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BEIRUT March 10, 2006 PRELIMINARY DRAFT A Medium-Term Reform Program for Lebanon with International Support.

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Presentation on theme: "BEIRUT March 10, 2006 PRELIMINARY DRAFT A Medium-Term Reform Program for Lebanon with International Support."— Presentation transcript:

1 BEIRUT March 10, 2006 PRELIMINARY DRAFT A Medium-Term Reform Program for Lebanon with International Support

2 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Prudent monetary policy and financial sector reform - Social sector reform - Fiscal adjustment and structural fiscal reforms III. Medium-term framework and international support

3 Where Would Lebanon Be in 2010 With No Reforms? If Lebanon undertakes no economic reforms, the economic situation will return to Pre Paris II Crisis conditions:  Pressure on the exchange rate  Weakened banking sector, due to increased exposure to sovereign risk  Pressure on the exchange rate  Weakened banking sector, due to increased exposure to sovereign risk  Debt Service alone will absorb 100% of total government revenues by 2010  Fiscal Deficit will grow back to levels higher than 20% of GDP by 2010 (today's deficits level are lower than 10%, 8% in 2005), with an immediate jump to 11% starting this year  Gross Public Debt will skyrocket to 214% of GDP in 2010 from 174%GDP in 2005 (which today is considered the highest in the world)  Starting this year, real growth will stagnate at 1% similar to 2005 level, leading to increased unemployment Monetary Debt Service Fiscal Deficit Gross Public Debt Real growth rates  With difficult financing conditions, interest rates will rise dramatically to reach, on average, 13% on LL & 11% on FX by 2008 Interest rates 3 3

4 ACHIEVING GROWTH AND EXTENDING PROSPERITY OVERCOMING MACROECONOMIC VULNERABILITY Macroeconomic Policies – including debt sustainability & fiscal consolidation Macroeconomic policies – including debt sustainability and fiscal consolidation Economic competitiveness, built on trade liberalization, investment promotion, and privatization Strengthening Social safety net and improving social services Standards of living Growth & Development Social Safety Nets Job creation

5 OBJECTIVES OF THE ECONOMIC PROGRAM OF LEBANON Modernizing the economy and stimulating growth:  Creating an environment conducive to growth and achieving real growth rates of 4-6 % in MT Creating employment while improving social indicators and social assistance to protect the poor:  Creating job opportunities for Lebanon’s youth  Improving social indicators & creating social safety nets Achieving economic stabilization, to place Lebanon's large public debt on a downward path in order to eliminate a major source of vulnerability:  Reducing overall fiscal balance in the MT to less than 3% of GDP  Gradually i ncreasing the primary surplus from 2 percent in 2005 to about 8% of GDP in 2010  Reducing debt / GDP ratio steadily over the medium and long term

6 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Prudent monetary policy and financial sector reform - Social sector reform - Fiscal adjustment and structural fiscal reforms III. Medium-term framework and international support

7 Fiscal Policy, Governance and Public sector reform 2 2 GOVERNMENT REFORM PROGRAM ECONOMIC REFORMS ACHIEVABLE IN MEDIUM TERM Privatization and Market Liberalization 3 3 Social Program 5 5 Economic Policy and Growth Agenda 1 1 PROMOTING ECONOMIC STABILITY & GROWTH Prudent Monetary Policy and Financial Sector Reform 4 4

8 PILLARS OF THE ECONOMIC PROGRAM OF GOVERNMENT Maintaining price stability, facilitating credit to the private sector, and maintaining a sound banking system Improving the quality and expanding the scope of services, and reducing their cost. Increasing investment, spurring on economic growth. Expanding the participation of the general public in the ownership of the privatized companies Improve social indicators, strengthen social safety nets to protect the most vulnerable segments of the population and improve the social returns from social expenditures International financial assistance to complement domestic adjustment efforts Growth-enhancing reforms, including developing financial markets and promoting good governance Fiscal adjustment that is aiming to reduce deficit and public debt to a sustainable level Economic Policy Fiscal Consolidation Social sector reform Privatization Monetary policy International Support

