civil war of 1975, 30 percent of all constructionworkers, 50 percent of the industrialworkers, 15 percent of those engaged in commerce, 10 percent employed in services and a large number of professionalspermanently emigrated. Those workers still employed in the country have had to face all kinds of hardship, making for increasedpoverty overall and adding to the inequitiesand the attendant instabilitythat existed in the countryeven before 1975.
2.18 Poverty Conditions. Before the civil war broke out in 1975, the top 20 percent of the population received 55 percent of total private income while the bottom 20 percent received only 4 percent. Lebanon'spoverty conditionswere exacerbatedby the presence of a large Palestinianrefugee community in dire straits and, from 1970 onwards, an exodus of the traditionally poor peasantry from the south of the country towards Beirut to escape conflicts between Palestinian fighters and Israel. A further influx of displaced and dispossessed people occurred twice in 1990, first from Liberia, where the civil war uprooted thousands of people of Lebanese origin, and then from Iraq and Kuwait. The Governmenthas estimated that between 55,000 and 65,000 Lebanese people returned from Iraq and Kuwait, having lost close to US$500 million in assets altogether. Finally, leading up to 1990, the sharp depreciation of the Lebanese pound and the extremely high rates of inflation eroded the purchasing power and substantially lowered the living standards of a vast number of people.
Developments in 1991
2.19 Otu. Economic developments in 1991 were relatively favorable. Following a significantdecline during 1989/90, GDP recovered sharply during 1991. Based on very partial and preliminary output indicators,it is estimated that real GDP may have increasedby around 40 percent during 1991, with rapid growth in construction and manufacturing. Domestic price developments, as measured by the Consumer Price Index (CPI),z which increasedby 52 percent on average, and the evolutionof the exchange rate (from an average of LL 701 per US$ in 1990 to LL 928 in 1991), suggest that the domestic price level rose by 15 percent in US$ terms during 1991. On this basis, GDP in current US$ terms was estimated at above US$4.3 billion in 1991.3
2.20 Balance of Pavments. The recovery of the economy and the further real appreciationof the Lebanese pound during 1991 resulted in a sharp surge in imports from about US$2.4 billion in 1990 to US$3.7
/ In the abeom t officaal price statistics, the mission hs used the CPI series as elabeoated by the Consultat R"earoh Institute (Beirut).
3/ In the aboene of katioa4l accounts statistics, national accomt estiates for 1090 by UIDP (DTCD) hae ben used as the basis ftor 1991 estamtes.
- 12 - billionin 1991." While exportsalso expandedrapldly (posslbly nearly by one half from the estimatedlevel of US$537million in 1990),the merchandise trade deficit furtherwidened significantly from about US$1.9billion to an estimatedUS$3.0 billion. The current account deficit,while smaller than the trade deficit because of net interest earnings and the inflow of private transfers (including reaittances), remainedat a significantly high level. Nevertheless, the central bank's international reserves position improved sharply, with an increase in non-gold reserves of about US$600million during the year. A large inflow of privatecapital, attracted by high domesticinterest rates combined with exchange rate stability and reflecting increased confidence, was behind the increase in the reserves.
2.21 Fiscal-Developmes. Compared to previous years, substantial improvements were made In Lebanon's fiscal performance during 1991. Government revenues increased sharply, from a low base in 1990, as the Government regained part of the authority it had lost during the war in enforcingtax collection. Total tax revenues Increased more than five fold from LL 40.8 blllion in 1990 (2.3percent of GDP) to LL 221.3billion in 1991 (5.5percent of GDP). Over half of this increasewas due to the improvedcollection of indirecttaxes, with import duties being the biggest contributor. At the same time, total government expenditures declined as a percent of the estimated GDP, and, consequently,the overallconsolidated government deficit, including Council of Development and Rehabilitation (CDR)transactions, as measured by data on financing,declined from 38 percent of GDP in 1990 to 19 percentin 1991. Only about 13 percentof the overalldeficit of LL 772.4billion 5 (US$832million) was externallyfinanced. At the same time, during1991 the Governmentswitched from primarilycentral bank (BdL)financlng of the deficitto treasury bill sales (para. 2.22 below). 2.22 The 1991 StabilizationPolicy. In order to achieverapid price stabilization, and recognizing the high degree of openness of the Lebanese economy, including an absence of restrictions on capital transactions, the authorities decided to adopt the LI/US$ exchange rate as the system's nominal anchor. Consequently, from the beginning of the second quarter of 1991, the BdL intervened in the foreign exchange market, in effect, pegging the exchange rate to a slightly appreciating path. To back this policy, a tighter monetary stance was adopted. In the absence of sufficient fiscal adjustment, that stance took the form of a switch from money (i.e., BdL) to debt (i.e., treasury bills) as the dominant instrument for fiscal deficit financing. The stability (and subsequent appreciation) of the nominal exchange rate, as well as
J/ In Ue abone of stme or D. tnd endpqmtU date, .st4tesof laport. ed oxtA hae ben deived fro Pbished by th f Di dateaon lettewr of credit; ed oxnot dat f the BOi.
T esi mate is lamd cm idmoum provde bys: (1) the Waustry of limo., cean bdetary ed earabetar trenatcties (XSawladivg Treasr advae); (LI) CM, as relars Its captal enpenditures end flugo ediztezui (JAI) Jd, as regards domtio fit_Umi.
- 13 - the authorities'perceived commitment to defend that stability, encouraged foreign investorsand domestic savers to buy increasing amounts of the local currency-denominatedtreasury bills, with a large proportionbeing accounted for by foreign inflows. The amount of outstandingtreasury bills soared from UL 1,023 billion at the end of 1990 to LL 2,333 billion (equivalentto US$1.4 billion at the present exchange rate) at its peak in December 1991. As noted above, foreign exchange reserves increasedrapidly, thus further fostering confidence in the central bank's ability to maintain this policy.
The 1992 Economic Crisis
2.23 While the results achieved in 1991 were encouraging,the price and exchange rate stabilizationpolicy was not sustainablebeyond the short term, without a major fiscal adjustment,as the costs of servicing the rapidly rising domestic debt were bound to aggravate the fiscal disequilibrium. The Government's decision in December of 1991 to grant a large and retroactive salary increase to the public sector changed investors' perceptions of the authorities' ability to maintain the policy adopted in early 1991. The situation may have been exacerbated by alleged problems in the banking system, which surfaced around the same time. Investors moved out of treasury bills into foreign-currency-denominated instruments, in Lebanon and abroad, with the stock of outstandingtreasury bills decliningby LL 288 billion during the first two months of 1992. The injectionof liquidity as a result of the payment of the approximately150 to 200 percent salary increase led to the expectation of a depreciation of the value of the Lebanese pound, triggering a sbarp loss of reserves (about US$600 million), which led to the inability of the BdL to defend the exchange rate. Following the abandonment of the stabilization policy in late February 1992 (unavoidable in view of the sharp drop in reserves and the absence of fiscal discipline),the Lebanese pound rapidly depreciated from LL 878 per US$ to about LL 1,200 within a matter of two weeks. Figures 2.1 and 2.2 (below) illustratethe above events by tracking the evolution of selected monetary and price indicatorsduring the period comprising the beginning and the end of the 1991 stabilizationprogram. The continuedmonetary financin%of the fiscal deficit since then, combined with the absence of actions to quickly restore fiscal discipline,has led to a continuousfurther depreciation(to about LL 2,500 in September1992) and to an accelerationof inflation (to about 200 percent for the 12 months ending September1992). Because of these developments,the real value of the stock of domestic debt has been sharply reduced. At the same time, the accelerationof inflationhas particularly affected the poorest segments of the population. Partial indicators suggest that the developments in 1992 have reduced the real growth rate to about 10 percent.
2.24 The confidence inspired by the completion of the Parliamentaryelection process and the appointmentof a new Government in November 1992 led to a significant inflow of short-term capital, including the conversion of US$ to LL deposits. The BdL used this
- 14 - opportunityto replenish its non-gold reserveholdings. Followinga loss during the first 10 months of the year, reserves increasedby about US$1.0 billion during November and the exchange rate appreciatedto about US$1-LL 1,850 by the end of 1992, which, in turn, led to a moderation in inflationand the emergenceof disinflation,with a decline in prices of about 15 percent during the last quarter. The central bank also took the occasion to sharply lower the treasury bill rate, thus moderating the negative fiscal impact of these inflows, which has lead to an increase in the stock of treasury bills through the reserve requirements of commercial banks. The Government was able to switch from central bank to domestic debt financing of its deficit through treasury bills. However, given the speculativenature of these inflows, as was dramaticallyevident in 1991 and early 1992, the current stability is vulnerable to changes in expectationsand will not be lasting until fundamental macroeconomic imbalances, in particular the fiscal deficit, are corrected. This issue is discussed in detail in Chapter III.
Figure 2.1: Lebanon: Stabilization Before and After December 1991 Treasury Bills, Currency In Circulation, Foreign Exchange Reserves
LEBANION Stabi I lZstIon: Befo a.nd After 1c. "91 250
Run on the pound\I__
200 ...... f_S.,......
150 ...... /...... /// X ,
100 _._ ...... Public salary Increse takes place
so(endO c. IOU - 111)
50 I I I I I I I I I I I 0 SO F A J A 0 D f JI 91 i U J S N J 92 U Outstanding Trasury at1 1is Currency In Circ. 9dL FE erve CS)
- 15 - 'U, g .
0 I I I TF T
n 1 * - S I -
II A: I SW' z 8-i I- I I: I - m 15.c. : ¶ i I . a 6 I * WY LA A * *
2 '1
______
ISL______03
'0 ______to 8-' CHAPTERIII
KEY ISSUES
The Parsmount Importance of the Fiscal Deficit
3.1 Many problems face the Lebanese economy after 15 yeare of war: physical asset, damaged; public serviceshave long been inoperative;and basic tools of economicmanagement need to be restored. The most pressing economic issue is the size of the fiscal deficit. Unless this structuralproblem is addressed,Lebanon is likely to again experiencethe vicious circle of high levels of inflationand a rapidly depreciatingexchange rate, which will impede its reconstructionefforts and undermine its growth prospects.
3.2 As was the case with many other nations experiencinghigh inflation in the past, at the heart of the high inflationexperienced in Lebanon during the latter part of the 1980s and most of 1992 was the unsustainably large and persistent fiscal imbalance financed, in large part, by seignorage, i.e., monetary expansion or inflation tax. In order to mitigate the inflation tax burden, households and firms substituted dollarized financial savings and investmentsin overseas financialmarkets for domesticmoney balances. As a result, the Lebanese financialsavings are heavily dollarized,and large amounts of capital, includingflight capital that has left the country due to the protractedviolent conflict,are invested overseas. Given its openness, this phenomenonrenders the Lebanese economy highly vulnerable to the variability of the asset portfoliosof investorsat home and abroad.
3.3 This vicious circle was well illustratedby the experiences of most of 1992. Lebanon'slarge, persistent fiscal deficit needed to be financed through the placementof treasury bills or through central bank financing. Interest payments on treasury bills increased governmentspending and, therefore,the size of the deficit. Central bank financingled to increasesin the money supply and, thus, fueled inflation. By mid-1992 treasury bills were no longer willingly accepted by the public as their yields were negative in real terms, given the prevailing levels of inflation. The placement of treasurybills would have required interest rates well above 100 percent, ballooning interest payments even further and exacerbatingthe level of the deficit. In the absence of fiscal adjustment,the Governmentresorted almost exclusively to central bank financing,with predictableresults.
3.4 The rapid monetary expansion that resulted from the central bank financing of the large fiscal deficit caused inflationary pressures and inflationexpectations to intensifyand set in motion massive currency substitutionout of the Lebanese pound and capital outflows. This shift in asset portfolios exerted severe pressures on the Lebanese pound, which depreciated quickly. The erosion of the value of the
- 17 - domestic currency,in turn, caused prices of imported goods to increase, fueling inflation 3ven furthar. At the same time, public expenditures with a large foreign currency component (foreigndebt service, expenditureson goods and supplies)increased. The tax system in Lebanon is not easily accommodatedto inflation;real tax revenues subsequentlydeclined. As a result, the fiscal deficit increased, requiring additional amounts of central bank financing. This further fueled inflation and expectations of future currency depreciations.
3.5 The costs and risks of high inflation, e.g., the loss of welfare for the poor, with possible social and political repercussions, and the adverse impact on productivity,capital accumulationand economic growth, are serious threats to the Lebanese economy, as it is highly vulnerable to the inflation/depreciation spiral. Therein lles the paramount importance of macroeconomic stabilization to the Lebanese economy, as a key precondition for the successful implementation of reconstruction,rehabilitation and developmentprograms in the long run.
3.6 The nomination of the new cabinet in October 1992 changed expectations: market participantsanticipated major improvementsin economic management; the value of the pound appreciated;and inflationary pressures diminished. A substantial inflow of capital took place, including the conversion of US$ held in commercialbanks in Lebanon to pound deposits. Enticed by high interest rates, the demand for Lebanese pounds and treasury bills increased dramatically. Virtually overnight, the situation had reversed: treasury bills were once again in demand; the central bank was able to reduce the discount rate from around 30 percent to 15 percent; and the Government was able to shift from central bank credit to treasury bills in the financing of its large deficit.
3.7 However, the fundamental structural deficit remains. Underlying the favorablerecent developmentsis the expectationof market participantsthat a sizeable reduction in the fiscal deficit, at least in the current account, will take place. If this does not materialize,investors will probably withdraw rapidly from treasury bills. Under these circumstances,problems experiencedthroughout most of 1992 would resume: inflation would accelerate and the value of the pound would once again start to tumble.
Structural Features of Lebanon's Fiscal Deficit
3.8 As capital expenditures in Lebanon are still very ow, the level of the overall fiscal deficit is essentiallydetermined by the discrepancybetween current revenues and current expenditures. However, as reconstructiontakes off, capital expenditureswill increase dramatically,and the overall fiscal deficit would skyrocket in the assence of fiscal adjustment. This is what makes the size of Lebanon's fiscal deficit so worrisome. The high level of the current deficit is illustratedin Table 3.1, which compares fiscal indicatorsin selected countries in the region. As indicatedin the table, the size of
- 18 - Lebanon's current deficit is the largest in the region. An important feature of Lebanon's public finances is the very low yield of taxation. At an estimated7 percent of CDP in 1992, it lags well behind countries such as Jordan, Morocco end Egypt, This is also illustratedin Table 3.1.
Table 3.1: Fiscal IndicatorsIn Selected Countries, 1989 (as Percentageof GDP)
-'lal colr . l ' . C n .r c .aa .- i- . -______- - : l_ Comty Osoll Balance Current samce iTaxSReve1n Direct Tae _ndirect TSaxe Bypt (FY1990) -1i.S0 -9.36 19.23 6.95 12.28 Iran -4.02 -0.95 5.88 3.76 2.11 Jordan -5.41 -8.24 14.35 3.25_ 10.88
.iac. (1 87) . 4.43 1.43 120.91 _ _2. 14.70 Tunisia __a:-4.30 .2.07 23.61 8.23 15.98
Sources: Internatioal Financial Statistics, IM and staff estimates.
Wealnesses in Revenue Collection
3.9 Efforts to reduce the fiscal deficit are frustrated by the application of taxes, which are not inflation-proof. A good example is import taxation, which is based on the customs dollar that is adjusted periodically,and lags well behind actual market developments. Currently,imports are valued at LL 800 to one US$. The market value for the US$ stood at about LL 1,850 (as of end-December1992). As a result, import taxation in Lebanon is extremely low compared to other countries.' This is illustratedin Table 3.2, which compares the share of import taxes in total tax revenue, as well as import taxes as a percentageof the declared value of imports for selected countries.
I/ i*em a trade policy pespective, however, low levels of Import taation hsve a naumer of advsntages (e.g., efflciency, the lowr cost of input and lowr prices tar consuies). Ther is a trade-off betwee budetar consideratios and trade policy coniderations. In the cas of Lebanon, the budetary considerations eo to be the more important ones, given the sixe of the deficit and the adIistrative diffieultioe in raising altenative taxe.
- 19 - Table 3.2: Import Taxation In Selected Countrles, 1969
Import Taxes Import Taxes Country (as X of GDP) (1 of imports)
Egypt 4.61 11.69 Iran 1.35 35.31 Jordan 6.03 8.60
1,~~~~~~~~~~~~~~~~~~~~~~N.. ~~~~~~~X 01-I
Morocco (1987) 2.96 11.65 Tunisia i 8.54 17.62 Souzoes: btlerustonal Financial statistlcs. VW and staff st4ates.
3.10 The lack of protection against inflationapplies to a number of taxes that, in most other countries,are a significantsource of governmentrevenue. Among these ;arespecific taxes on cement, alcohol and luxury goods, which do not adjust automaticallyto changes in the value of the products.
3.11 Low Income Taxation. The collectionof direct taxes is also very low (see Table 3.1). To some extent, this is explainedby the administrativeweaknesses in the tax departmentresulting from the war. In 1991, for example, income and profit tax collectionsamounted to Just over 1 percent of GDP; out of 65,000 commercialestablishments registeredin Beirut, only about 20,000 submit income tax statements. Out of these 20,000, 70 percent declare losses. In sum, less than 10 percent of all registered commercialestablishments effectively pay tax Fairly straightforwardmeasures, such as selected and well-publicized audits and the strengtheningof key tax departments,would have the potential of increasingincome taxes substantially.
