Ms. Sherine Shallah Economic Officer, Office of the Minister of Finance LEA Founding Member

1. Fiscal Adjustment during Political Turmoil: Fiscal Burden of Lebanese Government’s Economic Reform Program Ms. Sherine Shallah Economic Officer, Office of the Minister of Finance LEA Founding Member LEA’s inaugural policy roundtable: “PARIS 3 AND THE POST-WAR LANDSCAPE: LEBANON’S ECONOMIC POLICY IMPERATIVES”

2. The Lebanese Government has approved an economic program that involves fiscal adjustment of 4,366 billion LL • Primary deficit in 2006: 220 billion LL • Projected primary surplus in 2011: 4,146 billion LL Fiscal adjustment over the period 2007-2011: 4,366 billion LL

3. The gradual uncapping of the gasoline excise will yield 590 billion LL • Excise rate will be raised from 250 LL/liter (as of January 2, 2007) to 300LL/ liter at the end of 2007 • Excise rate will be raised by approximately 50 LL/liter per year over 2008-2011 to 490 LL /liter in 2011 • Additional burden to consumers per year from 2007 to 2011: 1,000LL/liter • Additional revenues of 290 billion LL in 2007 (small base) • Additional revenues of 75 billion LL/year from 2008-2011 Total fiscal burden of gasoline excise uncapping over the period 2007-2011: 590 billion LL

4. The increase in income tax will yield 294 billion LL, out of which 171.5 billion LL will be borne by citizens • Interest rate tax will be raised from the current 5% to 7% in 2008 • Tax levied on interest revenue from deposits and debt securities • Incremental tax burden on LL depositors: 0.15% • Incremental tax burden on US$ depositors: 0.11% • Revenue yield from deposit base (2008 base): 170 billion LL • Revenue yield from debt securities (2008): 124 billion LL • Revenue yield from debt securities borne by individual TB holders: 1.5 billion LL Total fiscal burden of income tax in 2008: 171.5 billion LL

5. The increase in VAT rate will yield 1,047 billion LL • VAT increase from 10% to 12% in 2008 • VAT increase from 12% to 15% in 2010 • 50% of household consumption exempt • Incremental burden of VAT increase from 10% to 12% in 2008: 1% of spending (387 billion LL) • Incremental burden of VAT increase from 12% to 15% in 2010: 1.5% of spending (660 billion LL) Total fiscal burden of VAT: 1,047 billion LL

6. Out of the fiscal adjustment of 4,366 billion LL, the total incremental tax burden on citizens will be 1,809 billion LL • Total fiscal burden of gasoline excise uncapping over the period 2007-2011: 590 billion LL • Total fiscal burden of income tax in 2008: 171.5 billion LL • Total fiscal burden of VAT: 1,047 billion LL Total incremental tax burden on citizens over the period 2007-2011: 1,809 billion LL

7. The core of the Government’s efforts ahead of and beyond the upcoming donor conference are sectoral Medium-Term Economic Reform Program Vision for growth - 2015 Sector Strategies Comprehensive Medium-term economic reform program to solve main issues faced by Lebanon, with international assistance Sector-specific growth recommendations and vision for the future for the next 10 years Reform strategies for the main infrastructure and social sectors, with actions to be conducted by government Social reform plan Private sector recovery plan Fiscal reform plan Agenda for reform and development of social safety nets, and improvement of service delivery Comprehensive program for the recovery of the private sector, with financial support, tax incentives and promotion New strategy for fiscal reform and public finance modernization

8. The Government’s fiscal consolidation will come in its most part from the reform of key sectors Envisaged fiscal containment path Revenue enhancing measures including: • Improve tax structure and collection • Increase tax rates (VAT and tax on interest income) • Uncap gasoline price Expenditure rationalization including: • Contain wage bill • Reform key sectors

