Lebanon’s Reform Program: Toward Achieving the Economy’s Potential Remarks by H.E. Fuad Siniora Prime Minister of Lebanon At a Meeting IN LONDON with Business Community
Ladies and Gentlemen,
It gives me great pleasure to be here with you today. I would like to thank those who organize this gathering and look forward to an interesting and lively discussion. As you may know, I have spent the better part of my life in the private sector and then almost a decade as a minister of finance. So I feel very much at home in the midst of such gatherings, and I am very much interested in the views of those who are in the trenches, so to speak.
First, let me start by saying how difficult the past year has been for all of us in Lebanon. We have witnessed events of unprecedented proportions that have changed in a fundamental way the political and economic landscape. After 30 years of civil strife and unsettled political situation, a new era for Lebanon has begun. But changes of such magnitude usually come with a heavy price, and Lebanon was no exception. The late Prime Minister Rafic Hariri, Minister Basil Fuliehan, and other prominent Lebanese leaders paid the ultimate price so that Lebanon can regain its sovereignty and independence.
Therefore, our meeting today comes at a difficult but promising time. The events of 2005, tragic as they are, have provided Lebanon with a great opportunity to undertake fundamental reforms. Either we pick up the pieces and sprint forward through dialogue and cooperation, or we surrender to despair and slip into social and economic chaos. I am happy to tell you that we the Lebanese have decided to press forward believing that no obstacles are insurmountable. When there is a will there is a way.
Ladies and gentlemen,
Over the past few months, the government has formulated a comprehensive reform program aimed at stimulating growth, creating employment, and improving social indicators. The ultimate objective of this program is to allow the Lebanese economy to rise to its full potential. We are certain that with a highly qualified work force and a reservoir of entrepreneurial spirit, astonishing resilience to weather shocks, well developed banking sector, an attractive climate and location, and favorable international and regional environments, achieving much higher growth rates is very much within our reach.
To achieve higher growth rates and create employment, we plan to move on two tracks: First, we should begin to reduce the large public debt and its heavy burden, and second, create the right business environment that is conducive for investment and job creation, while giving the right emphasis to the social aspects to guarantee stability. The private sector is invited to play a leading role and take a strong interest in the privatization process. Lebanon has always been the beacon of entrepreneurial spirit and private sector initiative, and the private sector has always been the backbone of the Lebanese economy and the propeller of growth (even when many other economies were still very much denominated by the public sector). We aim to get the state out of the business of businesses.
As an example, and in order to further encourage private initiative, the minister of finance has recently launched the "Bader" initiative to promote and support the entrepreneurial spirit of young Lebanese entrepreneurs. The program aims to address various issues related to entrepreneurship in collaboration with leading universities, build private-public partnerships to resolve critical economic issues, and establish Venture Capital funds, among others.
Ladies and gentlemen,
As you may know, and after 30 years of civil strife and Israeli occupation and unsettled political situation that made it impossible for the Lebanese economy to deal effectively with the pertinent issues, Lebanon's public debt has reached a record of 175 percent of GDP at end-2005. Reducing the debt-to-GDP ratio will lower the country's risk and with it interest rates, creating a more conducive environment for the private sector to flourish, and liberating the domestic banking system of its heavy exposure to the sovereign so that banks can focus more on financial intermediation and on providing credit to the private sector. Once this is achieved, it will contribute to job creation, better competitiveness and a higher growth rate.
Of course, the key to bringing down the vulnerabilities associated with a high debt-to-GDP ratio is to reduce budget deficits. That is why we will target an increase in the primary budget surplus, which will be used as the anchor for guiding our fiscal policy. Strong and sustained fiscal adjustment efforts will be undertaken to increase the primary budget surplus gradually from 2 percent of GDP in 2005 to 8 percent of GDP in 2010 so as to reverse the debt dynamics.
To achieve this target, the government prefers to streamline expenditures and cut waste, particularly in the energy sector and the social security fund and other government departments and state owned enterprises, before raising taxes. But given the time it takes to streamline expenditures, there is a need to raise some taxes moderately by focusing on taxes that have the least impact on economic activity and on the lower income groups of the country. The program recommends an increase in the VAT rate; start implementing the global income tax on income generated in Lebanon; and gradually restore the excise tax on gasoline to its pervious level before introducing the cap on gasoline prices in early 2004.
Expenditure measures will focus on reducing primary current expenditures while raising capital spending to invest in important infrastructures and help sustain growth especially in partnership with the private sector. Key measures include cutting waste and containing the wage bill, and reforming the energy sector (electricity company), and other state owned enterprises. In addition, several structural measures related to improving public expenditure management will be implemented.