3.12 Nontax Revene. In Lebanon, major governmer.trevenues emanate from profits from the centralbank. Although the share in total revenues decreased from an average of roughly 50 percent during the war years to 29 percent in 1991, central bank profits are an extremely uncertain source of income as these profits are mostly due to currency fluctuationsand accountingprocedures. Responsible for managing the country'sexternal reserves, the BdL holds importantamounts of foreign currency. Expressed in Lebanese pounds, the value of these assets increases as the Lebanese pound depreciates; the BdL then records profits that are transferred to the Government. In reality, th. central bank's net equity in dollar terms has hardly improved, and the transfers were made at the expense of an erosion of the central bank's equity in
- 20 - real terms. Table 3.3 indicatesthe compositionof total government revenues in Lebanon and other countries in the region. The large proportion of nontax reTenue highlights the narrowness and the vulnerabilityof Lebanon's revenuebase.
Table 3.3: Compositionof GovernmentRevenues, 1989 (as Percentageof Total GovernmentRevenues)"
Nontax Revenues2 Country Direct Taxes Indirect Taxes Egypt 29.31 31.27 39.42 Iran 29.20 16.38 54.40 Jordan 17.10 53.48 29.25
Morocco (1987) 26.53 62.75 10.72 Tunisia 26.88 50.24 22.89
Soeure: Internationt Fincial Statistics, INF. Excludes grants. NoIntaxrevuem lnclude capital rvenes.
Problems in Expenditure Control
3.13 Containing the Vag2 Bill. The level of the Government's wage bill is high and representssome 60 percent of budgetary current expenditures;most transfersto other public entities 2 represent salary payments. At the same time, real wages in the public sector are low and have been eroded over time. The number of people on the public sector payroll, about 130,000 (includingmilitary personneland teachers), seems high. Reportedly,many work short hours or not at all; some no longer live in Lebanon; others are deceasedbut continue to be paid.
3.14 Large Transfers to the ElectricityCompany. Electricity tariffs chargedby Electricitedu Liban (EdL) have remained unchanged since January 1, 1991. Current tariffs for residentialusers, which account for about 80 percent of consumption,are LL 30/kWh for the first 100 kWh per month and LL 55 for consumptionin excess of 100 kWh; industrial tariffsare LL 41; and tariffs for lighting are LL 45. The
/ lssenti ad scmda scools, sioss, the Uni'esite du Lban d selected public .uterpti-es.
- 21 - weighted average tariff (VAT) is only about 25 percent of the estimated cost of supply (about US$0.085, or about LL 160 at the current exchange rate). Private enterprisesin Lebanon supply power at prices that are about six times higher than those charged by EdL. Moreover, collection is about 40 percent of the bills issued. As a result, heavy losses are incurredby EdL; these are coveredby the central government and in 1992 amounted to between one quarter and a third of total outlays. At issue is how to increase rates and collectionsubstantially while restoring basic services and ensuring the affordabilityof minimum levels of consumption.
3.15 Controllng Extraudetry Expnditures. Other extra- budgetary expendituresare also large. They include subsidies to loss- making entities,such as the electricitycompany and the railroads. A large share of these excendituresis difficult to identify. They feature in a variety of budget categoriesand are, in practice,made outside regular budgetary procedures. Often, extrabudgetary transfers and Treasury advances are voted by the Parliament without adopting measures to offset the additional expenditures incurred. To some extent, the same applies to capital expenditures,for which the Council of Development and Reconstruction (CDR) has responsibility. The CDR can effectively incur foreign debt without formal veto power by the Ministry of Finance. As a result, the control function of the Ministry of Finance is seriously undermined. Even though the Ministry has tried to adhere to a very strict policy of reducing expenditures during 1992, these policies have been seriously frustrated by institutional arrangements that disperse financial control functions. Once reconstruction expenditures take off, the need to address the lack of control on public expenditures will become even more pressing.
3.16 All in all, in the short run, expenditurecontrol is complicatedby administrativeweaknesses and rigidity in key expenditure categories. Interest payments and salaries take a long time to curb. The main focus of public finance should, therefore, be on mobilizing additionalrevenues while putting strict expenditureceilings on expendituresthat can be controlled,especially extrabudgetary transfers. Expenditurecontrol is particularlyimportant as large reconstruction expenditures have yet to materialize. Clearly, this will add to the fiscal burden; the size of the deficit will remain large, and expenditureswill be all the more difficultto control. Thus, the need for a coherent and implementablefiscal program, which takes into account all the demands on Lebanon's fragile public finances, becomes evident. The main elements of such a program are presented in Chapter IV.
3.17 In spite of the huge demands faced by the authorities, Lebanon's public finances have some clear advantages compared to other countries. External debt is still relativelylow, and although precise numbers are not available, it is also clear that Lebanon's parastatal sector is relatively small. With the importantexception of the electricitycompany, the sector does not seem to present public finances with the type of burden experienced by other countries in the region.
- 22 - Moreover, the presence of very capable Lebanese entrepreneursand sizeable amounts of private capital should make the privatizationof selected public enterprisesccmparatively easy.
Monetary Policies
3.18 Over the last years, monetary conditions in the Lebanese economy have been dictated mainly by two factors: (i) the central bank financingof the large and persistentfiscal deficit; and (Ui) the continuingportfolio shifts by investorsat home and abroad, which, given the openness of the economy and the large stock of assets held by Lebanese nationals abroad,have led to large, and fluctuating,capital flows in and out of Lebanon. Currency substitution and international capital movements make monetary conditions in Lebanon unpredictable. The domestic money supply--intrinsicallylinked to the exchange rate and the level of the dollarized financial savings--is very unstable. The Lebanese authorities,equipped with relativelyweak monetary policy instruments,have, on the whole, adopted a generallypassive policy stance that has not been successfulin containinghigh inflationor in restoring a stable exchange rate.
3.19 In reality, the main objectiveof monetary and exchange rate policies has been to accommodatethe fiscal needs of the central government. As a result, the traditionalobjectives of monetary and exchange rate polices, ensuringprice stabilityand the value of the national currency, have been undermined. At this stage, a fundamental choice has to be made: either accommodate the fiscal needs of the central governmentand, thus, contribute to accelerating inflation and a further decline in the value of the pound, or implementfiscal adjustmentmeasures and allow the monetary authoritiesto play their role by strictly controllingcredit to the Governmentand reducing the growth in the money supply.
3.20 The most important problem to deal with is the reduction of the fiscal deficit. Provided that this takes place, the issue then becomes the extent to which the monetary authoritiesare allowed to enforce strict limits on credit to the Government. The immediate impact of restricting credit to the Governmentwould be an increase in the domestic market interest rate, which, although undesirable from the perspective of encouraging investment in real sector activity, would be required to maintain monetary stability. It is suggested that rates be determined freely, for example by auctioning off treasury bills and considerably loosening requirements on commercial banks to hold treasury bills. The success of this policy requires that credit ceilings to the Government be strictly adhered to and not circumventedthrough central- bank-financed extrabudgetary public expenditures. Central bank credit to commercial banks and the economy would also need to be restricted.
3.21 If credit expansion and the money supply can be kept under control, inflation is likely to come down to international levels. If interest rates stay well above the interest rates of major foreign
- 23 - currencies and the convertibility of the Lebanese pound remains guaranteed, there is no reason why the value of the pound should continue to slide. However, the perception that government policies are credible is absolutely essential in currency movements. Hence, the overriding need for monetary policies to be (i) transparent; (ii) enforceable; and (iii) predictable. Chapter IV suggests policy measures thar would meet these criteria.
Trade Policies 3.22 The promotion of domestic production and exports is the objective of trade policies. At the same time, trade policies have important budgetary consequences, especially in Lebanon, where the sum of imports and exports has traditionally exceeded GDP. The revenue collection function is defunct to a large extent. In turn, the low effective tariff rate encourages imports and provides little incentive for exports and domestic production. 3.23 The complicated and dispersed system currently in place lacks transparency. The current tariff regime contains 31 different ad valorem rates, ranging from 0 to 75 percent, and selected quantitative restrictions on agricultural products. The Conseil General des Douanes has the sole authority to determine the value in foreign exchange of imports. The Conseil has suffered from the war and lacks basic equipment to fulfill its functions. It is understaffed as no recruitment has taken place over the last 15 years. The complicated tariff structure, combined with the institutional weaknesses of the Conseil and a lack of control from outside the Conseil, provides ample scope for unofficial arrangements between an importer and an individual Conseil staff member.
Financial Sector
3.24 The financial sector has traditionally been very important for the Lebanese economy. Liberal regulatory requirements, combined with the convertibility of the Lebanese pound, made Beirut the financial center of the Middle East. As a result of the war, no significant term financing has recently been carried out by the Lebanese banking system. Bankingactivities essentially consist of trade financing and short-term investments abroad. Before the Lebanese bankingsystem can effectively engage in the sound, long-term financing required for the reconstruction of the economy, new financial instruments will need to developed. Also, the supervisory role of the central bank needs to be adjusted accordingly. 3.25 Today, prior to major reconstruction efforts, several issues confront the sector. First, the capital base has been seriously eroded. Part of this erosion is a direct result of fiscal policies. In order to finance the fiscal deficit, banks are obliged to hold 63 percent of their deposits in treasury bills. (An additional 10 percent must be
- 24 - held in cash.) With the levels of inflationexperienced in 1992, the real return on these treasurybills was sharply negative. Moreover, the capital ratio (currentlyestimated at 1 percent of risk-adjusted capital, compared to 8 percent required under the Basle accord) is determined on the basis of local currency liabilities,even though 80 percent of the banking system's deposits are foreign denominated. Most of these foreign deposits are invested abroad. With high domestic inflationand negative real interest rates, there is very little incentiveto use these foreigndenominated assets for the financingof productive activities in Lebanon. In October 1992, however, the central bank passed a regulationthat required all commercialbanks to meet a capital adequacy ratio test of 4 percent after February 15, 1993. Thereafter,gradual increasesare foreseen so as to reach 8 percent by February 15, 1995. Definitionsof the balance sheet items should reflect the guidelines specified by the Basle Committee on Banking Supervision.
3.26 Banking activity has shrunk to about half of what it was in 1983. Total bank assets, which had reached a peak level of US$17 billion in 1983, declined to US$7.7 billion in 1991, less than half the former level in nominal terms. Likewise,private deposits,which had reached US$12.1 billion, declined to US$5.7 billion over the same period. This decline in activityhas not resulted in concomitant declines in employment,especially in the Lebanese-ownedbanks. As a result, efficiency indicatorsof these Lebanese banks are low: in 1991, total assets per staff employed amounted to some US$0.3 million, compared to US$1.0 million for non-Arab banks. Likewise, the average level of deposits per employeewas US$0.9 million for foreign banks, compared to US$0.2 million for Lebanese-ownedbanks.
3.27 As noted in Chapter II, the economy is increasinglybecoming dollarized. As a result of inflationand the low yield on assets denominated in Lebanese pounds, an increasing number of domestic transactions are denominated in foreign currency. Consequently, the traditional functions and efforts of the monetary authorities (reserve requirements, credit ceilings, prescribed capital ratios), aimed at ensuring a healthy banking sector, are severely undermined.
Public Administration
3.28 The issues confrontingLebanon's public administrationare formidable. The structureof the civil service is outdated. As a result of the war, those well-trainedcivil servants who were able to go abroad emigrated. Physical facilitieshave been destroyed,as evidenced by the fact that the Ministry of Finance has no functioningcomputer. Civil service wages are low; staff morale is down; and many civil servants supplementtheir income by other sources. However, the total wage bill is unsustainablyhigh. There are about 138,000people on the public payroll, many more than in other countrieswith similar populations. The number of military personnelhas increasedwhile the salaries of those who have, in fact, left the civil service continue to
- 25 - be paid. There is, thus, a great need for civil service reform aimed at both restoringmorale and reducing the wage bill.
3.29 The challenge is to streamlinepublic administrationwhen so many demands are being made on its services. Without higher real wages in the civil service, morale is bound to remain low, and government policies will be extremely difficultto implement. At the same time, given the importanceof containingthe fiscal deficit, there is virtually no room for an increase in the wage bill. A future salary increaseshould, therefore,only be implementedwhen it is accompanied by a reduction in the number of civil servants.
3.30 A second issue is how to focus government interventions. The key institutionsat this stage are: (i) the Ministry of Finance, which would have the main responsibilityfor bringing back fiscal balances and, in conjunctionwith the BdL, for implementinga stabilizationprogram; (ii) the CUR, the focal agency for coordinating the reconstructioneffort; (iii) the Ministry of Public Works, which is the executing ministry for the rehabilitation of basic infrastructure; and (iv) the Ministry of Social Affairs, which would be responsible for designing a social safety net and ensuring that the social effects of the stabilizationprogram were being offset. It would be desirable if these institutionsand the BdL were to form a permanentworking group, which would be given the prime responsibility for managing the stabilizationprogram in the near future.
3.31 At the same time, the G'overnmentshould withdraw as much as possible from nonessentialactivities. A first step could be to privatize public enterprises in the electricity, telecommunications, oil refining, ports and railways sectors. This would require an appropriate and implementable legal and regulatory frameworkto prevent the emergenceof monopolies. Lebanon has always pursued private-sector- oriented policies. As mentioned earlier, its parastatalsector is comparativelysmall; prospectiveinvestors in the sectors mentioned above should be relativelyeasy to identify,provided they are given the autonomy to run these operationsand charge prices that are in line with actual costs. Currently,there is little room for the Government to continue to pursue social policies through selected enterprises. Public intervention,such as ensuring the affordabilityof electricitycharges, should be sought, instead, through taxation, higher incremental prices for large consumers and, possibly, cross-subsidization.
Social Policies
3.32 The poorer segments of the population bear the br.tntof inflation and the depreciationof the Lebanese pound as their incomes are largely determined in pounds. Although stabilization measures that are required to address the macroeconomic imbalances will ultimately benefit the poor, the required measures, such as civil service, tax and customs reforms, reductions in subsidies, as well as increases in the prices of public services, will certainly face resistance at a time when
- 26 - quick, decisive and implementableactions are required. Moreover, given the skewed income distributionin Lebanon, a strong case should be made for effectivelyprotecting the most vulnerable during the stabilization program. Rather than applying subsidies generally, it is more desirable to put in place programs of direct cash transfers, food stamps and kerosene coupons. The issue would be how to implementthese policies within the limits of administrative capacity. External assistance in th:s area would be desirable. Donor willingnessto assist in social sector policies has already been expressed.
- 27 - KEY POLICY DZOOKUNDATION
Introducti,o 4.1 After 15 years of war, the challenges faced by the Lebanese authorities are huge. Reconstruction and the rehabilitation of key infrastructure and productive capacity need to take place, if the economy is to grow. This wlll require massive investments from the public, as well as the private, sector. Yet, as pointed out in the previous chapters, reconstruction and investments are seriously frustrated by the size of the fiscal deficit. Current revenues cover less than 50 percent of current expenditures. Considering that major public capital expenditures are yet to take place, the level of the current fiscal deficit, approximately 10 percent of GDP in 1992, is unsustainable. 4.2 In the absence of fiscal adjustment, borrowing by the public sector for reconstruction expenditures would exacerbate the problem: interest payments would skyrocket, and debt service payments would soon exceed fiscal revenues. Moreover, without the necessary adjustments, volatility in the exchange rate and high levels of inflation would likely persist, which would not be conducive to private investments. In essence, the situation that has characterized Lebanon's post-war period so far would continue: the sizeable resources, both domestic and foreign, that are at Lebanon's disposal would continue to be used primarily for consumption and speculative purposes; too little would be devoted to the huge reconstruction task that lies ahead. In sum, the likelihood is small that successful and sustainable reconstruction would take place in the absence of comprehensive fiscal adjustment. 4.3 The main thrust of government policies in the near future should, therefore, consist of a comprehensive fiscal adjustment program. The main objectives of fiscal policies should focus on: (i) eliminating the current deficit; and (ii) ensuring that the overall deficit (including public capital expenditures linked to the reconstruction program) is sustainable, does not lead to unmanageable levels of debt service payments and does not fuel inflation. There is very little analytical basis for a comprehensive fiscal adjustment plan. Moreover, were such a program to exist, implementation would take a considerable amount of time, given the current limitations of Lebanon's administrative capacity. In addition, after 15 years of war and the resulting major breakdown of public services, there is a reservoir of skepticism among taxpayers vis-a-vis the government. Future tax collection efforts will be frustrated by these negative perceptions, unless some key public services are restored. 4.4 The challenge is, therefore, to identify policy measures that: (i) are straightforward in design; (ii) can be implemented quickly; and (iii) have good prospects for reducing the discrepancy
- 29 - between current revenues and current expenditures. At the same time, selected key public services need to be quickly rehabilitated s0 as to reestablish public authority. This chapter identifies some key fiscal measures and analyzes their potential impact. These measures are far from comprehensive and present only a first step towards fiscal balance; they need to be accompanied by other macroeconomic stabilization policies (such as monetary and foreign exchange policies), whose principles are briefly touched upon in this chapter. The main policies aimed at the rehabilitation of key public services are also described. Finally, this chapter highlights a number of key policy areas, the analysis and near-term implementation of which are considered essential if economic growth and reconstruction are to be sustained. (A summary of the policy recommendations is contained in the "Policy Matrix," Table 4.2, below.)