9 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Social sector reform - Fiscal adjustment and structural fiscal reforms - Prudent monetary policy and financial sector reform III. Medium-term framework and international support

10 Legal and business environment Tax & Customs modernization Support to growing sectors Accessing WTO Social Security and Pension Reforms Building a 21 st Century Administration Building a 21 st Century Administration Capital Markets Reforms Capital Markets Reforms State Owned Enterprises State Owned Enterprises Small & Medium Enterprises Small & Medium Enterprises Implementing EU Association Agreement Implementing EU Association Agreement Export Promotion Strategy GROWTH AGENDA Dialogue with the Private Sector Dialogue with the Private Sector GROWTH-ENHANCING REFORM AGENDA

11  Lowering minimum capital requirements & cost of registration of businesses – end-06  Reducing time it takes to have a business license, & the cost of opening and closing a business (promoting ease of both entry and exit for businesses)– end 08  Simplifying requirements in relation with nationality of shareholders, guarantee shares or an additional auditor for limited companies– end-06  Simplifying further the tax procedures & reducing the number of separate taxes and fees, including by adopting the Tax Procedures Code– 2006  Ratifying modern competition law and anti-dumping laws, which would increase competition and reduce prices, by early 2007  Ratifying the insurance draft law to regulate the sector, galvanize the stock market and attract new investors, by mid-2006  Implementing a Global Income Tax, by  Expediting the clearance of imports, including by increasing further automation, and reducing the cost of export at the Port of Beirut (2006) IMPROVING BUSINESS ENVIRONMENT

12 HELP THE PRIVATE SECTOR IN LEADING GROWTH  New consumer protection law - ratified  Anti-dumping, WTO compatible draft law - in Parliament  New competition law - in the process of finalization by GOL  Automation & revamping of Trade Registry & reduction of registration cost - work underway  Basket of E-Commerce draft laws - in Parliament Improving Investment Climate Support for SMEs  SME Unit - already set up  SME Observatory - QI '06  Guarantee fund to facilitate credit access - already set up  Doubling ceiling of guaranteed loans, eliminating other guaranty required by the banks and extending it to start ups - QI '06  Facilitating regulation of non performing loans for SMEs  Subcontracting 4 incubators to private consortiums - '06

13 WTO Lebanon now advancing towards membership in WTO The 4th working group meeting has been held on March 2 & 3 in Geneva, to accelerate accession process Lebanon is expected to accede to the WTO by the end of '06 Lebanese authorities are finalizing the legislative reform agenda for accession EU-MED Lebanon is now committed to the European Neighborhood Policy The Association Agreement will inter fully into effect on April 1 st 06 after its ratification of all EU members A National Indicative Program (NIP) for covering a series of bilateral activities between the EU and Lebanon signed in Nov 05 FOSTERING GROWTH THROUGH TRADE LIBERALIZATION Improve Export Conformity assessment technical center and national quality one-stop center expected to be set up in 06. GoL will equip labs to permit them to get international accreditation GoL passed a law in February 2005 calling for the establishment of a National Accreditation Board to regulate labs & permit the recognition of Lebanese laboratories by European & international bodies.

14 DIALOGUE WITH THE PRIVATE SECTOR ISSUEPROPOSALMEASURES TAKEN SOLVING ISSUES FACED BY PRIVATE SECTOR  Identify Major Concerns of the Private Sector  Propose solutions in coordination with private sector participants  In MOF, more than 50 measures to reduce impediments to business sectors are being implemented, including revision of laws, decrees and procedures IMPROVING BUSINESS CLIMATE IN LEBANON  Expedite the process of creation of businesses  Improve investment climate  MOET initiates with IFC and EU on improving business climate  BADER initiative to promote entrepreneurship spirit for the youth MODERNIZING LAWS AND REGULATIONS ON BUSINESS  Revise Laws, decrees and procedures related to business activities  Mapping of all the impediments to economic activities  Creation of joint committee to solve these impediments on fast track DETAILS OF SELECT INITIATIVES ILLUSTRATIVE

15 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Social sector reform - Fiscal adjustment and structural fiscal reforms - Prudent monetary policy and financial sector reform III. Medium-term framework and international support