9. One such sector will be power, whose reform will yield fiscal savings at over 3% of GDP Achievements Planned Reforms • Formulation of a sector reform strategy by Ministry of Energy and Water • Establishment of inter-ministerial power committee that meets on a regular basis • Finalization of sector roadmap with specific milestones • Monitoring of milestones by committee • Issuance of IPP Law to complement Electricity Law 462 • Securing of World Bank grant to build sector capacity Planned reforms fall under one of three categories: • Enabling reforms • Short term actions • Medium term actions

10. Planned reforms in the power sector can be divided into enabling reforms, and short and medium term actions Enabling Reforms Short and Medium-term Actions • Appoint qualified advisors to the Ministry of Energy and Water, EdL and HCP • Complete the auditing of EdL financial statements for 2001 through 2006 • Appoint a new Board of Directors for EdL • Establish the Electricity Regulatory Authority and design its bylaws • Corporatize EdL • Design establishment decree and new bylaws for EdL • Unbundle generation, transmission and distribution functions of EdL • Complete the establishment of a National Control Center to audit volumes and performance (contract already signed) • Modify restrictive oil specifications • Negotiate additional bilateral contracts for fuel oil and gas oil to reduce high premiums (Ongoing) • License private companies to install and operate remote meters • Reduce illegal network connections and enforce bill collection through support from security forces and the justice department (Ongoing) • Secure the supply of liquefied natural gas and natural gas • Build a gas pipeline • Complete the expansion and rehabilitation of the 220 KV transmission network • Complete the infrastructure needed to allow Lebanon's integration into the regional electrical network known as the "Seventh Joint“ • Privatize EdL

11. In the water sector, the Government aims at formulating an integrated water strategy by 2008 Completed Actions Actions Planned for 2007 • MEW Water Resources 10 Year Plan. (Cabinet Approved) • Privatisation Study, Sociétié Générale, Rafik ElKhoury • Report on Water Sector Policy and Action Plan, IPP Water. • EU Neighbourhood Policy • CDR Development Programme 2006 – 2009. • Preparation of the national water sector strategy that would take into account: • availability of water resources, • usage (irrigation, domestic & industrial), • institutional, regulatory, financial & environmental aspects • Government’s approval of Integrated Water Sector Strategy & Policy Develop an integrated water sector strategy and policy

12. The Government also plans to increase water resources and improve their management Completed Actions Actions Planned for 2007 • World Bank Irrigation Sector Note • MEW Water Resources 10 Year Plan. (Cabinet Approved) • MEW 10 Year Programme: • Shabrouh Dam • Brissa Dam • Extension of Dbayeh Water Treatment Plant • Review role of water establishments in irrigation particularly in view of concern over water establishments’ ability to develop, operate and maintain irrigation systems. • Detailed Review of investment programme for MEW, CDR, LRA & water establishments • Establishing an Integrated Water Resources Management System (MEW) • Opening of tenders for Canal 800 • Appointment of consultant to update the studies relating to Awali-Beirut Conveyor, Bisri Dam • Appointment of a committee of experts to recommend guidelines for re-use of treated wastewater. • Appointment of a committee of experts to recommend guidelines for re-use of treated wastewater • Launching Boqaata Dam • Launching Assi Dam Increase water resources and improve resource management

13. The Government’s foreseen strategy includes improving service coverage… Completed Actions Actions Planned for 2007 • MEW & CDR NERP 2 & 3 Programmes • CDR Wastewater Programmes: Coastal Water Protection and Protection of Water Resources. • South Bekaa Irrigation Phase 1 • Qasmieh Irrigation Project • Continue programmes extending water supply, wastewater and irrigation services. • Complete repair of war damaged facilities Improve service coverage