Immediate Measures 4.5 Increasing Fiscal Revenues. Three areas of taxation offer the prospect of significantly contributing to revenues in a relatively short time: taxes on imports, petroleum and real estate. These taxes could be supplemented by fairly straightforward measures, including an increase in excise taxes on alcohol, cars and luxury goods; an increase in selected and collectible sales taxes, for example, on cement; and an increase in car registration fees. Of these, the tax on real estate transactions has already been revised with the establishment of a zoning-based valuation method to determine the tax base. As a first step towards extensive customs reform, the Parliament has approved the elimination of most import duty exemptions and nontariff fees, and the Government is preparing to replace the customs dollar with the market exchange rate and implement a simplified tariff structure. 4.6 umort -Taxatio. The main reasons for focusing on imports as a major source of revenue are: (i) the size of the import bill; (ii) the very low current effective rate of taxation; and (iii) the relative ease of collection. In 1992, merchandise imports amounted to about 75 percent of GDP. Import taxes collected represented a mere 3.8 percent of the value of imports, among the lowest ratios in the world (see Table 3.2). Finally, import taxes are relatively easy to collect as compared to income or sales taxes, which require a much more elaborate administrative capacity. 4.7 Removal of the Customs Dollar. Significant increases in revenue from import taxes would result from the replacement of the customsdollar by the actual market value. As pointed out in Chapter III, a sizable difference exists between the market exchange rate and the customs dollar rate used in calculating the value of imports in local currency; furthermore, the rate is adjusted only periodically. Currently, imports are valued at LL 800 to one US$, compared with the market value for the US$ at LL 1,850 as of December 1992. This gap has significant implications for budgetary revenue.
- 30 - 4.8 Besides the revenue effect, removing the customs dollar has further advantages. First, it is a simple measure that can be implemented easily without the requirement of a new law or parliamentary approval. Second, recent developments make the current timing propitious: with the nomination of the new Government, the pound has appreciated and the cost of imports has come down in Lebanese pounds. The opportunity to increase import taxation, at a time when the impact on domestic prices from higher effective import tax rates can be offset by the lower dollar, should be exploited. Third, if the Lebanese pound were once again to depreciate, customs duties, expressed in Lebanese pounds would increase. This, in turn, would limit demand for imported goods and, consequently, the demand for foreign exchange. As such, the new system would diminish fluctuations in the exchange rate rather than contribute to them, as was previously the case. 4.9 Tariff Regime Simplification. In conjunction with the abolishment of the customs dollar, the tariff structure should be greatly simplified. The current tariff regime contained 31 different ad valorem rates ranging from zero to 75 percent; numerous exemptions, estimated to cover 40 to 50 percent of total imports; and selected quantitative restrictions on imports of agricultural goods. This system is very difficult to enforce, in part because of the rate structure, but also because of security and enforcement difficulties. The simplified tariff structure would enhance the enforcement of tax laws. The Government is considering replacing the 31-rate system with a streamlined 6-rate tariff structure, with rates of 5, 10, 15, 20, 25 and 35 percent. At the same time, exemptions, which are significant in the current regime, would be eliminated (with the exception of those covered by international agreements and the armed forces). These measures would represent a major improvement over the previous system and contribute to higher revenues. It is possible, however, that this six-rate structure would continue to lead to important leakages. In that event, the Government may wish to consider a further simplification, perhaps to a flat rate on all imports.
4.10 The above-mentioned changesin trade taxation could be supplemented by arrangements with an external pre-shipment inspection agency to verify the value of the goods declared. This could make an important contribution to the Government's credibility and would provide clear signals to economic operators. A pre-shipment inspection arrangement has been applied in a variety of ways in a number of countries.
4.11 It is expected that the additional revenue from import taxes would amount to approximately IL 400 billion in 1993, equivalent to about 3 percent of GDP. This would bring the effective rate of taxation on imports from an estimated 3.8 percent in 1992 to about 7 percent in 1993. As indicated in Table 3.2, this figure is still low by international comparisons.
- 31 - 4.12 Taxationof Real EstateTransactions. There is considerablescope to increaserevenues on the roughly200,000 real estatetransaction, that occurannually. In 1991, thesetaxes yielded aboutLL 50 billion,more than the revenuefrom incometaxes. However, the base of the taxationwas the declaredvalue, as opposedto the actualvalue, of the transaction.It is estimatedthat, by applying existingtax ratesbut changingthe base to the transactionvalue, governmentrevenues could increasesignificantly. In the Lebanese context, the transactionvalue cannot always be determined. In December 1992, the Governmentset new standardvalues: two minimumvalues per square meter (one for unimproved land and the other for buildings) and three coefficients (according to the condition of the property). With existingrates of 6 percent,it is estimatedthat the implementationof thesemeasures could increase tax revenuesby LL 200 billionLebanese poundson an annualbasis, an amountequivalent to about 1.5 percentin 1993.
4.13 Petroleum Taxes. This is the third area recommended for key actions. Current taxes on petroleum range from 4 to 18 percent, with a weightedaverage of about11 percent. This leads to prices which are among the lowest in the world. It is suggested that this average be raised to around 30 percent. Within that average, the current differentiation among products (with the highest tax rates on gasoline and the lowest rates on kerosene) could be maintained on income distribution grounds. At 1991 levels of consumption for all products (about 22 million barrels), an average 30 percent tax on petroleum (in addition to the proposed import duty) would yield about LL 300 billion, equal to more than 2 percent of GDP in 1993. The final price of petroleum products would still be at about the same level or lower than that in neighboring countries. Smuggling is, therefore, unlikely to increase as a result of the increase in gasoline taxes. 4.14 OtherTaxes. The three measures mentioned above--taxation of imports, petroleum taxes and taxation on real estate transactions-- represent avenues for significant and immediate increases in revenues, collectivelyyielding an estimatedLL 900 billion annually (close to 7 percentof GDP in 1993). An overarching,consistent macroeconomic stabilization program (as described in Chapter V) would require about LL 1,100billion in additionalrevenue for 1993 (about8.5 percentof projected1993 GDP). Thus, threefourths of the necessaryother revenue couldbe obtainedthrough tax measuresin the threeabove-mentioned areas. To reachthe overallrevenue targets, additional measures might include: (i) additionalexcise taxes on luxurygoods, cars, alcoholic beverages,tobacco and cement;(ii) selectedtaxes on services(hotel rooms,meals, airport departures, etc.) and (iii)administrative measures aimed at increasing the number of commercial establishments that pay income tax. (At present only an estimated 10 percent of these commercial establishments effectively pay corporate income tax.) The actual implementation of these "supplementary" tax measures would need to be ensured to the extent possible, determined largely on the basis of administrative capacity. ThblrImmediate revenue impact, although
- 32 - helpful, would seem to be less promising than the taxation of imports, petroleum and real estate transactions.
Controllintthe Growth of Current Public Exnenditures
4.15 Combined with efforts to mobilize revenues,current publlc expenditures need to be contained if the currentbudget balance is to be eliminated. Given the state of Lebanon's fiscal accounts,much more analysis is required before a program of structuralchanges in the composition of public expenditures can be recommended and implemented. The Government has begun to take initial measures to control expenditures. In January 1993, it abolished the wheat subsidy that hd been reintroduced in 1992 when the price of imports of wheat rose sharply as a result of the exchange rate depreciation. Meanwhile,main areas for expenditure control would seem to include the following large categories: (i) the wage bill; and (ii) a strict control on extra- budgetary transfers.
4.16 Wage Bill. The size of the wage bill weighs heavily on the budget, and its share in public expendituresis too high in relation to tax revenues and other expenditurecategories. As indicatedin Chapter II, it was the increase in civil wages granted at the end of 1991 that triggered inflation and a run on the pound. Yet, real wages have been eroded by inflationsince the last salary increase,and significant pressures exist to increase civil servicewages. The recent price stability has eased these pressures somewhat, and the Government's current intention is to maintain wages at their present level for 1993. However, a nominal increase in wages may become unavoidable, and it may also be necessary to improve the remunerationsfor selected key positions and to grant compensationpayments to retrenchedworkers. The budgetary impact of such an increase could be offset somewhat by reducing the 130,000-person civil service payroll. While comprehensive civil uarvice reform may be unavoidable, it would, however, take time to implement, requiring a civil service census. A first step might consist of taking a census of civil servants as soon as possible and, in any event, earlier than any salary increase is granted. To be eligible for the increase,civil servantswould need to report to work, and their employment status would need to be verified. Thus, future increases in nominal salaries would likely result in much lower increasesin the overall wage bill. At the same time, the basis could be laid for future civil service reform.
4.17 kAxtabmdgUat Transfers. Considerable amounts of transfers are devoted to loss-making enterprises. Most important are the transfers to Electricite du Liban (EdL), the electricity company, which amounted to an estimated LL 450 billion in 1992, or about a quarter of total current expenditures. As described in Chapter III, the average tariffs need to increase and collectionhas to improve. In order to protect essential consumption for the poorer segments of the population, a low tariff for the first 100 kWh of monthly electricity consumption needs to be established. This "life-line" tariff could be subsidized by
- 33 - higher rates on consumptionexceeding 100 kWh/month. This 'non-life- line tariff' should gradually,but quickly, be brought in line with produ^tion costs so as to bring the weighted average tariff (VAT) to 50 percent of the cost of productionas early as possible in 1993. These measures are expected to decrease overall outlays to the Electricity Company by an estimatedLL 100 billion for 1993. As soon as possible after the first increase,but no later than 1994, the VAT should be doubled. As basic services are being restored,collection would need to improve dramatically. Collectior.targets need to be set and actively enforced and, as necessary, supportedby governmentactions to ensure security. If current efforts by EdL to improve collectionsdo not yield quick results, considerationmight be given to contractingcollection with the private sector. Strict budgetary constraintsshould also be placed on other nonfinancialpublic enterprises(e.g., railroads,the Council of the South) and other nonidentifiedtransfers.
Credit and Monetary Policies
4.18 Given the heavily dollarized structureof the Lebanese economy, any economic stabilizationpolicy must necessarilybe keyed to maintaining a reasonable degree of exchange rate stability. Such stability is, in turn, conditionalon the Lebanese authorities pursuing not only the fiscal policy outlined above, but credible credit and monetary policies that are consistentwith, and conduciveto, the stabilizationof the exchange rate as well as prices.
4.19 Credit and monetary policies should be designed and implemented so as to contain the growth of the money supply within a range that is consistent with the stability of both the exchange rate and prices. Towards that end, the central bank should be empowered to actively use the instrumentsat its disposal: most importantly,(i) the central bank's credit policy towards the Government; (ii) the purchase and sale of treasury bills, with a view to controllimg the reserve money; and (iii) the reserve requirements. The level of central bank financing is the key variable to be monitored and targeted. By slowing the pace of monetary and credit expansion, inflation could be brought under control and the exchange rate stabilized. Targets should be set on a freq-ient basis consistent with these aims and as part of an overall stabilization program.
4.20 It is suggested that interestrates on treasury bills should be decontrolled. The current method used by the Government tends to offer rates that exceed the market-clearing rates that would equate risk-adjusted returns with those of alternative instruments. This not only exerts pressure on the fiscal balance, but also tends to encourage speculative capital inflows that could result in a destabilizing divestment once exchange rate expectations changed. In this connection, the monetary authorities should consider moving to indirect monetary control instruments, e.g., selling and buying treasury bills competitively. Interest rate deregulationwould facilitatethe
- 34 - developmentof a secondarymarket for trnasury bills in which to conduct such operations.
4.21 As was noted earlier, the main sources of instabilityin the supply of money in Lebanon include the significant international capital movements and currency substitution that are often speculative in nature. International capital movements not only influence the exchange rate but also affect the reserve money and money supply, while currency substitutionchanges the compositionof the money supply. These phenomena could be destabilizing. Furthermore,there are factors unrelated to economic fundamentals that affect expectations and can significantly limit the effectiveness of the Government'suse of traditionalmonetary policy instruments. Nonetheless, the monetary authoritiesshould pursue credible macroeconomicpolicies to ensure exchange rate stability. And, to the extent necessary, the monetary authoritiesshould counterbalanceabnormal changes in reserve money induced by large capital movements,e.g., by selling and buying previously issued treasurybills or some central-bank-issued instruments. Those instrumentswould probably be preferable to newly issued treasurybills, as the latter tend to incur considerablefiscal costs.
Exchanje Rate snd Foreign Reserve Policies
4.22 The policies of a market-determinedexchange rate and an unconstrained payments system have served Lebanon well in the past and should be maintained. In order to stabilize the exchange rate of the Lebanese pound, the Lebarose authorities should mainly rely on correcting macroeconomic fundamentals by actively pursuing a combination of credible fiscal, credit, and monetary policies and should intervene in foreign exchange markets only to smooth abnormal movements. As noted earlier, an important policy to dampen movements in the exchange rate is the deregulation of interest rates on treasury bills to equal_ze the risk-adjusted returns in domestic and foreign currencies. Given the large reservemovements in the past that resulted from foreign-exchange- market intervent-i, it is recommendedthat the level of nongold reserves, which ; end-1992 stood at four months of imports,be gradually increasc1 to the equivalent of about five months of imports.
4.23 The Banque du Liban holds over US$3 billion in gold reserves, which cannot be used or pledged under legal provisions. While contribut:ing to confidence, the holding of gold reserves has a significantcost in terms of foregone interest income, central bank profits and, hence, budgetary receipts. At this time, while Lebanon is undergoing major adjustments and confidence in the economy is critically important to foreign investors, it is advisable to leave these gold reserves untouched.
- 35 - Protecting the Poor During the Transition
4.24 Inflationand the lack of essentialpublic services have hit the poorest segments of the Lebanese population the hardest. The proposed stabilization and reconstruction policies are expected to benefit the poor. However, these benefits will take time to materialize,whereas the negative impact of fiscal adjustment is likely to be felt immediately. Effectivesocial policies are often difficult to target; they are also very country-specific.Possible social measures, such as the issuance of food stamps or kerosene coupons to ensure that basic needs are met, may be difficult to administer in Lebanon and hard to target in the absence of social data. As regards the tariffs for electricity and other utilities, it is recoxmendedthat "life-line"tariffs be established,with very low rates for essential consumptionand cross-subsidization,and increasingrates, for larger levels of consumption(see para. 4.17). The key considerationin designing social measures is the extent to which existing non- governmentalorganizations can sustain their ongoing activities in the health and education sector during the transitionperiod and to determinewhich functionscan most effectivelybe implementedby the Government.
ReconstructionProgram and Policies
4.25 Seventeenyears of turmoilhave left Lebanon'scapital stock destroyed or severely deteriorated;a quarter of its population displaced;public and social services nonexistentor of extremely poor quality; and public administrationseverely weakened, as many professionalshave left the country. Total damages have been estimated by the United Nations at around US$25 billion.' As soon as conditions began to normalize,the Government revived the Council for Development and Reconstruction (CDR), entrusting it with the task of preparing a recovery strategy. Sectoral plans were prepared and damage assessment was undertaken with the help of consultants and support from external donors, in particular the European Community (EC). On this basis, the Government and the CDR have prepared a National Emergency Reconstruction Program (NERP) for the emergency reconstruction phase.
4.26 Rebuilding the ravaged economy and returning to a sustainablegrowth path requires a phased program, consistingof the short-term emergency reconstruction phase (for which the Government prepared the NERP), followed by a medium-term recovery phase. While much of Lebanon's reconstruction and productivity restoration is expected to be undertaken by the private sector, government support is crucial, particularlyin the emergencyreconstruction phase. The NERP and, within it, the Bank-supportedEmergency Recovery and Rehabilitation Project (ERRP) aims to: (i) start removing critical infrastructure bottlenecks, a process without which the supply response, to be led by
I/ Ax pre3Gt*e4 In the Mmorzdu of the Pridenlt for the M Loa.
- 36 - the private sector, is unlikely to materialize;(ii) help alleviate the pressing social problems; and (iiI) strengthenthe existing institutions in charge of planning, financing, and implementingthe NERP. During the recovery phase, the expansion of infrastructure capacity will take place while the economic and social distortionsinduced by the war are being addressed. Beyond these two phases, Lebanon is expected to regain its ability to pursue progress primarilybased, as in the past, on private- sector-led development.
- 37 - Table 4.1: Ustioml Memgeny Uecmtruactin Proirm COW) equptal Inwstsent, Crait an Technical Ans tUnceCI ot (1993-1996; In US$61 tlions)
Sector Capitat Credit to Technicat NERP Investments 1/ Private Assistance 2/ Total sector
Physlcal Infrastructure Power 272.7 4.0 18.3 295.0 Water Spply 167.4 19.9 187.3
Telecatmnnications 146.4 16.4 162.8 Ports 10T.J 7.1 114.6
Airport 140.9 9.6 150.5 Roads 192.1 20.3 212.4
Vastewater3/ 95.2 1S.7 110.9
Solid Waste 76.9 4.3 81.2
Public Trarsport 22.6 2.5 25.1 Subtotal 1,221.7 4.0 114.1 1339.8
Social Sectors EdLcation 136.6 16.6 153.2 Housing4/ 72.9 206.6 9.7 289.2
Health 59.7 _ _ 7.0 66.7 Subtotal 269.2 206.6 33.3 509.1
Productive Sectorsm
Oil and Gas 55.0 9.1 64.1 Agriculture and 62.4 36.0 19.6 118.0 Irrigation
Industry 19.5 6.5 26.0 Private Sector 10.0 2.4 12.4 Services SUbtotal 136.9 46.0 37.6 220.5
|g Suldfngdrment 63.3 3.2 66.5
N| ogment and 0.6 111.7 112.3 I pLe_entation
Total 11691.7 256.6 299.9 2 24.2
Notes: 1I Includes contingencies. 2/ Technceal Assistance ineludes both project-retated and noqrroject-related technical assistanee. 3/ UWestoewter includes both sanitary sewerageand storm water drainage. 4/ *ORcing credit only includes the extrnal ly financed component.