16 PRIVATIZATION PROGRAM AND ASSET MANAGEMENT  Two new GSM companies expected to take place at end- September 2006  Privatizing the fixed line (Liban Telecom) is expected by mid  Other plans include the sale of BDL’s shares of MEA and Intra (which includes Casino du Liban) by 2008  Optimizing public assets management in all sectors, including transportation sector (ports, airports), and services such water and hospitals Improving efficiency in delivery of services, reducing cost, improving competitiveness, and fostering growth Telecom (Fixed) Telecom (Fixed) Telecom (Mobile) N/A EDL Water Airport MEA Ports N/A Progress Along Privatization Steps (end 2005) Not startedCompleted Sector Strategy Privatization Strategy Sector Laws Regulatory Authority Regulatory Decree Licensing Corporatization Privatization

17 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Prudent monetary policy and financial sector reform - Social sector reform - Fiscal adjustment and structural fiscal reforms III. Medium-term framework and international support

18 MONETARY AND EXCHANGE RATE POLICIES  Maintaining macroeconomic stability through a proper monetary and exchange rate policy  Focusing monetary policy on price stability using short-term monetary instruments  Reducing interest rates through a narrowing of the spreads following an improvement in the level of confidence and the expected international financial assistance  Maintaining a stable exchange rate policy and improving competitiveness through structural reforms included in the reform program  Maintaining a sound and profitable banking sector with possible voluntary contribution of banks to the reform efforts  Selling BDL's shares in the Middle East Airlines (MEA), and Intra which includes Casino du Liban over the next three years [by end-2006?], which will strengthen the financial position of BDL Monetary & exchange rate policy aims at maintaining price stability, facilitating private sector credit & maintaining a sound banking system

19 CAPITAL MARKET DEVELOPMENT Area Reform Measures Undertaken by Government of Lebanon Article 201 of By-laws of the BSE  Eliminate commission fees paid on securities transactions since September 2004  Various workshops on themes of interest to MOF & market participants  Establish “Capital Markets Advisory Team"  Various workshops on themes of interest to MOF & market participants  Establish “Capital Markets Advisory Team" Enhancing Dialogue with Market Participants  Approved listing of sovereign Eurobonds on BSE, March 2004  BSE involved in public debt transactions, September 2004  Since August 2004, listed every Eurobond issued by Republic on BSE  Approved listing of sovereign Eurobonds on BSE, March 2004  BSE involved in public debt transactions, September 2004  Since August 2004, listed every Eurobond issued by Republic on BSE  A decree was signed to allow remote trading  BSE is creating a new website and will be listing real time market prices for all traded instruments on its website  A decree was signed to allow remote trading  BSE is creating a new website and will be listing real time market prices for all traded instruments on its website Listing of Republic’s Eurobonds on Beirut Stock Exchange Remote Trading And Accessibility to Information Remote Trading And Accessibility to Information Tax Incentive  Continue to offer a tax incentive for companies listing on the BSE, by reducing the dividend tax from 10 % to 5 % MAJOR REFORMS UNDERWAY

20 CAPITAL MARKET DEVELOPMENT CAPITAL MARKET DEVELOPMENT (cont’d.) Area Reform Measures Undertaken by Government of Lebanon Development of Market Supervision & Regulation  Received technical assistance from FIRST Initiative to assess market & existing legislative framework & make recommendations on appropriate regulations  Capital Market Draft Law has been approved by the Council of Ministers submitted to Parliament  Received technical assistance from FIRST Initiative to assess market & existing legislative framework & make recommendations on appropriate regulations  Capital Market Draft Law has been approved by the Council of Ministers submitted to Parliament  Enacted: Securitization of assets & Investments Funds Laws (enacted in December 2005)  In-Progress: Dematerialization of Securities Law (since 2002), the Securities Lending Law (since 2003) and the Insider Trading Law (since 2005)  Enacted: Securitization of assets & Investments Funds Laws (enacted in December 2005)  In-Progress: Dematerialization of Securities Law (since 2002), the Securities Lending Law (since 2003) and the Insider Trading Law (since 2005) Enactment of Financial Legislation  Develop secondary market liquidity by introducing longer maturity instruments with a low frequency of auctions. (e.g. The 5-year T-bills)  Establish a DVP system for the LBP market starting with the new 5-year t-bill issue  Increase trading hours at the BSE  Develop secondary market liquidity by introducing longer maturity instruments with a low frequency of auctions. (e.g. The 5-year T-bills)  Establish a DVP system for the LBP market starting with the new 5-year t-bill issue  Increase trading hours at the BSE Develop Secondary Market Liquidity  Establishing a specialized courts to deal with matters related to the capital markets and will staff these courts with judges who have the right expertise Establishing a Specialized Court MAJOR REFORMS UNDERWAY