To ensure continued fiscal discipline in a complex political environment, we are looking into the possibility of adopting a fiscal accountability law that would constrain the ability of future governments to borrow, and thus reduce the risks of fiscal slippages in the future.
Ladies and gentlemen,
Let me now turn to talk about improving the business environment and the competitiveness of the economy. This entails, in addition to a stable macroeconomic environment, good governance, well developed capital markets, greater openness and a liberal trade regime, among others.
We consider that good governance is crucial for a pro-business environment since it levels the playing field for potential investors and reduces the cost of doing business. We have decided to hire an international firm to audit public finances and public enterprises over the last fifteen years (1990-2005) to identify the sources of any possible misuse of public fund in the past, if any. Among other things, this would eliminate any domestic political exploitation of this issue and help understand better and learn from past experiences and consequently to avoid possible misuse in the future. In addition, the government intends to improve procurement procedures, enhance the role of monitoring agencies, and empower state watchdog institutions to take punitive actions and enforce conflict-of-interest regulations against senior public officials.
The government is planning on developing the financial sector in general and capital markets in particular to take advantage of the enormous capital flows in the region. We recognize how vital financial markets are for an efficient use of savings, both domestic and foreign, and therefore for supporting higher productivity and faster growth.
Lebanonhas a long tradition in banking, and the size of the banking sector relative to the size of the economy is by far the largest in the region, and perhaps one of the largest in the world, with a consolidated balance sheet amounting to 300 percent of GDP. The recent sale of a commercial bank (BLC) to a Gulf investor reflects a strong interest in investment opportunities in Lebanon. An estimated $1 billion was invested into the Beirut Stock Exchange in 2005 mainly in banks' shares, increasing banks' capital significantly, and improving an already high capital adequacy ratio. But the sector still has a potential to grow domestically and regionally and a further increase in its equity base may be needed.
The government intends to address the long standing issue of underdeveloped capital markets The role of the stock market is instrumental in the coming period as it will facilitate the corporatization and privatization drive, help attract long-term financing mainly from the region- especially at times of high oil prices- and provide the private sector with working capital. Similarly, the development of a secondary market for fixed-income instruments should contribute to financial deepening. Recently, the parliament approved two laws on securitization and investment funds, and draft laws dealing with the regulatory and legal framework and insider trading are now in parliament.
The government is considering several measures to reduce the cost of doing business and improve competitiveness. These include (i) lowering the minimum capital requirement and cost of registration of new companies; (ii) reducing the time it takes to get a license, start a business or close a business; (iii) increasing the flexibility of the labor market and the ease with which to hire (work permit) or fire workersin order to attract investors and reduce unemployment; (iv) streamlining the tax system; and (v) improving the enforcement of the rule of law. In this context, we have signed an agreement with the IFC to review and eliminate all legal and bureaucratic impediments to start a business.
In addition, we will eliminate existing public and private monopolies (exclusive agencies) in the telecom, energy and water sectors, which represent a key obstacle to business development, improve the supply of electricity, reduce the high cost of telecommunications (which has already started and should be increased with privatization), and streamline administrative procedures. This would result in improved services to the public and make it possible to provide them at lower costs, which should be the main objective of such enterprises, rather than solely maintaining the jobs of those working in these institutions.
To monitor competitiveness indicators on a continuous basis, the government will establish a Competitiveness Council by end-2006. This council would be composed of major public/private institutions to report on, and deal with, business activities bottlenecks.
Experience taught us that dismantling barriers to competition and trade can foster growth and improve living standards. (Growth in the dynamic economies of China and India has come in the sectors most open to foreign investment and competition.) We are hoping to join the WTO by year-end, which will provide further assurances to foreign investors against unfair competition. We are also finalizing an action plan on the EU neighborhood policy, and we have just started exploratory talks with the US on a Trade and Investment Framework Agreement (TIFA), which we hope will lead to a free trade agreement.
Ladies and gentlemen,
Privatization is an integral part of our reform program. The aim is to remove state monopolies, enhance efficiency in the delivery of services, reduce the cost of doing business, improve competitiveness, and stimulate growth.
The privatization plans of the two existing mobile licensesare well advanced. We will appoint members of the regulatory agency soon, and we are striving to make the process as transparent and as open as possible. We expect the privatization process to be finalized before the end of the year. Much interest has been shown already in the telecom sector and we expect very successful outcomes. This is an important step, not so much because of its financial impact on debt reduction and debt service, which is very significant, but also because it will lead to a larger number of subscribers (higher penetration ratios), better competition and consequently lower cost, with very positive impact on employment and growth.