- 38 - 4.27 The NERP is designed as a multi-sectoraloperation focused on emergency repairs and the rehabilitationof physical and social infrastructure. It aims to undertake a series of integratedmeasures that are designed to have maximum impact on restoringeconomic activity and alleviatingsocial hardship. The NERP encompasses15 sectors grouped in 5 components: infrastructure,social sectors, production, technicalassistance and governmentbuildings.
4.28 The NlERPhas been scaled down significantlyfrom the earlier plans, which did not realisticallyconsider the implementationcapacity and the financing requirements. Nor was the size of the earlier plans consistentwith the absorptivecapacity of the Lebanese economy. The program now envisions total outlays of about US$2.2 billion over the 1993-96 period: US$1;7 billion (includingcontingencies) in public investment;US$257 million in credit to the private sector (of which US$207 million is for housing and the remainder for the productive sectors);and US$300 million in technicalassistance, which, because of the weak administrativecapacity, is required to implement the proposed investmentprogram. Over two thirds of the proposed investmentsaim at rehabilitating physical infrastructure in order to remove existing bottlenecks in the recovery of production. These investmentsinclude US$463 million for transport, US$340 million for the water and waste sector, US$273 million for power and US$146 million for telecommunications. The social sector component supports the reconstructionand re-equipmentof damaged facilities in education, health, social services and housing. A summary of the proposed program is presented in Table 4.1. Individualsector assessmentsare provided in the annexes to this report, presented in Volume II.
4.29 As indicatedabove, the NERP concentratesheavily on physical infrastructure. The allocationsto the social sectors amount to US$509 million, includingUS$207 million in housing credits and US$33 million in technicalassistance, and compare with US$1.4 billion for the rehabilitationof infrastructure,excluding credit from domestic financial institutions. This relative balance reflects the urgent short-termneeds for rehabilitation. In view of the relative government neglect of the social sectors in Lebanon, and the sharp worsening of social conditions as a result of the conflict and the weakening of the economy, early attention to social sector issues will be important. Moreover, since the services sector is likely to one, again, be of the main sources of economic growth, human resources development, virtually nonexistent over the 17 years of conflict,becomes a high priority. The Government should, therefore,develop, as soon as possible, a strategy for social sector development,without which the physical rehabilitation to be undertakenover the next few years will not result in steady and stable long-termgrowth.
4.30 The proposed productioncomponent provides credit facilities to private sector activities (in agriculture and tourism) and finances the rehabilitation of public facilities in a number of sectors. The technical assistance component supports public sector capacity building in various aspects of economic management and in the implementation of
- 39 - the NERP. The government buildings component supports the rehabilitationand re-equipmentof key ministries and revenue-earning facilities. For the implementationof the NERP, a Program Management Unit (PMU) in charge of planning and monitoring the entire program is to be establishedin the CDR; similarly,Sector ImplementationUnits (SIU) would be setup for the respectivesectors.
4.31 As noted, the program has been scaled down substantially, but the feasibilityof its implementationwill still depend on the financing available in support of the program and the implementation capacity, even if capacity is enhancedwith the proposed technical assistance component. While a number of loans have already been contracted for the program, and other support has been committed in principle, there remains a significantfinancing gap. In the absence of a stabilizationprogram, in particular fiscal adjustment,it is unlikely that external support can be obtained in the magnitudes required. Nor would the Government be in a position to provide the required local counterpart contributions. At the same time, despite the significant fiscal adjustmentthat has been projected if the stabilizationprogram is pursued, the amount of contributions that could be made from the Government'sbudget would be limited, and nonexistentin the early years of the program. It is expected,however, that extraordinaryfinancing, particularlygrants, from countries in the region could be obtained to finance the required domestic counterpart funds during the initial years of the NERP.
4.32 If financing shortfalls were to occur, the implementationof the reconstructionprogram would have to take place over a longer period, and the benefits would have to be delayed accordingly. In that case, considerationmay also need to be given to eliminatingthe component for credit to the private sector altogether. This component, which is to be financed by external loans to be contracted or guaranteed by the Government, has already been reduced substantially. The provision of such credit would be best left to Lebanon's financial sector, which has significant liquidity and is better equipped to assess credit risks, or to external private capital. Existing problems related to the virtual absence of medium- and long-term lending by commercial banks (a result of the structure of deposits) should be addressed not by resorting to public sector credit schemes, which have failed in Lebanon in the past (and in most other countries), but by encouraging term transformation by commercial banks (e.g., through rediscount facilities in the central bank) or adjusting the legal and regulatory framework to encourage the establishment of private finance institutions. Indeed such actions may well be required to encourage the private sector investmentthat will have to accompany the Government'sreconstruction effort if Lebanon is to recover and grow.
4.33 The current weaknesses of public institutionsand cost recovery measures suggest that the Government should focus early on the sustainability of the physical assets that are to be rehabilitatedas part of the NERP. It is suggested that the operation and maintenance of these assets be contracted with the private sector. It is also
- 40 - suggested that the private sector play a majorrole in the expansion of physical infrastructure, beyond the initial emergency reconstruction phase. The poor administrative state of public enterprises and institutions, and the limited financial capacity of the public sector, suggest that, for efficiency and financial considerations, the Government consider divesting existing public utilities, in particular telecommunications and power, and leave the future expansion of facilities entirely to the private sector. It is, therefore, a high priority that an appropriate legal and regulatory framework be established for private investment in these, and other infrastructure, sectors prior to divestment and the award of concessions. It must be emphasized that the capital required for private sector investments in infrastructure, or for any major investments in the productive sectors, including the repatriation of part of the large holdings of Lebanese abroad, will only be attracted if an appropriate macroeconomic framework is established through the implementation of a stabilization program, and maintained thereafter. 4.34 As indicated above, the NERP would involve outlays of about US$2.2 billion over the 1993-96 period. The fiscal projections in the base case scenario discussed in Chapter V assume that the Government will take actions to virtually eliminate the current budget deficit by 1994 and that capital expenditures not included in the NERPwill remain lnchanged from the 1992 level, at about 3.3 percent of GDP, during 1993- 96. On this basis, the overall public sector deficit would average 11 percent of GDP during that period, of which over one third is projected to be financed domestically. With an amortization of existing external public debt of about US$50 million per year, the overall gross external financing requirements of the public sector during the period of reconstruction would amount to about US$2.4 billion. Based on a conservative estimate of grant financing likely to be available (US$800 million over the four-year period), some US$1.6 billion in loan disbursements would, thus, be required. While this would sharply increase the level of external debt from the current low levels, the resulting debt indicators remainlow by any standard. The level of external financing required would also sharply decline once the emergency reconstruction phase was completed, provided fiscal stability was maintained along the lines projected.
Aenda for Future Reforms 4.35 Strong stabilization measures are key in bringing about reconstruction and exterual financial assistance. The stabilization measures recommended in this chapter represent a beginning. However, to realize sustainable improvements in the fiscal situation, many more focused, medium-term policy actions will be necessary. The design of such actions requireb detailed analysis. A great deal of flexibility is also needed in responses to the particular characteristics of the post- war Lebanese economy, which, at this stage, are difficult to predict. Since 1975, many external circumstances have changed: Lebanon is no longer the sole financial center in the region; other countries in the
- 41 - region have started to implementmarket-economic policies; and the needs of the populationhave changed dramatically. It is, nevertheless, possible to highlight a few key focus areas that will need to be analyzed and addressed in the years to come. (These areas are summarized in the "Policy Matrix," Table 4.2, below.)
4.36 Public Finance. Beyond the immediateneed to reduce the fiscal deficit, several structuralpublic finance issues require the attentionof the authorities. After the reconstructionof key infrastructure,price and cost recovery issues will need to be tackled. The tax system will need to be revised and designed in such a way that it can be effectivelyimplemented in its totality and is both equitable and economically efficient. Important future areas of attention comprise: (i) the effective taxation of consumption, either through a sales or a value-added tax; (ii) continuedreforms in trade taxes aimed at ensuring efficientdomestic production and export promotion; (iii) effectiveand equitableincome taxation;and (iv) the taxation of existing propertiesbased on their market value. In all likelihood,a fundamentaland comprehensivetax reform will be required. A new tax system would need to aim for: (i) lower statutorytax rates; (ii) a broader tax base; and (iii) a transparent and enforceable tax regime.
4.37 Public Expenditures. Government spendingwill also need to be thoroughlyanalyzed and revised. A first objectivewould be to obtain a comprehensivepicture of all governmentfinancial operations. Currently,only part of these operations are known and effectively controlledby the central government. Second, clear policy objectives and public investmentcriteria will need to be set. Third, a major shift in governmentspending will be required,away from military and security purposes and towards the social sectors.
4.38 Civil Service Reform. It is recommendedthat the census of civil servants be followed by a more fundamental civil service reform. An assessment of the needs of the public administration will need to be made and carried out as soon as possible. The time is ripe to proceed quickly with a civil service reform. First, compared to other countries, the Lebanese private sector is growing quite rapidly, and private sector employment is expanding. The reinsertion of la:l-off civil servants is comparativelyeasy under such conditions. Second, civil servants are already, to a large extent, dependenton income outside their regular civil servant salaries. Compared to other countries, a relatively small incentiveor bonus would entice these civil servants to seek employment elsewhere. As the enforcement of government regulations becomes more transparent, the opportunity for civil servants to seek "unofficial" incomes linked to their status as civil servant would diminish. This would provide an additional incentive to leave the civil service.
4.39 Sogial Policies. A considerablenumber of social services, especially in the health sector, are currentlyprovided by nongovernmentalorganizations (NGOs) and are linked to the current political situation. In the future, they will need, to a large extent,
- 42 - to be carried out by the public sector. In addition to finding the correct balance between public and private social services, issues to be addressed in the medium term include: (i) the reinsertionof military personnel and redundant civil servants; (ii) the adequate balance between the private sector, public sector and NGOs in the provision of social services; (iii) the sustainabilityof health care and the provision of health insurance;and (iv) the restorationof social security and pension funds. Considerableanalytical work will need to precede effectivepolicy implementationin these areas.
4.40 Deepening of the Financial Sector. Lebanon'sbanking sector will face changing demands as reconstruction takes off, and the demand for long-term credit increases. Financial instruments will need to be diversifiedand deepened. Savingswill need to increase. Banks will require recapitalizationand restructuring. Mergers are likely. Existing laws will need to be revised. Central bank supervisionwill need to be strengthened,and competitionin the provisionof medium- and tong-termcredit will need to be assured, especially in real estate. all of these above areas require more detailed analysis.
- 43 - a
0 Ii 0
IIU0* II iii Ii ------I'' I Jt a ' ii I I N; liii!a a -, Ii i !!ugh Al,;
______- iii - - - - -
- I I U U
S
4 4' 4. ' j - I II IIii ii I iiU ______U
jb.I.
.2 Ii INi I - m I B as (I 5 0 * 14 S
- 44 - 1 ~Ii,, i 1.p
';. .i. .
- ______~~)1i-)4SI- I~~~ ~ '~ " 1993Actfons Alreadv Taken 1993Actlons Pt _ 1994-1995
B. Non.tav.ejJle Limlt tiqufditfy *d credit Contfnwu onetarypolfcfes expension. Lfberalfie interest consistent with rates on treasury bilts. eeroeconomicstabitfty. PursuemnetarWY aNd credit policiles aspart of aa Pcompehesiv stab ilzation progren.
C. Exchanelate Policie Nafntafned market-deterdinedexchange rate and Pursueexchange rate poliees as Continueexchange rate unconstrainedpaysnto system, part of a coaraihensive policies consistent with stabilization pregrem. acroeconomi stability.
II. omtnustfon_a Adopteda reconstruction preora consistent with Start 1993-96reconstruction Reviewthe HER?;iaplmnt availability of ffnancin-. programto rehabditate eoomic privtifation; contract amt and socalt Infrastructro ad key to the private sector. sectors. Prepar privatization of the telecom ications nd powr sector..
Ill. OtherPolicies A. kli*A .tol Carry out study of soclt sector. Degin to (opt Lock Into possibility of desoxfofn strategy. soclol sfety net. Prepare social, sevice and hum reorc dvotopent strategy.
B. Ir Mafintaneda Iiberat(zed fnternatlonel trade eawlioneat. Engae preship t finspection cONIn iss th a viewto stopping custom revne teake and hazrdow lotts, urtit the cusom inspection is ready nd capabLe,of undertaking this task.
______1993 Acti9onsAready Taken 993 ActSom Plmrr.*tRecoended -4-19_I
C. Ftqneale Cndiss#li a study to exemine Start l ple_ ting the prudential resultion and identify findings of the may to mbillzo dhmetic finonclal c_mIssioned report. sawings for log-term domestic investment.
D. civdl 8Iere Freete recruitrent of workerspaid Thrcoug elimlnmtfon of daily wae end eliminate the 'ost workers,0 votlntary autasatic renewal of contracts. deperture d emrty retirement, eliminate surplus civit service.
5. Institution lkltdirn Crested a spefelt unit for targe taxpeyern. Study possibilities for carrying Reorgam the dpartments out tax reform. of propet tetion ad excisetezes. Estabifsh a central externat debt awrgement unitwithin the Ninistry Caiputerie the Ministry of of Fnonce. finance for it to effectivety deal with Place *lt phblic debt seroice Incme taxacion. obtigations In the budet. 1994r Slepiwfy income Stnengthen the Goverment taxation and reduce the Accomting Office so that 1. can muober of statutory rates undertske ex post budget tudit WAd xeoptfona. besiming in 1993. 1 lmeta compdiensive Enforce the law that requires personn tnformat1on cucrent expenditures budgeted wder nagm_ t system with a Chapter 1 of the generat budget to view to curbing the pubtle be within the expected recept. sector's w bitl and helping supervise the ispimetawttin of adbinistrative reform. CUPT v
A NACROECONONICFlANEVOR FOR STABIIZATIONAND RICONSTRUCTION
J=rQdu tction 5.1 This chapter presents a broad macroeconomic, quantitative framework within which stabilization and reconstruction of the Lebanese economy can take place. Due to the paucity of data, and the absence of time-series, an unusual number of estimates and assumptions have been made to construct the framework. Thus, caution needs to be exercised in interpreting the results of this analysis. However, the projected scenarios using the quantitative framework are broadly indicative of general directions of developments and the likely outcomes of alternative policies and, thus, form a plausible basis that could support macroeconomic policy decisions. 5.2 A "base case scenario," describing the broad mechanisms for successful stabilization and reconstruction and showing projections of main macroeconomic indicators, is discussed below. The base case scenario visualizes major investments for reconstruction taking place whileprivate consumption per capita levels are virtually maintained initially and, by the middle of the 1990s, start growing steadily; and debt service payments remain at manageable levels. In fact, this scenario centers around three main elements: (i) major fiscal adjustment in 1993 and 1994 and the succe.ssful stabilization of the economy along the lines of the policy recomendations described in Chapter IV; (ii) the implementation of reconstruction policies and large increases in investments; and (iii) the availability of external financing, especially through the inflow of private capital. The principal conclusion emerges from the interaction of these three elements: successful reconstruction will require very sizeable amounts of both budgetary resources and public and private capital from abroad. Only with stabilization and fiscal adjustment is there a chance that both will materialize. 5.3 Two alternative scenarios are also presented in this chapter, to illustrate what would happen in the absence of fiscal adjustment. A likely consequence is that the level of private capital inflows would not be significantly above historical levels, as uncertainty in the economy would prevail. Under the first alternative scenario, the lack of fiscal adjustment would also prevent the Government from contributing to public investments associated with the reconstruction program; official creditors would then withdraw from the program. As a result, overall investment levels would be significantly below those under the base case scenario. GDP growthwould fall, and sharp declines in consumption per capita would occur. This is the most likely outcome of a failure to implement stabilization policies. 5.4 The second alternative scenario presupposes that, in spite of the lack of fiscal adjustment, the Government would still be able to
- 49 - maintain total overall investmentat levels similar to those under the base case scenario. This would be achieved by substantially higher levels of external borrowing by the public sector. In that event, the public sector's debt service would rapidly become unsustainable, as debt service payments would soon equal fiscal revenues, even under favorable lending terms. Also, GDP growth would be lower than under the base case scenario, as the efficiency of incremental public investmentsis likely to be well below the efficiency of private capital. 5.5 The projections are based on a four sector Revised Minimum Standard-Extended Model (RMSM-X). The key equations and assumptions of the model can be found in Annex 6 of Volume II of this report. The projections presented in this chapter are tentative at best, and great caution should be taken in interpreting the numbers. They are presented for illustrative purposes and to demonstrate the need for consistent policies in a macroeconomic framework. The historical database used for the projections is extremely weak. There are no official national accounts, trade, balance of payments or price statistics for Lebanon. Numerous estimates and assumptions needed to be made in attempting to ensure the internal consistency of the historical data base. Apart from their weak data, the projections are surrounded by other elements of uncertainty. First, the projections of the base case scenario not only assume the immediate implementation of the stabilization policies, they also assume that successful medium- and long-term economic policies along the lines of the broad agenda for reform can be specified and put in place in due course. Thesedevelopments are to take placewithin a political and security environment that is difficult to predict. Second, the projections presuppose favorable external conditions and the availability of both private and public capital for Lebanon's reconstruction. To date, there is little information to accurately predict these capital flows. Third, the resolution of outstanding regional conflicts would certainly affect the Lebanese economy. Predicting whether and when such potential developments might, indeed, take place -- not to mention specifying the nature of their impact on economic affairs in Lebanon -- is, of course, difficult. In general, external conditions in the 1990s are quite different from those experienced by Lebanon prior to the war. All in all, the projections presented in this report should not be considered as forecasts. They represent, instead, the results of a consistency framework exercise, based upon a specific set of assumptions, which, though plausible, may well divert from actual realizations.