14. …and improving sector governance Completed Actions Actions Planned for 2007 • Law 221 and its amendments • Decrees (By-Laws) October 2005 • IPP Water • Tripoli Water Authority Management Contract • LWPP • TSU Bekaa Water Authority (WB) • Appoint Boards and DGs for all Water establishments • Define roles of different stakeholders • Water establishments set policies, criteria and procedures in areas such as investment programmes, human resources, o & m, customer services. • Establish Water Users Associations for irrigation • Water establishments develop Business Plans • Develop three year investment programmes with 2008 Budget. • Establish a regulatory framework to include dispute resolution mechanism, tariff adjustments and service standards • Government and MEW establish clear policy on cost recovery and subsidies for sector • Appoint a consultant to study PPP options for Nth. Lebanon Water Establishment • MEW and Water establishments to set measures that will enable the water establishments to operate and maintain water and wastewater facilities till private operators are contracted. • Complete the adaptation of MIS established in Bekaa Water Establishment, South Lebanon Water Authority by IPP Water and LWPP • IPP Water to implement capacity building measures it recommended in its Water Sector Policy and Action Plan Improve sector governance

15. The Government also aims to promote private sector participation in the water sector Completed Actions Actions Planned for 2007 • Tripoli Water Authority Management contract • Baalbeck-Nabi Chit Service Contract (O & M) • Operation and maintenance contracts for wastewater treatment plants under construction • Appoint a consultant to MEW, CDR and water establishments to develop model tender and contract documents for service and management contracts (with WB assistance) • Above consultant to develop model contracts for regulation or supervision of such contract, Promote private sector participation

16. In addition, the Government has drawn a transport strategy that covers seaports,… Strategy of Ministry of Public Works and Transportation in relation to Seaports Immediate Actions Two-year Actions Ten-year Actions • Analyze the utilization of Tripoli’s economic zone • Confirm the depth/length of the quay and channel for Tripoli terminal • Re-think the utilization of the existing space at the Port of Beirut • Establish the Authority to be in charge of land and maritime transport policy-making and regulation • Improve utilization of existing facilities at Port of Beirut and Port of Tripoli by capitalizing on current opportunities in international shipping • Establish one prototypical logistics center/inland depot as a “proof-of-concept” • Professionally managed port sector with private sector involvement • Regionally competitive national port facilities and services with improved land access and links to inland depots and logistics centers • Complementary commercial port facilities at Beirut & Tripoli with high-speed link • Improved touristic port facilities at Saida, Sour, and Jounieh

17. …, airports,… Strategy of Ministry of Public Works and Transportation in relation to Airports Immediate Actions Two-year Actions Ten-year Actions • Revisit the 3 stage plan for Qleiaat airport • Consider free zone at Beirut airport • Consider free zone at Qleiaat airport and possible link to agro industries and planned industrial area at Beddaoui • Develop the first stage of the Qleiaat airport • Beirut airport operating close to capacity; consider provision of passenger services at Qleiaat airport

18. …, rail, … Strategy of Ministry of Public Works and Transportation in relation to Rail Two-year Actions Ten-year Actions • Complete the construction of the Tripoli-Syrian border rail line • Recover and protect rail Right-of-Way (RoW) in the corridor Khalde - Beirut - Jounieh • Operational passenger and freight rail service between Beirut and Tripoli, and onwards to Syrian border • Rail service integrated with port and logistics centers

19. …, roads … Strategy of Ministry of Public Works and Transportation in relation to Roads Two-year Actions Ten-year Actions • Reduce the number of fatalities at black spots • Major improvements in road safety

20. …and public transport networks Strategy of Ministry of Public Works and Transportation in relation to Public Transport Immediate Actions Two-year Actions Ten-year Actions • Consider the proposal for a Beirut subway system • Launch suburban mass transit line between Khalde – Hadath (LU) – Beirut – Jounieh using Bus Rapid Transit (BRT) technology along rail RoW • Provide feeder services and parking facilities along line • Rationalize provision of bus transport services in Beirut • Commuter rail line services for Greater Beirut integrated with fully-developed feeder system, including one or two metro lines • Inter-city passenger transport by rail north of Beirut • Attractive services within and between major cities

21. The fiscal adjustment of 4,366 billion LL targeted by the Lebanese Government lies in its most part in sector reform Almost 60% of the fiscal adjustment will be due to administrative and sector reform Fiscal adjustment over the period 2007-2011: 4,366 billion LL Total incremental tax burden on citizens over the period 2007-2011: 1,809 billion LL