Work is also underway to incorporate and later privatize the fixed line network by 2007 and to issue a third mobile license by 2008-09. Other privatization plans include the power (electricity) sector (once all the preparatory steps have been taken), and some other enterprises such as the national carrier, Middle East Airlines, and Intra Investment Group, which owns most of the shares in Casino du Liban.
One often neglected aspect- which is not only important for the success of the reform program but also for improving the business environment- is social reform. Having a stable social environment will impact positively the political climate which would in turn influence economic activities.The government will establish soon an inter-ministerial committee to prepare a comprehensive medium-term social strategy before the end of the year. We have also started working on the reform of the pension system, which represents an impediment to labor mobility and employers. Of course we remain committed to enacting the socio economic council as a forum for national dialogue over socio economic matters.
Ladies and gentlemen,
The tasks before us are enormous and the challenges are formidable. Fiscal adjustment, privatization, and growth should lead to a steady reduction in the debt-to-GDP ratio over the next five years. However, in light of the magnitude of the public debt relative to the size of the economy, domestic efforts alone may not be sufficient to reduce the debt to sustainable levels- levels at which the government can stay within its budget constraint without resorting to extraordinary measures, such as increasing taxes or cutting into priority spending, that could stifle economic activity.
As you all know, Lebanon's friends have expressed a strong willingness to support Lebanon in its efforts and to help ease the pain of adjustment in the context of the International Conference in support of Lebanon. This willingness was first expressed in New York last September and on many other occasions thereafter, the latest of which was in Washington on the sideline of the Spring Meetings of the IMF and the World Bank.
The question that is probably on your mind is: what is holding up the international Conference? Let me assure you first that the support of the international community for holding such a conference has not waned. But as Prime Minister, I am fully aware that a comprehensive reform program is essential to win the support of Arab and other friendly nations. It will also require a broad national consensus to put in place.
Building social and political consensus is essential to advance reform especially in a complex political environment such as ours. While we are not under any illusion that a hundred percent consensus is possible- neither in Lebanon nor anywhere else for that matter- we will spare no effort to canvass as much support as possible even if it takes a bit more of time. Building such a domestic commitment is what is standing between us and the conference.
We have already started the process of consultations with our domestic and international partners. Our aim is to transform the government's proposed reform program into a national program with a high degree of ownership. Once we reach a national consensus on a credible and economically and socially viable reform program which is endorsed by the cabinet, we will then call on our friends to support our efforts and to show the world that successful reforms are possible in Lebanon.
I believe that international support is crucial for Lebanon; otherwise the debt-to-GDP ratio will likely revert back to an unsustainable path. Such a support will not only reduce the debt burden but it will also enhance confidence and contribute significantly to reducing interest rates and increasing growth with a greater impact on debt. It will also have a major impact on the political and social conditions in the country.
While political consensus is important for the success of the reform program, I believe that the fruit of economic reform could in itself contribute to improving the political environment and bridging the social divide. Failure to undertake the necessary reforms could threaten social and political stability, radicalize views and positions, and jeopardize the democratic process with a negative spill over in this turbulent region.
In our part of the world, Lebanon represents a unique phenomenon of diversity, multi-confessionalism, democracy, tolerance, freedom of expression, and liberty. We will strive to preserve and keep these ideals alive, but our friends' help is critical. I strongly believe that what happens in Lebanon will have repercussions that far exceed Lebanon's size. Our success in strengthening our democracy and building a strong economy is in the interest of all and will provide a powerful example for a region that is in dire need of one.
Ladies and gentlemen,
As for the international business community, I truly believe that Lebanon holds great prospects. We will not dictate nor will we decide for you on where to invest. Nonetheless, Lebanon has a number of comparative advantages in various sectors such as tourism, information technology (IT), telecommunications, light industries (clothing, jewelry, agro-industries, pharmaceuticals, among others), financial sector, investment banking, among others.
Furthermore, Lebanon remains a tax heaven and quite attractive for businesses. The corporate tax rate at 15 percent is very low by international standards, the personal income tax is also low averaging about 10-12 percent for high income brackets ($100,000 a year), there is no capital gain tax, and the average tariff rate is less than 5 percent. More importantly, there are no restrictions whatsoever on the movement of goods and services or on capital. Lebanon maintained full capital mobility even under the most dire of conditions. Most importantly, Lebanon's human capital is second to none: around 25% of Arabic speaking MBAs in the world are Lebanese.
In closing, let me say that we will spare no effort to realize Lebanon's full potential. We will work hard to address macroeconomic balances but we need the support of the international community. We also endeavor to improve the business environment that is free of restrictions but we count on you to take a strong interest in this country of ours. The return for both of us will be very high.