Base Case Scenario Projected Develo9pents in 1993 5.6 Fiscal Develoms. Important fiscal adjustment would take place in 1993. A package of revenue-enhancing measures would more than double nominal fiscal revenues to about LL 2,100 billion, or 16 percent of GDP. Such an increase can be achieved by taking a large proportion of the measures discussed in Chapter IV and making improvements in
- 50 - administration. On the expenditureside, despite a rise in interest payments resulting from the accumulation of domestic debt to finance the fiscal deficits in 1991 and 1992, it is projected that the growth in nominal current expenditureswould be limited to 38 percent. This should be feasible if the wage bill is containedand transfersand subsidiesare reduced; as discussed in Chapter IV. As a result, the current fiscal deficitwould be substantiallyreduced, from about 10 percent of GDP in 1992 to roughly 4 percent in 1993. As the NERP takes off, public capital expenditureswould increase from LL 300 billion in 1992 to about LL 1,000 billion in 1993. This would be made possible by a net inflow of official assistance,and net loan disbursementsand grants, projected to total US$490 million in 1993. Despite the sharp rise in the level of capital expenditures,the overall public sector deficit of 12 percent of GDP in 1993 would be somewhat smaller than in 1992 (13 percent of GDP) as a result of the projected improvementin the current accountby the equivalentof close to 6 percentage points of GDP.
5.7 Monetary Develoomentsand Prices. As a result of fiscal adjustment and the external flows associatedwith the NERP, domestic financing of the overall fiscal deficit would decline from about LL 1,350 billion in 1992 to LL 625 billion in 1993; and the stock of domestic debt as a share of GDP, which stood at 43 percent at the end of 1992, would begin to be reduced. Within the total domestic financing, central bank credit to the public sector would be kept to low levels and, possibly, not be used at all. The effective exchenge rate is expected to stabilize,and inflationis expected to remain low as a result of the fiscal and monetary policies,with an increaseof 10 percent between the end of 1992 and the end of 1993. (On that basis, the average rate of inflationfor 1993 would be 25 percent.)
5.8 Reconstructionand Inflow of Cagital. An estimatedUS$1.6 billion of total investmentswould be needed in 1993 to begin Lebanon's reconstructionand to have a noticeable impact on future growth. With fiscal adjustment,about one third of these investmentscould be expected to be carried out by the public sector, financed primarily by external official assistance. The remainderwould need to be financed and carried out by the private sector. If private consumptionper capita is to be virtually sustainedat its current levels, an inflow of about US$1.9 billion in private capital flows1 would be needed in 1993. At more than 50 percent above the level of the average inflow over the last four years, this amount might seem large; however, it is lower than the estimatedinflows that have occurred in the last two years in response to, first, political reconciliationand, in late 1992, to the appointmentof the new Government. Clearly, only if stabilization measures are successfullyimplemented and confidence in the Lebanese
V theumount of privete capital inflows during 1989-02 may veil be overstated, e.g..to the eztent that reexport and current transfers may be underestimated. For the same reasons, the amount of private capital required In 1993and beyond may wellbe overestimated as well. Private capital inflows include net private mediun- and long-tern debt, net sbort-tem capital, trade credits, unidentified capital flows, and errors and missions. Ihe total Item is calculated as residual In the balance of payments.
- 51 - economy is restored, is there a chance for private capital inflows to reach this level. This underscoresthe importanceof fiscal adjustment. The US$1.9 billion in private capital inflows may seem large, but it representsonly about 8 percent of total assets held by Lebanese nationalsabroad. Also, developmentsin late 1992 have witnessed large inflows of capital (aboutUS$l billion within a week or so), including conversions'rom US$ to LL deposits. Speculativepurposes were behind these inflows. If the economy stabilizes,arbitrage opportunities would be noticeably reduced and some resourcescould be expected to shift from speculativeinto productive investments.
5.9 GDP Growth. Real GDP growth is expected to be around 10 percent in 1993. This number is derived from estimates of actual output performancein 1991 and 1992. It is also based on the overall investmentlevels describedabove and estimatesof the incremental capital output ratio (ICOR). In real dollar terms, 1993 GDP would amount to only about three quarters of its 1974 level, before the civil war.
5.10 alance of Payments. Total imports would increase substantially as reconstruction takes off. Total import levels are expected to reach nearly US$5 billion in 1993, some 14 percent above the 1992 level. To complete the macroeconomic picture for 1993, exports are assumed to grow by 20 percent as overall activitypicks up and Lebanon recapturessome of the export markets it had prior to the war. All in all, the current account deficit of the balance of payments, after grants,would amount to an estimatedUS$2.2 billion (33 percent of GDP) in 1993. Historically,Lebanon has had large current account deficits, financed essentiallyby private capital. The result of the stabilizationpolicies would be that, despite the reconstruction program, import needs, as a share of GDP, the current account deficit, after grants, would be projected for 1993 to be somewhat smaller than in 1992.
- 52 - Table 5.1: Base Case Scenario: Key NacrosconomicIndicators (percentages)
1993S [ 1994-1996 1997-1999
GDP (percentagereal growth) 10.0 8.0 6.4
PrivateConsumtion (pct. real growth) 2.3 0.9 4.8
IrwestMsnt/DP 23.8 30.4 18.9 of which: pubtlc nvestwents 7.7 10.8 4.9
Current Fisal Salance/GDP -4.3 0.2 3.2
OverallFiscal Ealance/CP -12.0 -10.7 -1.7
Externat PubLic Debt Service/Exports 4.2 4.1 3.9
Current Account BalncelGDP -35.8 -32.0 -20.5 (beforegrants)
ProjectedDevelgo=mn after 1993 5.11 In the period1994-96, developments similar to those describedfor 1993 are expectedto takeplace. In sum, further fiscal measures are projected to be taken and are expected to virtually eliminate the current budget deficit. In 1995, there would be a current budgetsurplus, freeing up resourcesfor publicinvestments. Central bank net financingof the governmentbudget deficit would be held at zero and inflationwould fall to an averageof about 10 percent. Encouragedby the successfulstabilization policies, levels of official and private inflows would continue to be very high, the latter at around US$1.8billion annually over the 1994-1996period. This would allow investmentsto peak at 32 percentof GDP by 1995,while consumptionper capitawould continueto grow modestly. GDP growthwould amountto an averageof about 8 percentper annrmin the period1994-1996. The importantlevels of external financing would allow Lebanon to finance relatively high deficits in the currentaccount of the balanceof payments.
5.12 After 1996, real GDP growth is projected to continue at around6 percenton averagefor the period1997-99. However,this significantrate of growthwould be realizedwith substantiallylower levelsof investments,as key infrastructurewould have been rehabilitatedand the efficiencyof capitalwould improve. This improvementin capitalefficiency would have three consequences.First, the level of investmentwould declinesignificantly to an annualaverage of 19 percentof GDP over the 1997-1999period, compared to an annual averageof 29 percentfor 1993-1996;public investment would decline from an averageof 10 perceatduring 1993-96 to 5 percentthereafter as the NERP was completed.As a result,and with continuedmodest
- 53 - improvementsin the current balance, the overall fiscal deficitwould graduallybe reduced to only 1 percent GDP by 1999, and the external and domestic borrowing by the Governmentwould be greatly reduced. Second, with a decline in the overall level of investments,imports would decrease as a percentageof GDP. The current account of the balance of payments would improve from a deficit of 36 percent of GDP in 1993 (beforegrants) to 17 percent of GDP in 1999. Somewhat smaller private capital flows from abroad would be required,but they would remain sizeable,would at US$1.9 billion annually on average. Third, the lower levels of investmentswould allow room for increasesin consumptionper capita. The main macroeconomicindicators under the base case scenario are shown in Table 5.1, above.
Table 5.2: Base Case Scenario: Fiscal Projections (as percentageof GDP)
19B9-1992 1993 1993-1996 1997-1999
Current Ft-wel Balance -15.7 -4.3 0.2 3.2
Capital Expniture 3.5 7.7 10.8 4.9 of hidch: reconstruction 4.4 7.5
XE~~~~~~~~~~~~~ V
Iet Ext alt finMMcinf: 0.1 7.2 6.5 1.2 Grants 0.4 2.9 2.3 0.8 Loams(net) -0.3 4.2 4.2 0.3
Met Domstfc Financiwng 19.5 4.8 4.1 0.6
1/ Include net central bank finaing.
Extent of Fiscal Adjustment
5.13 As described earlier, the viability of the base case scenario centers around fiscal adjustment. The extent of the fiscal adjustment implied for the base case scenario is illustratedin Tot-le 5.2, above, which shows the significantamount and speed of the fiscal adjustment associated with the base case scenario. It also shows the large increase in capital expenditures as of 1993, and the subsequent drop thereafter. It is hard to predict whether this type of adjustment can be achieved. What is certain, however, is that public finance issues are.likely to remain on the policy agenda for quite some time to come. Clearly, the recommendationspresented in Chapter IV represent only a promising beginning. Many more actions in public financewill be required to ensure that the current budget balance improves along the lines implied by the base case scenario.
- 54 - 5.14 FinancingReauirements. The financing requirementsimplied by the base case scenario are illustratedin Table 5.3, below. The numbers represent the inflows that are required to carry out the reconstructionprogram and to ensure very modest growth rates in private consumptionper capita. As shown in the table, projected private inflows are sizeable and would remain so throughout the decade. There is little basis for making far-reachingstatements as to the likelihood of these outcomes. What seems clear, however, is that in the absence of economic stabilityand fiscal adjustment,these additional flows will most likely not be realized. The projectionsalso illustrate that the additional inflow of private capital is not a one-time event. This underlines the importanceof sustainingstable economic policies throughout the decade. Obviously,continued price and exchange rate stability are key, but these factors need to be supplementedby overall confidence in the Lebanese economy and prospects for remunerative investments.
Table 5.3: Base Case Scenario: External Financing Requirements (millions of US$)
1993 1994-96 1997-99
1. CurrentAccount Deficit 2,444.6 8,230.9 7,240.6
2. PubticLoan Amortifation 50.0 150.0 207.6
3. ReserveBuild-up 289.1 1,174.1 624.3
4. Totat Financing 2,763.7 9,555.0 8,072.6
5. PubLic Grants 200.0 600.0 300.0
6. Public Loans(Gross Disburssemnt) 340.0 1,230.0 315.0
7. Private Capitat ftoms 2,243.7 7,7n.0 7,457.6 (Inctuding Direct Foreign Investment)
5.15 Under the base case scenario, the debt service payments are projected to stay manageable. The special feature of Lebanon's economy, as compared to those of-other countries, is that its external debt is relatively low: in 1992, total public debt service payments, including payments of debt arrears, as a percent of total exports amounted to only about 7.5 percent. This is expected to increase markedly as reconstruction accelerates. However, because of the low starting point, the total external debt service ratio would not exceed 20 percent during the decade, a level which is considered sustainable; the public external debt service ratio would only be around 4 percent.
- 55 Debt Service Payments and Creditworthiness
5.16 The key constraintfacing Lebanon's economic growth lies with the public sector and its ability to service debt obligations,both domestic and foreign. In 1992 total public debt service payments already amounted to 63 percent of fiscal revenues. Most of these were domestic debt service obligations (domesticinterest payments amounted to 46 percent of current revenues). With foreign borrowing for reconstruction,this ratio of debt service payments to fiscal revenues is expected to remain high, even with fiscal adjustment. Under the base case scenario, the proportionof debt service payments (domesticand external) to fiscal revenues would amount to about 28.5 percent in the initial years but would decline gradually thereafter. This again underlines the importanceof fiscal adjustment. The key debt service indicatorsare illustratedin Table 5.4.
Table 5.4: Key Debt gervlce Indicators
19 _t 1994-1996 J 1997-1999
Extemnal Debt Stock of External Putlic Debt (mft. USS) 586.6 1.298.2 1,747.0 Total Debt Service Psmentss/EVorts 9.6 15.6 17.6 of which: Pubtlc Sector/Exports 4.2 4.1 3.9
Total Putlic Debt Stock of Domestic & External Pubic Debt (bill. LebanesePounds) 5,896.7 9,084.6 11,530.9 Public Debt Serviee/Fiscal Rwverm 37.8 28.5 20.3 Interest Pa*mnts/Fical Retenue 33.2 25.3 17.2 Stock of Pubtic Debt/GDP 45.2 48.7 41.7
Includes amortization crd interest on exterrl"t!'n" Interest an dstic debt.
AlternativeScenarios
5.17 This section explores the consequencesof a failure to implementthe stabilizationprogram describedabove. Its purpose is to demonstratethe overridingneed for strong fiscal adjustmentand a reduction of the current fiscal deficit. The outcomes of two alternativescenarios are summarized in Table 5.5, below. For illustrativepurposes, the current deficit of the Government,excluding interestpayments on newly incurred debt, is assumed to remain at its present level as a percentage of GDP under both scenarios. It should be noted that, under these scenarios, the actual current deficit would increase. In fact, in the absence of any actions, interest payments would go up; an increasing amount of resources would be devoted to government consumption; investments would fall; GDP would decline; and tax revenues would most likely drop by more than the drop in GDP. As a result, the current fiscal deficitwould increase. In addition, the
- 56 - Government would have great difficulties in placing its treasury bills; central bank financing of government operations would continue, as would inflation.
5.18 AternativeScenario 1: Low Capital Inflows. It is assumed that the current budget deficit, excluding new interest payments, would remain at around 10 percent of GDP. Uncertainty in the economy would prevail, and inflation and exchange rate volatility would probably re- emerge. Thus, private capital inflows would not be significantly above their historical level. For illustrative purposes, it is assumed that the average inflow of private capital would equal approximately US$1 billion per year. 2 Because of the persistence of the current budget deficit, the Government would be unable to contribute to the public investments associated with the reconstruction program. As a result, official creditors would be likely to withdraw from their plans to finance the reconstruction program. Under the first alternative scenario, it is assumed that external assistance for Lebanon's reconstruction program is the same as under the base case scenario in 1993, but that it would be stopped as of 1994, the result of the lack of fiscal adjustmont and the inability of the Government to contribute to the reconstruction program from its own budgetary resources. Thus, overall imestment would probably remain depressed. As a result, GDP growth would drop. Private consumption per capita would fall. Also, as too few investments would have taken place in the initial years of the decade, GDP growth would decline substantially after 1997. 5.19 Alternative Scenario 2: Higher Levels of Official Canital Flows. Essentially, this would be a "goodwill" scenario. As explained above, without a major reduction in the current fiscal budget, inflation is likely to continue; as a result, an increase in private capital flows projected under the best case scenario would not materialize. However, under this scenario, it is assumed that "external goodwill" towards Lebanon would lead official creditors to increase their capital flows so as to offset the reduction in private capital inflows, as compared to the base case. For the purpose of this scenario, it is assumed that total investments would remain at roughly the same level as in the base case. -The reconstruction program would be financed entirely from external sources. It is assumed that half of the external assistance would be on grant terms. Private capital inflows would remain at their historical levels. The substitution of public investment for private investment would lead to lower GDP growth and lower levels of private consumption because the additional public investments are likely to be less efficient than the private investments. Moreover, the ability of the public sector to carry out a substantially larger share of investments would be limited. As a consequence of lower GDP growth, tax revenues would also be lower. The key constraint in the second alternative scenario is again the Government's inability to service its debt. The lack of fiscal adjustment, combined with ever increasing debt
,gd Is a very optimistic assvtplm. An a reslt of h eshebgerte Istability ed the accolrati of ntlati, pvate capita lnnomcould we declie to le tha half the recet vl. sheebdaesult ould thm be significantly woe tha desribed ader Alteave Scenario1.
- 57 - service obligations,would clearly be unsustainable. Even in the favorableevent that half of the additionalofficial inflowswould come in the form of grants, the ratio of public sector debt service payments to fiscal revenues would come close to 100 percent by 1999. Since such debt service payments would not be feasible,the Governmentwould be forced to engage in domestic monetary expansion,with resultant inflation.