21 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Prudent monetary policy and financial sector reform - Social sector reform - Fiscal adjustment and structural fiscal reforms III. Medium-term framework and international support

22 SOCIAL SECTOR REFORM PROGRAM Global Objectives Commitment to achieve the MDG’s Commitment to achieve the MDG’s Increase efficiency of social spending Increase efficiency of social spending Improve the targeting system Improve the targeting system Strengthen Social Safety nets Strengthen Social Safety nets Minimize regional disparities Minimize regional disparities Mainly in the areas of poverty eradication, improving education and Health indicators While maintaining the same level of spending, considered as sufficient in international and regional norms, reallocate resources to have a better yield. By improving service delivery and minimize the leakages given the current targeting mechanisms Designing and strengthening social safety nets that would offset any potential impact of economic and fiscal reform upon the poor By re- channeling funds into disadvantaged areas

23 SOCIAL STRATEGY: GLOBAL MEASURES Designing a comprehensive social strategy Designing Sector strategies Improving statistics and information The foundation of A Ministerial Committee that have as members the different Ministries involved in the social sectors with the following objectives: Design the sector strategies Implementation of strategies Follow up and monitoring The sector strategies will be designed within the framework of the comprehensive social strategy and will target : Improving Health indicators Improving Education Indicators Rationalizing cost Improve the production of statistics on the living conditions of the households and on other macro-economic issues, by pressing ahead with the following Finalize the multi-purpose survey Empower the statistical capacity of Ministries concerned with the social sector Implement the statistical master plan.

24  Establishing an Inter-Ministerial Committee for Social Development Policy, comprising the ministries of social affairs, health, and education to design, coordinate, monitor the implementation of the social strategy, and reduce overlap in the provision of social services across ministries - (by 2006)  Preparing a comprehensive medium-term social strategy to be finalized (by mid- 2006)  Reforming existing social safety nets and possibly piloting new safety net programs and possibly a social pension (as part of the pension reform)  Introducing short-term pilot programs targeting the poor (students, poor senior citizens, poor households headed by women)  Piloting also the introduction of a non-contributory social pension for poor elderly (in 2008) as part of the pension reform program.  Assessing the incidence of the existing subsidies, such as wheat, sugar, and tobacco, and consider alternative income support if warranted, (by end-2006)  Reducing cost, improving efficiency and quality of health and education services The aim is to redirect expenditures in social sectors to better target lower income groups and disadvantaged areas without increasing cost IMPROVE SOCIAL POLICY MAKING PRELIMINARY

25  Integrating the three existing systems into one modern scheme (End of Service Indemnity-NSSF, Army scheme, and Civil Servants scheme)  Relieve fiscal burdens in terms of reducing contingent liabilities  Promote equity among contributors, given that current operating systems having different eligibility criteria and different pension benefits  Provide social protection for a wider segment of population, as current systems cover limited segment of population  Pave the way for a more flexible labor market as the private sector scheme restricts labor mobility Pension reformSocial Safety Nets Increase efficiency in Health & Education  Strengthening existing safety nets and creating new ones  Marginalized groups -orphans, women-headed households, handicapped, and ex-detainees  Micro-credits  Community development initiatives  Public Works in disadvantaged areas (improve infrastructure and generate employment)  Better targeting mechanisms and eligibility criteria  Undertake analysis of incidence of subsidies, & consider alternative programs  Revising the cost and reallocating resources  Insure affordability  Improve quality  Increase outreach  Improve the social return of government expenditure on major social services (health, education and social affairs)  Achieve universal coverage of basic health and education services … WITHIN A COMPREHENSIVE SOCIAL STRATEGY SOCIAL SECTOR REFORM PROGRAM PRELIMINARY