Table 5.5: Selected IndicatorsUnder DifferentScenarios
Atterntive 1: Atternatiw 2: osecase Low Private Large Pbtic Scenario Sector Inflows Sector Borroming ("Goodwilto)
Gross Domestic Product (X growth) 1993-96 8.0 4.8 6.8 1997-99 6.4 2.7 3.8
Gross Domestic Investment (X of GDP) 1993-96 30.4 22.9 28.3 1997-99 18.9 17.5 19.9
Private Conaptfon Per Capfta (Z growth) 1993-96 -0.8 -2.1 -1.2 1997-99 2.8 -0.6 -3.3
Public Debt Service Psyments (domestic and external debt) Cf of fiscal raw.) 199Z 63.3 63.3 63.3 1996 27.9 38.8 73.9 1999 17.4 43.5 94.6
Conclusign
5.20 Although the numbers and assumptions used for the scenarios are tentative, the basic message seems to be clear. Substantial fiscal adjustment needs to be carried out. This adjustment has to be fast, substantial and supported by large amounts of private inflows and external assistance, if private consumption per capita is to be sustained while the reconstruction effort is undertaken. Even under favorable circumstances (continued high levels of private capital inflows and large amounts of external assistance), the lack of fiscal adjustment would lead to very undesirable outcomes in terms of private consumption and the Government's ability to service its debt. The new Government is well aware that the short-runstability that has been
- 58 - establishedin recent months is tenuous. It recognizesthe need to implementa credible stabilizationprogram. This is necessary in order to ensure that its high priority r'econstruction program can be successfully implemented and that the private sector can be enticed to return its capital and invest in Lebanon. In the few months since it took office, the Governmenthas taken significantinitial actions along the lines suggested in this report. There is, thus, a reasonable prospect that, barring unforeseenevents and with the vigorous pursuit of stabilizationand economic policy reforms, the scenario of stability, reconstructionand growth outlined in the base case could indeed materialize. Significant amounts of external support will be needed to realize this scenario. However, with the adoption and maintenance of appropriatemacroeconomic policies, and in particularborrowing in the magnitudes required, includingborrowing from the Bank, Lebanon can begin to reconstructits economy after 17 years of devastation.
- 59 - l -- ~~~~~~~~~~~~~~~~IIMN111 S~~~ ~~ IIN II. Projections Appendix
1. Balance of Payments ...... 63
2. Consolidated Central Government Operations . . . . 64
3. National Accounts, Estimates and Projections . . . 66
4. Key Indicators ...... 68
- 62 - Pretion Table 1. Balce of Payments (in mllionsl of US$)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Resoue Balance -1507.0 -1659.0 -2797.0 -3100.0 -3353.4 -3486.0 -3638.0 -3429.7 -31654 -3012.6 -2830.3 M^erhendls Tre Baance -1707.0 -18S9.0 -2997.0 -3322.1 -3719.0 -4069.7 -440.9 -4744.2 -4926.9 -532.7 -S264.1 M }andimsxport 539.0 537.0 750.0 987.0 1185.7 1479.5 1874.2 2242.6 2660.4 2930.4 3221.2 Merlhand sors 2246.0 2396.0 3747.0 4309.1 4904.7 S549.2 6415.2 6986.9 7587.3 8063.1 8485.3 Net NFactot Services 200.0 200.0 200.0 222.0 365.6 S83.8 903.0 1314.5 17613S 2120.1 2433.7 Export CofNoFItor Series 3C0.0 300.0 300.0 338.2 491.9 71S.5 1039.8 1457.1 1920.8 2292.9 2618.0 Ipost. of NonFacft Servies 100.0 100.0 100.0 116.2 126.3 131.7 136.8 142.6 1S9.3 172.8 184.3
Net Pao Iomm 507.0 479.0 480.0 4S3.9 458.8 371.6 287.2 164.0 69.2 1.2 -27.8 Net CurrtTrasfT s 680.0 580.0 480.0 400.0 450.0 475.0 500.0 S25.0 550.0 S7S.0 600.0
Curnt Amut Balace (befoe grabs) -320.0 -600.0 -1837.0 -2246.2 -2444.6 -2639.4 -28S0.8 -2740.8 -2546.1 -2436.4 -2258.1 Caiqta Of&iOCinrnts 0.0 0.0 70.7 0.0 200.0 200.0 200.0 200.0 100.0 100.0 100.0 CurntMtoAut DEao (afer grant) -320.0 -600.0 -1766.3 -2246.2 -2244.6 -2439.4 -2650.8 -2540.8 -2446.1 -2336.4 -2158.1
0% 800.0 300.0 500.0 X00.0 W KHDrecFcrepga Investnt 0.0 0.0 0.0 0.0 300.0 800.0 800.0
PubhcM&8LT (ad &*wSement) Gross Disbanrant NA NA NA 0.0 340.0 390.0 425.0 415.0 115.0 100.0 100.0 Amortizao NA NA NA -64.2 -S0.0 -50.0 -50.0 -50.0 -60.3 -7S.6 -71.7 Net Dumrse7me 14.1 23.1 33.9 -64.2 290.0 340.0 375.0 365.0 54.7 24.4 23.3
Net Othe Capia FlHows I/ 262.9 279.9 2301.4 2525.1 1943.7 1643.3 1934.1 1747.6 2141.6 201t.3 1805.1
Ovenaf Baance2 -43.0 -297.2 569.0 214.7 289.1 343.9 4S8A 371.9 250.2 198.2 175.9 Ines In d Re (-) 43.0 297.2 -S69.0 -214.7 -289.1 -343.9 -458.4 -371.9 -250.2 -198.2 -17S.9
Avea Eage Ra. 496.5 701.8 928.2 1683.0 1912.8 202S.1 2146.1 2274.3 2322.S 2353.8 23S3.8
Sources:Daxt provided by to Bankof Lednoa IMl, Dhreon of Trade; and sdaffemas and pr.octon.
1: Comprce of netp edim andlong em deb, net Shorttam capa, trde credits, capa fows, and eors and omissins. 2/: Iludes cnly non-gold resev of to BdL.
mIAbemxn',epVmenupOlt1tbop.Wk1 Projct&io Tabde2.L ebnon: osdaded aJ Cental Govmaamt Opmtiornu: 1989-199 (biBicnsof LebanesnPounds)
hAd Pmjacdm
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
TotalRevnaue 62.6 126.4 456.7 984.0 2100.0 2794.1 3405.2 4164.9 4768.0 5299.3 S8032 Tot EzpMrIdkm1/ 534.7 794.5 1229.1 2229.3 3662.1 4S71A4 S378.2 6314.2 S368.2 SS05.1 6114.0 Curnot E _ad 49S.0 745.2 1036.6 1929.3 26S7.2 2945.6 3374.9 3885.S 4130.4 4429.4 4607.6 Wave a Salad. 96.9 210.0 370.0 738.9 887.0 1064.4 1224.1 1370.9 1480.6 1584.3 1663.S Oher Currnt (joiL Trmst3s) S8.3 96.7 240.6 425.8 875.1 1039.6 1235.0 1467.2 1704.7 1922.6 210S.4 BxtubWdguteryTransbes 88.3 179.0 184.0 90.0 117.0 100.0 50.0 0.0 0.0 0.0 0.0 Ncolsum Subsidy 99.3 46.0 35.1 16O.0 80.0 30.0 0.0 0.0 0.0 0.0 0.0 latentPEayDome 152.2 213.5 206.9 514.6 698.2 711.6 865.8 1047.7 94S.1 922.6 838.7 PridaeSeetor (>xcfe 151.5 203.5 203.5 454.0 658.5 630.4 721A. 819.7 643.1 607.3 5173 Feip SbxtotIntureg 0.7 10.0 3.4 60.6 39.7 81.1 144.5 228.0 300.0 315.3 321.4 Cpia1dEb r 2V 39.7 49.3 192.5 300.0 1004.8 1625.8 2003.2 242S.3 1237.7 1375.7 506.5 of whichbSoamdoa Po ita Lsams. Ponds 573.8 1113.8 1394.9 1?05.7 is tUSIdlles 300.0 ISO.0 650.0 75D.0 Curent Duid4pEDama -4324 -618.8 -579 -945.3 -557.2 -ISIS 30.2 279.0 637.S 069.9 1195.7 Omeranl ne -412l1 -668.1 -772A4 -124S.3 -S12. -1777.3 -1973.0 -2149.3 -6W0.2 -505.8 -310.8 } _amn 472.1 60.1 M4 1245.3 2l 1777.3 t(3.0 2149.3 l0.2 S.$1 310.8 lteal 7.0 16.2 97.1 -108.0 937.3 1093.6 1234.0 1285.0 359.3 292.8 302.1 Not llrowiag 7.0 16.2 31.S -108.0 S54.7 688S 804.8 330.1 127.1 S7.4 66.7 Gants 0.0 0.0 65.6 0.0 382.6 405.0 429.2 454.9 232.2 23S54 23SA Dossom 465.1 6MI.9 675.3 1353.3 624.8 683.7 739.0 864.3 240.9 213.0 8.7 Netank of Lwba 134.2 351.9 -424.2 -5.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net Oder 31 330.9 300.0 1099.5 1930.3 624.8 683.7 739.0 864.3 240.9 213.0 8.7
Dom_sicPubi Debt NA NA NA 411S.4 4740.2 S424.0 6163.0 7027.3 7268.2 7481.2 7490.0 Ex PubliDal Det 0.0 0.0 317.1 548.8 IIS8.S 1932.4 2876.7 3830.4 4024.6 4108.9 4219.9 Ttal PublbcDebt NA NA NA 4664.2 S898.7 7356.4 9039.7 10857.7 11292.8 1tS90.2 11709.9 Pro*ceti Tabb 2. L)bsoin Cosidaed 2/ CmUi GovonMt OFatiou: 19819 (bilho of Lebans Pond)
1989 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999 (IperctfODP
Toa ArWnuD 5.2 7.2 , IIA 10.4 16.1 18.0 18.5 19.0 19.0 19.0 19.0 Total Izgaiudt 44.6 45.3 30.8 23.5 28.0 29.5 29.2 28.8 21.4 20.8 20.0 C>ono3tEbqmabtFur5 41.3 42.5 . 25.9 20.3 20.3 19.0 18.3 17.7 16.5 15.9 15.1 CR*dblEbqpsvimurb 3.3 2.8 4.8 3.2 7.7 10.5 10.9 11.1 4.9 4.9 4.9 of whI Rmarnudon Psoram -. 4.4 7.2 7.6 7.8 Cunat Budget(- defit) -36.1 -35.3 -14.5 -10.0 -4.3 -1.0 0.2 1.3 2.5 3.1 3.9 OwnaiUBaanoe -39A -38.1 -19.3 -13.1 -12.0 -11.5 -10.7 -9.8 -2.4 -1.8 -1.0 (in percestof Tob ExpAndikor.)
Totb }reVaue 11.7 15.9 37.2 44.1 S7.3 61.1 63.3 66.0 88.8 913 94.9 Ovall BRace -8.3 -84.1 -(2.8 -55.9 -42.7 -38.9 -36.7 -34.0 -11.2 -8.7 -5.1
Menwa_ndo beamm (in bMiousof Lebane Pounds)
Nonal GDP 119S.7 1752.8 3995.1 9496.7 13060.7 15516.1 18433.2 21898.6 25069.5 27863.2 30512.7
(In prct of GDP)
Domstc PublicDebt NA NA NA 43.3 36.3 35.0 33.4 32.1 29.0 26.8 24.S ExtEl Publc Debt 0.0 0.0 7.9 5.8 8.9 12.5 15.6 17.5 16.1 14.7 13.8 TotalPublc Debt NA NA NA 49.1 45.2 47.4 49.0 49.6 45.0 41.6 38.4
Sours: Dat prod by dte Lban _ahortIs; and soff esmtes and proecm. a/: C'ad EBdgt,E_uabudgiary Accouns, Annead Bdgts sad CDR. 11: wludesnt leakiSg. 21: Includesdomestc fencing of CDRctafW aexpandituesasnemd to bav comedtrough transfers fom dkeceua govsnmkt.L Thc 1992value b based on the proposedbudet of 1992. 3/: Compindsdof adt comeurcialbanks and non-bankpublc. :% i6 I ProectionTable . NationaiAccount, ESimates aNd Projectlong 1990-1999
Projected 1969 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
(n bions of eurnt Lebanee Pound)
GOPatmaep,I 1199.7 1752.8 3995.1 9498.7 13060.7 15516.1 18483.2 21896. 25069.5 27663.2 30512.7 Net IndirectTaxes -95.7 -42.3 96.5 2825 8660 1288.9 1659.0 1970.9 2256.3 2507.7 2746.1 IndirectTaxes 3.6 3.7 131.6 44215 99C 1318.9 1659.0 1970.9 226.3 2607.7 2746.1 SubsidIes 99.3 46.0 35.1 160.0 80.0 30.0 0.0 0.0 0.0 0.0 0.0
GOPat factorcost 1294.4 1796.1 3896 9216.2 12172.7 14227.3 16774.2 19927.7 22813.2 26355.5 27706.6
ResourceBaance -7482 -1162 -2596.3 -5217.4 -6414.4 -7069.4 -7807.3 -7800.1 -7351.5 -7091.1 -662.0 Total mrs 1164.8 1751.6 3570.9 7447.7 96233 11504.6 14061.0 16214.2 17991.1 19385.5 20406.3 TotalL,or0s 416.6 587.4 974.6 2230.3 3206.9 4445.2 6253.7 8414.1 10639.7 12294.4 13744.3
ToW ExpendItures 1948.9 2917.0 6591.3 14716.1 163621 17820.7 20340.6 23435.3 27356.9 29736.2 31772.2
TotaiConsumption 1707.2 25665 5793 12844.3 16362.1 17820.7 203406 23435.3 27356.9 29736.2 31772.2 GovenmentConsumption 124.4 255.5 483.3 944.9 132A4.5 16362 1965.1 2251.3 2503.5 2737.8 29267 Pvte Conwmpthon 1582.8 2310.9 5309.0 11899.4 15037.8 1615 18375.5 21184.0 248534 26996.4 28846.5
GrossDonmstc Investment 239.7 350.6 799.0 1871.8 3113.0 4754.9 5899.9 6263.4 5064.1 5216. 5402.6 Govemrnment 39.7 49.3 192.5 300.0 1004.8 1625.8 2003.2 24283 1237.7 1375.7 150S6 Private 200.0 301.3 606.5 1571.8 21062 3129.0 3896.6 3635.1 3626.3 3842.4 3896.1
(n MMlionsof Crent US Doglus) Memorandumifteni GDPat MarketPrices 2414.3 2497.7 4304.0 56439 68280 7661.9 8589.3 96289 10794.4 11837.6 12963.3 Per CapitaGOP 677.6 687.1 1160.7 1492.2 1769.9 1947.1 2140.0 2352.0 2565.0 2784.7 2995.6
MerchandIseTrade Balance -1507.0 -1659.0 -2797.0 -3100.0 -3363.4 -34860 -36380 -3429.7 -3165.4 -3012.6 -2830.3 xports 839.0 837.0 1050.0 1325.2 1677.6 2195.0 2914.0 3699.7 4561.2 5223.3 5839.2 Imports 2346.0 2496.0 3847.0 4425.2 5031.0 5681.0 6552.0 7129.4 7746.6 8235.9 8669.6
MM-._TAPCTTTWKI ProjectionTable & NationalAccount, Estimates and Projectons 1990-1999
Projected 1989 1990 1991 1992 1993 1994 1995 1996 1997 1996 1999
(in billionsof constant1990 Lebanese Pound)
GDP at marketpricem 2023.8 1752.8 2633.1 2896.4 3186.1 3441.0 37162 4013.5 4334.6 45r7.6 4831.4
ResourceBalance -1129.4 -1164.2 -1915.3 -2057.6 -2140.7 -2141.7 -2156.8 -1959.7 -1744.6 -1604.6 -1458.8 Exports 610.1 587.4 730.6 900.9 1097.5 1377.8 1753.7 2139.8 2546.6 2790.6 2998.5 mpts 1739.5 1751.6 2645.9 2958.5 3238.2 3519.4 3910.5 4099.5 4291.2 4395.2 4457.2
Total Consumption 2748.4 2566.5 4021.8 4302.4 4434.7 4343.9 4475.8 4624.7 5050.6 5176.6 5285.2 GovernmentConsumption 200.2 255.5 335.6 316.5 359.0 398.8 432.4 444.3 462.2 476.6 486.9 PrivateConsumption 2548.2 2310.9 3686.2 3985.8 4075.7 3945.0 4043.4 4180.4 4588.4 4700.0 4798.4
Gross DomesticInvestment 404.8 350.6 528.6 651.7 892.1 12387 1397.3 1348.5 1028.6 1007.5 1004.9 Government 67.0 49.3 126.9 104.5 288.0 423.6 474.4 522.8 251.4 265.6 280.2 Private 337.7 301.3 399.7 547.2 604.1 815.2 922.9 825.7 777.2 741.9 724.7
Memorandumitern: PerCapitaReWaGOP 568.0 482.2 710.1 765.8- 825.9 8745 925.9 980.4 1038.0 1077.3 1116.4
(n percentof GDP)
ResourceBalance -62.4 -66.4 -65.0 -54.9 -49.1 -45.5 -42.4 -35.6 -29.3 -25.4 -21.8 bxts 34.8 33.5 24.4 23.5 24.6 28.6 33.9 38.4 42.4 44.1 45.0 Imports 97.2 99.9 89.4 78.4 73.7 74.1 78.3 74.0 71.8 69.6 6.9
Total Consumption 142.4 146.4 146.0 135.2 125.3 114.9 110.3 107.0 109.1 106.7 104.1 GovernmentConsumption 10.4 14.6 12.1 9.9 10.1 10.5 10.7 10.3 10.0 9.8 9.6 PrivateConsumption 132.0 131.8 132.9 125.3 115.1 104.3 99.7 96.7 99.1 96.9 94.5
GrossDomestic Investment 20.0 20.0 20.0 19.7 23.8 30.6 32.0 2&6 20.2 18. 17.7 Government 3.3 2.8 4.8 3.2 7.7 10.5 10.9 11.1 4.9 4.9 4.9 Private 16.7 17.2 15.2 16.5 16.1 20.2 21.1 17.5 15.3 13.8 12.8
M MEJECMlR TNTACCTSWKI Projoctio Table 4 LIaa_m Key hJae1c
1990 1991 1992 1993 1994 199S 1996 1997 1998 1999 Real arow&Rates: GramsDomestic roduct(GDP) -13.4 50.2 10.0 10.0 8.0 8.0 8.0 8.0 5.6 S.S Grms Doaoweiccome (GDY) -13.9 49.7 9.8 10.0 8.0 8.1 8.1 8.1 S.8 5.7 Rea Per CapibaGowd Raetw GrossDomestic Prouct (GDP) -IS.1 47.3 7.8 7.8 5.9 5.9 5.9 5.9 3.8 3.6 TobdCXn""umpd lle-8.5 S3.6 4.9 1.1 -4.0 1.0 1.3 7.1 0.7 0.3 Pffhte Candok"m" -11.1 S6.4 6.0 0.2 -5.1 .OS 1.4 7.6 0.6 0.3 Extenal DebtA D. Servies (LT+ST+JMF): Totd Ebtun Publc Debt (US$") 0.0 360.7 296.6 S86.6 926.6 1301.6 1666.6 1721.3 174S.7 1774.0 Pdui SewtotExAnal Debt Sevice (I38$ 14.2 3.7 100.2 70.8 90.1 117.3 150.3 189.5 209.6 208.2 Puli3cSectorDekServiclExpoxst 1.7 0.3 7.6 4.2 4.1 4.0 4.1 4.1 4.0 3.6 EP Sedwc DetoCt__Svic / GDP 0.6 0.1 1.8 1.0 1.2 1.4 1.6 1.8 1.8 1.6 hotIntetBodea (LT+ST4BUF): Pbi Sector lntret Paid (US"M 14.2 3.7 36.0 20.8 40.1 67.3 100.3 129.2 133.9 136.6 Puld3cS9atotIntert / Eports 1.7 0.3 2.7 1.2 1.8 2.3 2.7 2.8 2.6 2.3 PubicSeetorln traIGDP 0.6 0.1 0.6 0.3 0.5 0.8 1.0 1.2 1.1 1.1 Gross nw mat I GDP 20.0 20.0 19.7 23.8 30.6 32.0 28.6 20.2 18.7 17.7 ICOR (annal) -1.5 0.4 2.0 2.3 3.5 4.5 4.7 4.2 4.2 4.0 ICOR(LS-reedluyew sow) NA NA NA NA NA 1.9 3.4 3.8 4.2 4.3 Domestc Savig I GDP -46.4 -45.0 -35.2 -25.3 -14.9 -10.3 -7.0 -9.1 -6.7 -4.1 EOP Resouc BElnco I GDP -66.4 -65.0 -4.9 -49.1 -4S.S -42.4 -3S.6 -29.3 -25.4 -21.8 Nadona Savings I GDP -4.0 -22.7 -20.1 -12.0 -3.8 -1.2 0.1 -3A -1.9 0.3 DOP Caat Acunt BaElo GDP -24.0 -42.7 -39.8 -3S.8 -34.4 -33.2 -28.S -23.6 -20.6 -17.4 CGovermt lavestmest I CGDP 2.8 4.8 3.2 7.7 10.S 10.9 11.1 4.9 4.9 4.9 Govrnmn Savigs / GDP -3S.3 -14.S -10.0 -4.3 -1.0 0.2 1.3 2.S 3.1 3.9 Prvte Invesent / GDP 17.2 1S.2 16.S 16.1 20.2 21.1 17.5 1S.3 13.8 12.8 Pxtvaft Savp I GDP 31.3 -8.2 -10.1 -7.7 -2.8 -1.3 -1.1 -S.9 -S.0 -3.6 PzojectionTable 4 Lebanow Key Incdictr
Conued Estmat Proeted 1990 1991 1992 1993 1994 199S 1996 1997 1998 1999
Govermnit Revnes IGDP 7.2 11.4 10.4 16.1 18.0 18.5 19.0 19.0 19.0 19.0 Govnimenrt Eweditusin CIDP 42.5 25.9 20.3 20.3 19.0 18.3 17.7 16.5 1S.9 IS.1 BudgetDdci*t(+)orSurpIuslGGDP 38.1 19.3 13.1 12.0 11.5 10.7 9.8 2.4 1.8 1.0 Prim IyNOdi (+)or SurplusI GDP 25.9 14.2 7.7 6.6 6.9 6.0 S.0 -1.4 -1.S -1.7
GDPDefato (% growth ate) 68.8 S1.7 116.1 2S.0 10.0 10.0 10.0 6.0 S.2 3.8
ReldExuchage Rads (IL / US) (1990=100) 100.0 88.9 76.7 72.5 72.5 72.5 72.S 72.S 72.5 72.5 Teamsof Trade blden(199C0100) 100.0 98.8 98.3 98.4 98.7 99.2 99A 99.7 99.9 100.1
Export(GNFSYVoume Growth Rate -3.7 24.4 23.3 21.8 25.5 27.3 22.0 19.0 9.6 7.4 Expotss(GNFS) I GDP 33.5 24.4 23.5 24.6 28.6 33.9 38.4 42.4 44.1 4S.0
'0 Impsart(GNFS)VolundWrowthRate, 0.7 S.1 11.8 9.S 8.7 11.1 4.8 4.7 2.4 1.4 Impngnb(GNFS) I GDP 99.9 89A 78.4 73.7 74.1 76.3 74.0 71.8 69.6 66.9
Currn AccountBadance (US$M) (beforegants) -6C0.0 -1837.0 -2246.2 -2444.6 -2639.4 -2850.8 -2740.8 -2S46.1 -2436.4 -2258.1 (afte grnts) -6C0.0 -1766.3 -2246.2 -2244.6 -2439.4 -2650.8 -2540.8 -2446.1 -2336A -2158.1 DdLForeign Exchae Reserves(UsM) 620.0 1233.3 1448.0 1737.1 2081.0 2539.3 2911.2 3161.4 3359.6 353S.S OfficbaReserves (months Impots) 7/ 3.1 3.9 4.0 4.3 4.5 4.8 5.0 S.0 5.0 S.0
1. Lr dnte lang-termde - T- wSTd t d* 2. DOD- denotes-debt outstandig and debtdisbursed.- 3. "ICOV denotes'jgonenbj capitl outt twith a 5-yearsperiod. 4. -WrO deotes -balnc of payments" S. Cront accountbalne as definedin lino F.1 on annex83 6. GNFS" denotes-goods and nanfc svIce. 7. Exclus gold.
m:McM ebmI osmx%keyIndic.wkI I~~~~~~ StatisticalAppendlx
1. Supply and Use of Resources at Current Market Prices ...... 73
2. National Accounts Summary at Current Prices . . . . 7'.
3. National Accounts Summary at Constant 1990 Prices . 75
4. EstimatedOutput by Sector, 1974, 1988-1992 . . . . 76
5. Balance of Payments Summary at Current Prices, 1989-1992 ...... 77
6. External Trade, 1989-1992 ...... 78
7. ConsolidatedCentral GovernmentOperations, 1989-1992 ...... 79
8.1 MonetarySurvey, 1989-1992 ...... 80
*8.2 BalanceSheet of Bank of Lebanon, 1988-1992 . . . . 81
8.3 Balance Sheet of CommercialBanks., 1988-1992 . . . 82
9. The Structureof Deposits at CommercialBanks, 1988-1992 ...... 83
10. CommercialBank Credit by Economic Sector, 1988-1992 ...... 84
11. Term Structure of Interest Rates on Treasury Securities,1988-1992 ...... 85
12. Commercial Bank Interest Rates on Lebanese Pound Loans and Deposits, 1988-1992 ...... 86
13. Recent Movements in Selected Monetary Data, January 1989-June1992 ...... 87
14. Public and Publicly Guaranteed External Debt, end-1991...... 88
- 72 - ii Ig§i ii 111111s!fli 1 Xa lull§1 'Iii?°!a lgg ii gX§*R I!!A § t !n S g"!!!gE#Fif AppendixTable 2. Lebanon:National Accounts Summary at CurrentPrices
1988 1989 1990 1991 1991 1991 Population 9.4030 8.5630 9.6350 8.7080 (constant GOwth (cufrentUS$m) 1990US$ (realrates)
GDPat factorcost 3274 2607 2558 4200 3662 43.1
AGRIACULTURE 348 210 184 NA 24 32.5 MANUFACTURING 670 496 365 NA 529 45.0 CONSTRUCnON 328 156 181 NA 343 89.6 TRADE 921 755 725 NA 1011 39.4 NONFINANCIAL SERVICES 574 521 491 NA 744 51.6 FINANCIALSERViCES 261 236 223 NA 350 57.1 PUBUCADMINISTRATION 172 232 388 NA 440 18.4
1988 1989 1990 1991 1992 1 (billonsof current Lebanese Pounds)
GDPat FactorCost 1340 1294 1795 3899 9216 NetIndirect Taxes NA -96 -42 97 283 GrossDomestic Product 1340 1199 1753 3995 9499
ResourceBalance NA -748 -1164 -2596 -5217 Import(GNFS) NA -1165 -1752 -3671 -7448 BxotS (GNFS) NA 417 587 975 2230
TotalExpenditure 1340 1947 2917 6591 14716
TotalConsumption 938 1707 2506 6792 12844 Goverment NA 124 256 483 845 Private 938 1583 2311 5309 11899
GrossDomesUtc lnvesment 402 240 361 799 1872 Government 17 40 49 193 300 Private 385 200 301 607 1572
GrossDomestc Savings 402 -508 -814 -1797 -3346 NetFactor Income NA 252 336 446 764 NetCurrent Transfers NA 338 407 446 673 GrossNational Savngs 402 81 -70 -906 -1900 NetIndirect Taxes NA -96 -42 97 283 IndirectTaxes NA 4 4 132 443 Subsidies NA 99 46 35 160
GrossNational Product 1340 1450 2089 4441 10263 AverageExchange Rate (WU 409 497 702 928 1683 GOPat mp(curr. milL USS) 3274 2414 2498 4304 5644 Sources:UNDP (1968-1990 GDP at factorcost) and World Bank staff estimates. 11:Estimated
-74- AppendixTable 3. Ldanon: NationalAccounts Summary at Constant1990 Pries
(bliions of LebanesePounds)
1989 1990 1991 1992 11
GDPat factorcost 2185.3 1795.1 2569.5 2810.3 Net IndirectTaxes -161.6 -43 63.6 86.1 GDPat marketprices 2023.8 1752.8 263.1 2896.4
Rsource balance -1129.4 -1164.2 -1915.3 -2057.6 Impots (GNFS) -1739.5 -1751.6 -2645.9 -2958.5 xot (GNFS) 610.1 587.4 730.6 900.9
TotalExpenditures 3153.2 2917.0 4648.5 4954.1
Totalconsumption 2748.4 2666.5 4021.8 4302.4 Gene govenment 200.2 255.5 335.6 3165 Private 2548.2 2310.9 3686.2 3985.8
Total InvestmentEenditure 404.8 350.6 526.6 651.7 Government 67.0 49.3 126.9 104.5 Prhate 337.7 301.3 399.7 547.2
Net factorIncome 425.0 336.1 293.7 232.9 Netcurrent transfrs 570.0 407.0 293.7 205.3 Grossnational product 244a8 2088.9 2926.8 3129.3 Grossdomesti saving -724.7 -813.7 -1388.7 -1405.9 Grossnational saving 1365 -70.5 -597.2 -582.0 Cpaity to Import 622.1 587.4 722.2 8860 Termsof trade adjustent 12.0 0.0 -84 -14.9 Grossdomesic Income 2035.8 1752.8 2624.7 2881.5 Grossnational income 2460.8 20889 29184 3114.4
Source WoridBank staff estimates. 11:Estimated
-75- *'.ppendl Tabl 4. Lebanon: EsUmatedOutput by Setor 1974,1988-92
(millionsof cunrentUSS)
1974 1988 1989 1990 1991 1992 11
GDPat factorcost 3538 3274 2607 2558 4200 5476
AGRICULTUE 3924 348 210 184 NA NA MANUFACTURING 587 70 4*6 365 NA NA CONSTRUCTION 141 328 156 181 NA NA TRADE 1087 92 755 725 NA NA NONFINANCIAL SERVICES 950 574 521 491 NA NA FNANCIALSERVICES 135 261 236 223 NA NA PUBLICADMINISTRATION 314 172 232 388 NA NA
Sctoral Share of GOPtoee
AG1RICULTURE 9.2 10.6 81 7.2 NA NA MANUFACTURING 16.6 20.5 19.0 14.3 NA NA CONSTRUCTION 4.0 10.0 6.0 7.1 NA NA TRADE 30.7 281 29.0 28. NA NA NONFNANCIAL SERVICES 26.9 17.5 20.0 19.2 NA NA FINANCIALSERVIMCE .8 o 9.1 67 NA NA PUBLICADMINISTRATION 89 5.3 89 15.2 NA NA
11:Esti7ated
-76- AppendixTable 5. Lebanon:Balance of PaymentsSummary at CurrentPrces. 199-1992 (millionsof US dollars)
low te 1991 109211 ExportsofGNFSV2 S30 837.0 1060.0 1396.2 Merctkandise(f.ob.) in.0. 7.0 750.0 987.0 Non-FactorSerJies 300.0 300.0 300.0 336.2
Impotsof GNFS21 -234.0 -2496.0 -3647.0 -4425 Merchandise(c.if,) -2246.0 -2390.0 -3747.0 -4309.1 Nen-FaetorServIces -100.0 -100.0 -100.0 -116.2
ResourceBalance -1607.0 -1609.0 -2797.0 3100.0
NetFactor Inome 607.0 479.0 410.0 463.9
NetCurrent Transter 660.0 680.0 480.0 400.0
CurrentAccount Balance Beforeofflioial eapital grants -320.0 400.0 -1637.0 -2246.2 Ofal capitalgrnts 0.0 0.0 70.7 0.0 Afteroffiei caparlgrants -320.0 -00.0 -1786.3 -2246.2
DirectForeign Inesmnent 0.0 0.0 0.0 0.0
PublicMIrT (notdisbuement) GrossDisbursement NA NA NJA 0.0 Amoetzation NA NA NA -84.2 NetDisbursement 14.1 23.1 33.904.2
NetOther CapitalFlowsi6 262.6 279.9 2301.4 2626.1
Oerall Balance41 -43.0 -287.2 669.0 214.7 Net ForeignRewves(- *ces) 430 27.2 -66.0 -214.7
As Shameof GOP: PesourcesBalance 42.42 -6.42 -04.99 -64.93 InterestPapments (LT*IMPF#8T) 2.2 3.0 1.6 0.60 CufrentAocount Balnoe -1326 -24.02 -42.88 -9.6o LTcapital Inlow 0.6° 0.92 2.43 44.49
ForeionExchanee Reserves. Gross Bdl.Reserves (xc-. gokd 113.00 619.0 1233.31 1448.0 Gold(end-year London price) 3696.781 364.01 3200.10 32601.1 GrossBdi. Rsesves(Incl.gold) 406.77 4173.98 4493.41 4708.1 GrossBdl. Rseres (monthsImp.) 5/ 23.53 20.07 14.02 12.8
Price andExehance Ras NamONt. (Ann. avg.XLWUS6 400.60 701.76 928.23 1683.00 NomOff. (End-ct-") 606.00 642.00 87E.00 1850.62 MUV-Manul.(% change) -0.7 6.7 2.0 2.80 IndexReal Exchange Rate (LUUS$) 113.05 100.00 6a95 76.70 SOcs: Oa8prcvkdby ft sketLOW.Win IM. MOmNofTias 8Adn: selmatee.