26 Ministry of Social Affairs Social Development Centers Non-governmental education, targeting: Elderly Orphans Delinquents Disabled Ministries of Finance and Economy Producer subsidy of wheat, tobacco and sugar beat Subsidy of contributions to the NSSF for some specific groups (taxi drivers, Mayors,..) Ex-detainees Fuel Subsidy during winter-time Existing Social Safety Nets in Lebanon Ministry of Health Discounts on Medications Waive co-hospital fee for poor patients Ministry of Displaced Grants for housing for the displaced Other socio-economic assistance for displaced Other Ministries Social allowances Social Funds (ESFD and CDP) Community development SME support Employment generation SOCIAL SECTOR REFORM PROGRAM In addition to other informal subsidy schemes including transfers, family networks, charity organizations and others

27  Alleviate poverty  Increase efficiency of spending  Better targeting mechanisms based on means-tested  Minimize regional disparities Social Safety Nets reform SOCIAL SECTOR REFORM PROGRAM  Inefficient targeting mechanism and weak service delivery  Leakages to non-poor  Limited coverage  Lack of data and statistics on the localization and profile of the poor  Overlapping of services among the different Ministries and agencies Problems with current system Reformed System Strengthening existing social safety nets Introducing new Social Safety nets * * New safety nets will include: cash transfers to selected segments (poor senior citizens, poor female-headed households,..), in-kind transfers to improve education and health indicators for poor families, small scale development projects, and others.

28 IMPROVE SOCIAL CONDITIONS THROUGH TARGETED PROGRAMS

29  Promote equity among contributors  Relieve fiscal burdens in terms of reducing contingent liabilities  Provide social protection for a wider segment of population  Pave the way for a more flexible labor market PENSION REFORM PROGRAM  Inequity of benefits among and within the systems, mainly in terms of:  Contribution rates  Income replacement rates  Accrued rate  High fiscal cost  Limited coverage of social protection  Questionable financial sustainability  Restrict labor mobility Current System Reformed System Integrating the three existing systems into one modern scheme Expected applicatio n in 2008

30 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Prudent monetary policy and financial sector reform - Social sector reform - Fiscal adjustment and structural fiscal reforms III. Medium-term framework and international support

31 PERIOD OF RISING DEFICITS STRONG ADJUSTMENT MEDIUM TERM FISCAL BALANCE GOVERNMENT MEDIUM TERM TARGETS GOVERNMENT MEDIUM TERM TARGETS OVERALL IMPROVEMENT IN FISCAL BALANCES -10%/GDP -19% of GDP 5%/GDP -10%/GDP 8% of GDP -3 % of GDP Evolution of Primary Balance and Budget Deficit

32 DOMESTIC ADJUSTMENT EFFORTS LEAD TO DECLINING DEBT RATIO IN MEDIUM TERM But WITHOUT INTERNATAION SUPPORT THIS WOULD NOT BE SUSTAINED AS THE DEBT-TO-GDP RATIN WOULD REVERT BACK TO AN ASCENDING TREND BEYOUND PRE-PARIS IIPOST-PARIS II MEDIUM TERM TARGETS 138% 185% 50% 134%

33 FISCAL ADJUSTMENT – EXPENDITURE MEASURES Rationalizing current expenditures through: Wage bill / GDP will decrease by 1.5% by 2010  Containing the wage bill in MT by limited hiring, freezing real wages & & reducing overstaffing => Wage bill / GDP will decrease by 1.5% by 2010  Minimizing transfers to public entities and revisiting spending patterns  Reforming public spending and reducing waste and redundancies  Increasing working hours in public sector and improving productivity Rationalizing current expenditures through: Wage bill / GDP will decrease by 1.5% by 2010  Containing the wage bill in MT by limited hiring, freezing real wages & & reducing overstaffing => Wage bill / GDP will decrease by 1.5% by 2010  Minimizing transfers to public entities and revisiting spending patterns  Reforming public spending and reducing waste and redundancies  Increasing working hours in public sector and improving productivity Providing for adequate public investment through:  Slightly increasing capital expenditures over to invest in some important infrastructure projects & provide for adequate maintenance  Reducing cost of public investment through participation of private sector in public investment and increasing share of foreign-financed projects Providing for adequate public investment through:  Slightly increasing capital expenditures over to invest in some important infrastructure projects & provide for adequate maintenance  Reducing cost of public investment through participation of private sector in public investment and increasing share of foreign-financed projects As a result, expenditures / GDP will decrease from 30% by end 2005 to 26% by 2010