4. IaSse mgaU uwstbw i..
MUWWWWWASSIMANITOUvmt_W
- 77 AppendkTable 6. Lebanon:Extemal Trae, 1989-92 (volumeindices; millions of currfent US doliars)
1989 1990 1991 1992 If
ValueCurrent Prices (USS mililons) MerchandiseImports ConsumerGoods 1166.7 12436 1944.7 2186.8 IntermediateGoods n.e.l. 657.8 701.7 1097.4 1233.9 of whichOil 137.8 147.1 230.0 255.2 CapitalGoods 412.0 439.6 687.4 68.7 Other 10.5 11.2 17.5 19.7 TotalMerchandise Imports (CIF) 2240.0 2396.0 3747.0 4309.1
ValueCurrent Prices (USS millions) MerchandiseEports Agriculture 161.7 161.1 225.0 153.2 Oil 5.4 5.4 7.5 4.5 Manufactures 32.8 327.6 467.5 352.2 OtherEpons 43.1 43.0 60.0 46.2 TotalMerchandise Exports (FOB) 539.0 537.0 750.0 987.0
VolumeIndices 1990-100 MerchandiseImporta ConsumerGoods NA 100.0 NA NA IntermediateGoods n.e.l. NA 100.0 NA NA ofwhich Oil NA 100.0 NA NA CapitalGoods NA 100.0 NA NA Other NA 100.0 NA NA TotalMerchandise Imports (C) NA 100.0 NA NA
VolumeIndbes 1990-100 MerchandiseExports: Agriculture NA 100.0 139.5 NA Oil 130.5 100.0 171.1 NA Manufactures 1061 100.0 136.9 NA OtherExports 1061 100.0 136.9 NA TotaWMechandise Exports F) NA 100.0 139.5 NA
US$Prices Indices 1990100 Termsof Trade: MerchandibeExport Prices NA 100.0 100.1 103.2 MerchaniseImport Prices NA 100.0 105.9 105.0 MerchandiseTerms of Trade 102.0 100.0 9W8 98.3
It: Estimated
-78- AppendixTable 7. Lebanon:Consolidated Central Government Operations, 1989-92 a/ (billionsof LebanesePounds)
199 190 1991 1992 1! TotalRvenue 02.0 120.4 456.7 9S4.0 IndirectTaxes 3.6 3.7 131.0 442.5 DirectTaxes 14.8 97.1 89.7 189.6 Other, Including Fees & Dues 1S.7 20.9 i01.7 268.9 Bank ot Lebanon profits 28.8 64.7 1S3.7 83.1
Total Expenditure 21 634.7 794.6 1229.1 2229.3
Current Expenditures 495.0 745.2 1030.6 1929.3 Wages & Salies 90.9 210.0 370.0 738.9 Other Current (inl. Transtets) 58.3 90.7 240.0 425.8 ExtrabudgetaryTransfers 88.3 179.0 184.0 90.0 PetroleumSubeldy 09.3 46.0 35.1 180.0 Interest Payments 162.2 213.5 208.9 514.6 Private SectorCredit 161.6 203.6 203.6 464.0 Foreign SectorInterest 0.7 10.0 3.4 0.6 Capital Expenditures31 39.7 49.3 192.5 300.0
Current Budget Balance -432.4 418.8 -79.9 445.3
Adjustmentitem 0.0 0.0 0.0 0.0
Overall Defict -472.1 468.1 -72.4 -1245.3 g tdcrg&bgp.gdp 38.8 37.2 16.9 14.3 Financing 472.1 8.a1 m.4 1245.3 eternai 7.0 10.2 97.1 -108.0 Net Borrowing 7.0 16.2 31.5 -108.3 Gants 0.0 0.0 65.6 0.0 Domestic 406.1 051.9 675.3 1353.3 Nt Bank of Lebanon 134.2 351.9 -424.2 -577.0 Net Othfer41 330.9 300.0 1099.5 1930.3
(percent of GDP)
Total Revenue 5.2 7.2 11.4 10.4 Totia Expenditure 44.6 45.3 30.8 23.6 Curent ExpendIture 41.3 42.5 25.9 20.3 Capit Expenditure 3.3 2.8 4.8 3.2 Current Budget (- deficit) -36.1 -36.a -14.5 -10.0 Overal Deficit -39.4 38.1 -19.3 -13.1
(percentof Total Expenditure)
Total Pevenue 11.7 15.9 37.2 44.1 Oveal Detioit -88.3 -84.1 -62.8 -55.9
Memorandum Item: (bllions of LebanesePounds)
Nomial GOP 1198.7 1752.8 3995.1 9488.7
Soutrce: Data prowidedby the Lebaneseauthities; and staff esmates.
at: Central Budget. ExtrabudgetaryAccounts. Annexed Budgets and CDR. 11:Esimated 21:Includes net lending. St3 inudes domestic financingof CDR pital expenditue assumedto have come through transfes from the central govem The 1992value Is based on the proposedbudget of 1902. 41: Residual.
- 79 - AppendixTable 8.1. Lebanon: MonetarySurvey, 1989-92 (billionsof Lbanese Pounds,end-of-pafiod)
1969 1990 1991 1992 1/
Net ForeignAssets 3352.0 5175.2 6169.0 13477.8
Gold 1866.9 2992.5 2865.6 6033.2 ForeignExchange 1485.1 2162.7 3303.3 7444.6 CentralBank 456.0 522.0 1084.1 2679.7 CommercialBanks 1029.1 1660.7 2219.3 4764.9
DomesticCredit 1491.1 2639.5 3247.3 7234.2
Net Claimson the Government 606.2 1073.4 1256.1 728.2 CentralBank 59.2 411.1 -13.0 -590.0 CommercialBanks 547.0 662.3 1269.1 13182
Claimson PrivateSector 884.9 1566.1 1991.2 6506.0 ClaimsIn ForeignCurrency 703.1 1290.0 162&0 NA ClaimsIn LebanesePounds 181.8 276.1 363.2 NA
Moneyand Quasi-money 2465.2 38223 5499.5 12846.4 LebanesePound Component 945.4 1265.1 2140.2 3100.4
OtherItems (net) 21 2377.8 3992.4 3916.8 7865.6
(Percentchanwg of beginning-of-periodmoney stock)
Net ForeignAssets -17.0 74.0 26.0 132.9
Gold -63 45.7 -3.3 57.6 ForeignExchange -10.7 283 29.3 75.3 CentralBank -2.1 2.7 14.7 29.0 CommercialBanks -87 25.6 14.6 46.3
DomesticCredit 24.4 46.6 15.9 72.5
Net Caims on the Govemment 17.7 19.0 4.8 -9.6 CentralBank 6.2 14.3 -11.1 -10.5 Commercil Banks 11.5 4.7 15.9 0.9
Claimson PrivateSector 6.7 27.6 11.1 82.1 ClaimsIn LebanesePounds NA 3.8 2.3 NA
Moneyand Quasi-money 13.4 55.1 49.9 133.6 LebanesePound Component 183 13.0 22.9 17.5
Memorandumitems NominalGDP (billons LL) 11987 1752.8 3995.1 94987 Velocity(GDP relative to M2) 0._ 0.5 0.7 0.7 _or: rat ptvdd buh S nk ofL.;ad _W ala. d,emsg It. gf: bWtd vaaton ad_aUeM
- 80 - AppendixTable 8.2. Lebanon:Balance Sheet of Banquedu Uban,1988-92
(billionsof LebanesePounds)
June 1988 1989 1990 1991 1992
ForeignAssets 2505.8 2324.5 3517.3 3952.6 6489.1 olw: Gold (2004) (1867) (2992) (2866) (5405) Cikms on Public Sector 111.6 163.7 611.8 276.3 915.3 Clismson PrivateSector 1.2 6.8 17.9 20.1 31.1 Clims on CommercialBanks 2.0 93.3 169.1 189.2 145.7 FixedAssets 2.0 5.1 8.8 7.8 127.5 UnclassifedAssets 13.1 20.7 31.1 100.2 99.4
ASSETSLIABILITIES 2635.7 2614.0 4356.0 4546.3 7808.0
Currencyoutside BdL 121.3 203.8 349.1 518.6 641.1 Depositsof CommercialBanks 73.9 126.0 158.3 278.7 280.7 Depostisof SpecializedBank 0.6 1.8 0.2 0.5 1.8 Depositsof PtublicSector 186.6 104.5 200.6 289.4 373.6 Depositsof PrivateSector 0.2 0.4 1.5 2.3 4.8 ForeignUablMles 1.0 1.6 2.8 2.9 7.1 Capit Accounts 14.5 14.6 26.7 60.1 79.9 OtherItems, net 2237.6 2161.3 3616.7 3393.7 6419.1 01w:Valuation Adjustment (2236) (2104) (3429) (3228) (6252)
SourceBanque du Uban,Quarterly Bulletin, Second Quarter 1992
- 81 - AppendixTable 8.3. Lebanon:Balance Sheet of CommercialBanks, 1988-92
(billionsof LebanesePounds)
June 1988 1989 1990 1991 1992
Reserves 72.6 130.9 178.0 282.5 302.7 Cash 5.0 11.4 16.1 34.0 29.9 Depositsat BdL 67.5 119.5 161.9 248.6 272.8 DomesticCredit 1040.8 1436.4 2236.7 3280.5 5518.1 PrivateSector 738.5 878.1 1548.3 1971.1 4238.9 PublicSector 302.3 558.3 688.4 1309.4 1279.2 ForeignAssets 1703.8 1468.2 2374.5 3061.2 5669.0 Claimson Non-ResidentBanks 1532.9 i t33.9 2182.7 2799.9 5215.1 Claimson Non-Residents 137.8 S5.1 138.4 201.8 348.1 OtherForeign Assets 33.0 29.3 53.5 59.5 105.8 FixedAssets 22.8 30.9 57.8 90.0 108.2 UnndassifiedAssets 36.5 67.7 88.5 83.6 141.7
ASSETSULIABIUTIES 2876.4 3124.1 4935.4 679z 11739.7
PrivateSector Deposits 2057.6 2270.5 3487.7 5012.1 8524.9 LocalCurrency Demand 65.8 92.5 115.3 202.0 220.3 OtherLocal Currency 363.5 658.2 815.2 1450.7 1387.2 ForeignCurrency 1628.2 1519.8 2557.2 3359.3 6917.4 PublicSector Deposis 5.7 11.3 26.1 40.0 54.9 Non-ResidentDeposits 180.1 170.5 276.1 468.1 997.2 Uabs.to Non-ResidentBanks 306.4 258.7 437.7 373.8 573.9 CapitalAssets 25.7 42.7 103.9 147.9 174.7 Paid-upCapital 11.3 21.4 33.4 63.6 84.1 L-T Borrowingfrom Residents 0.0 2.3 25.5 30.4 37.3 L-T Borrowingfrom Non-Res. 14.4 19.0 45.1 53.8 53.2 Unclasified Uabillties 301.0 370.4 603.9 756.0 1414.0
Source:Banque du Uban,Quarterly Bulletin, Second Quarter 1992
UiLEEMMPMAOMMI
- 82 - AppendixTable 9. Lebanon:The Structureof Deposits at Commercial Banks, 1988-92
(billions of LebanesePounds)
June 1988 1989 1990 1991 1992
LebanesePound Deposits 452.9 794.3 994.6 1739.2 1720.8 Residents 429.3 750.8 930.5 1652.8 1607.6 Nonresidents 23.6 43.5 64.2 86.4 113.3
ForeignCurrency Deposits 1784.7 1646.7 2769.2 3741.0 7801.3 Residents 1628.2 1519.8 2557.2 3359.3 6917.4 Nonresidents 156.5 127.0 212.0 381.7 863.8
TOTALDEPOSITS 2237.6 2441.0 3763.8 5480.2 9522.1 Total Residents Deposits 2067.6 2270.6 3487.7 5012.1 8524.9 Total NonresidentsDeposits 180.1 170.5 276.1 468.1 997.2
Source:Banque du Uban,Quarterly Bulleftin, Second Quarter 1992
AltUM%EPXOTHTABI.E.LL
- 83 - AppendixTable 10. Lebanon:Commercial Bank Credit by EconomicSector, 19892
lbiMionsofLebanese Pounds)
June ios8 1989 1990 1991 12
Agriculture 6.3 11.6 167 28.2 59.7 Indusry 58.8 97.5 164.8 182.7 355.1 Construcion 35.9 72.3 134.1 186.3 357.2
ForeignTrade 153.2 134.0 223.8 271.4 493.1 DomesticTrade 173.9 215.0 428.5 604.6 1294.0 Services 96.8 57.6 100.7 99.8 248.8
Consumption 27.5 24.8 46.4 63.1 125.8 FinancialInsitions 32.9 29.9 40.4 36.3 49.2 Other 153.1 235.0 401.9 498.2 1254.2
TOTAL 738.3 877.7 1647.2 1970.5 4237.1
Source:Banque du Liban,Quarty Bulletin,Second Quarter 1992
- 84 - AppendKixTable11. Lebanon:Tern Structure of Inteest Rates on Treasury SecurIes, 1988-92
(In percent; endof-period)
1988 1989 1990 1991 1992
Discount Rate 3 Month 18.00 18.00 18.00 14.50 22.50 6 Month 20.00 20.00 20.00 15.50 22.50
12 Month 20.00 20.00 20.00 16.30 22.50 18 Month 16.40 21.80
24 Month 16.50 20.60 Specal Bonds 6.00 6.00 6.00 6.00 6.00
Yield to Maturity 3 Month 18.84 18.84 18.84 15.04 23.84 6 Month 22.22 22.22 22.22 16.80 25.34
12 Month 24.98 24.98 24.98 19.47 29.01 18 Month 21.73 29.50
24 Month 24.59 30.50 Spedal Bonds 6.19 6.19 6.19 6.19 6.19
Source: Banque du Liban, Quarterly Buietn, SecondQuarter 1992
- 85 - AppendixTable 12. Lebanon:Commercial Bank Interest Rates on LebanesePound Loans and Deposits, 1988-92
(In Percent;Period Average)
1988 1989 1990 1991 June 1992
Loans 41.48 39.43 39.39 31.54 45.81 ChecidngAccount 6.11 5.01 4.55 3.74 3.74 SavingsAccount 13.75 11.77 11.47 11.83 11.36 lxedDepost8 (Medium) 16.12 14.51 15.14 13.81 15.36 FixedDeposits (Long-Term) 18.62 16.38 16.96 15.37 17.52
MemorandumItems:
InterbankRates PeriodMinimum 3.00 5.00 15.00 9.50 4.00 PeriodMaximum 15.00 20.00 90.00 12.00 10.00 End-of-Period 5.00 10.00 25.00 12.00 5.00
Source:Banque du Liban,Quarterly Bulletin, Second Quarter 1992
- 86 - Appendix Table 13. Lebanon: RecentMovwments In Seed MonetaryData. January19n- December 1992
CPI Inflaodon Average Percent M2 M2 Net T-lle Prinmry 1988aw100 (In 11) Exchange Change (LL bil.) Excluding held by Markt Rate i Forign Non-bank Diount LWJUS$ A£R Curency Public 3-Month __ (LL bil.) (L bW.) T-bliS Jan 1989 142 632 Feb 1989 147 512 Mar 1989 150 473 Apt 1989 170 518 May 1989 174 506 Jun 1989 176 507 Jult9S9 180 613 Aug 1989 183 636 Sep 1989 188 506 Oct 1989 184 453 Nov 1989 183 427 DOec1989 189 474 2466 945 145 18 Jan 1990 195 37 546 2 2542 9t4 142 Feb 1990 214 40 562 8 2586 962 143 Mar 1990 227 61 569 18 2062 983 151 Apt 1990 229 35 6we -2 276 980 1$ May 1990 236 39 635 26 2813 964 148 Jun to90 254 44 664 31 2952 991 147 Jul 1990 265 47 602 29 3048 1045 151 Aug 1990 313 71 771 44 3997 1086 150 Sep 1990 427 127 1080 114 3761 1107 151 Oct1990 421 129 870 92 3178 1286 155 Nov 1990 369 98 706 a6 3277 1286 161 Dec 1990 348 84 790 67 3822 1286 177 14.6 Jan 1991 397 104 974 79 4568 1273 186 Feb 1991 423 98 1081 so 4467 1311 200 Mar1991 446 98 981 76 4159 1381 297 Apr1991 449 98 942 88 4222 1372 329 18.0 May 1991 438 86 922 46 4330 1467 364 18.0 Jun 1991 436 71 909 37 4451 1625 395 17.6 Jul 1991 430 e6 897 36 4674 1868 444 16.5 Aug 1991 440 41 893 16 4801 1802 470 16.0 sep 1991 433 1 892 -17 4913 1803 63N 10.0 Oct 1991 468 11 885 2 4974 1907 624 150 NoV t991 462 29 881 26 6149 1984 637 14.5 Dec 1991 467 31 879 11 6499 2140 650 14.5 Jan 1992 602 28 879 -10 6495 2107 ee1 14.5 Feb 1992 625 24 930 -14 0242 2014 08 18.2 Mat 1992 711 00 1175 20 7137 2026 N63 Apt 1992 800 78 1443 53 8430 2006 044 May 1992 860 94 1621 7e 8796 2140 656 Jun 1992 898 108 1733 91 9147 2220 658 Jul19W2 976 124 1793 100 Aug 1992 1156 16S 2119 137 Sep 1992 1333 208 2465 176 Oct 1992 1320 182 2388 170 Nov 1992 1219 164 2080 139 Dec 1992 1130 147 1881 114
__199D 1990 991 1992 Avg.Pricetj 2911 440 52 Inflation 21 09 51 116 Source:Bank ofLebanon Il: AnnualizedInfaton over 12 monthpreceding period 21:Growth rate ofaverage price Index'.
M:tE8U1OEMtEP1SUXtO80RY1iSH.lI(I
- 87 - Appendix Table 14. Lebanon: Public and Publicly-GuaranteedExteal Debt (end-1991;US miIns)
Outstding and /. Pincipal lIterest Total Disbursed11 Anrears Aneas Outstanding21
TOrAL 316.69 14.67 44.06 360.74 Multilateral 6263 3.94 7.33 69.96 ArabFund 20.61 1.32 0.62 21.23 IBRD 29.07 Q00 0.00 29.07 a5 12.96 262 6.71 19.66 Bilateral 254.06 130.73 36.72 290.78 Abu Dhabl 5.12 4.93 1.71 6.83 Belgium 0.80 0.12 0.01 0.81 France 197.24 118.57 29.94 227.18 oh: est.miPary (78.04) (7&04) .00 (76.04) Germany 11.29 0.9 0.44 11.73 Italy 12.56 6.02 2.04 14.62 USA 27.03 0.14 2.5 29.61 orsw MinWYof Fbinc d COO.
Nolw. 1 Icludesprincial In ofoaicexoakcdsbowed In wr8c (2 E psle outstandingan dislburedp-n antuetas
- 88- MIAPSECTION LEBANON t
, . . fii .n c e0, . ; . , 7 A < V
.~ EL.,0.BAROA 2
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