34 Expenditure Measures – Reform of EDL Transformation Strategy:  Adopt long-term sector plan  Entrust auditing of EDL financial statements to external auditor Supporting Enablers:  Appoint new board of directors for EDL  Establish Electricity Regulatory Authority, and design its bylaws  Introduce potentially necessary amendments to Law 462 Implementation:  Corporatize EDL  Design new bylaws for EDL  Unbundle generation, transmission and distribution functions  Complete the establishment of a National Control Center Sep 06 Jan 07 Jun 06 Dec 06 Mar 07 Sep 06 Mar 08 Restructuring Initiatives Timing PRELIMINARY Long Term Initiatives Timing Inputs:  Secure supply of liquefied natural gas to Zahrani Network:  Complete 220 KV network Dec 06 (Decision) Jun 07

35 Expenditure Measures – Reform of EDL (cont’d.) Inputs:  Modify restrictive oil specifications based on 2003 study  Negotiate additional bilateral contracts for fuel oil and gas oil to reduce high premiums Loss Reduction:  Install remote meters  Obtain support from security forces and the justice department to reduce illegal network connections  Obtain support from security forces and the justice department to increase the bill collection rate Pricing:  Revise tariff structure  Study lowering connection and installation costs to make legal connectivity more affordable to low-income households => Savings of [2-3] % of GDP - This is crucial for reducing expenditures and achieving a sustainable fiscal position Jun 06 Ongoing Mar 07 Short Term Initiatives Timing PRELIMINARY

36 STRUCTURAL EXPENDITURE REFORMS Transparency Establishing a medium term expenditure framework '06 Improving budget coverage (CDR, EDL, etc.) 2006 Solving the issue of appropriations and carryovers, complementary period and treasury advances Adopting a Fiscal Accountability Act Implementing Treasury Single Account 2006 Adopting new Public Accounting Law 2006 New Public Procurement Law 2007 Integrating the three systems into one modern fully-funded (FF-DC) scheme by (2008) while preserving the acquired rights Reforming Public pension system Enacting modern debt management law (2006) Setting up a modern debt management office ( ) Improving quality of financial reporting (06-07) Establishing a Higher Council for Debt Management As a result, public expenditure management will be greatly enhanced with more accountability and transparency AccountabilityPensionDebt Mgt

37 GOVERNMENT MEDIUM TERM TARGETS GOVERNMENT MEDIUM TERM TARGETS EXPENDITURE REDUCING MEASURES WAGE BILL REDUCTION (% of GDP)CUT DOWN TRANSFERS TO PUBLIC ENTITIES (incl. NSSF) PRESERVE CAPITAL SPENDINGLIMIT TRANSFERS TO EDL 9.5%/GDP 7.9%/GDP 1.70 %/GDP 1.03 %/GDP 2%/GDP 3%/GDP

38 EVOLUTION OF PUBLIC EXPENDITURES IN THE MEDIUM TERM Primary Expenditures Reduction in the Next 5 Years ( )

39 FISCAL ADJUSTMENT – REVENUE MEASURES Revenues measures As a result, revenues / GDP will increase from 22% by end 2005 to 24% by 2010 – taking into consideration revenue loss due to privatization of telecom sector  Raising the VAT to 15 percent either in one step (July 2006) or in two steps (July 2006 and beginning 2008) depending on potential savings on EDL. A 15 percent VAT would generate about 2.5 percent of GDP in additional revenue  Aligning domestic and international fuel prices by lifting cap on gasoline price and raising gradually gasoline excise tax on quarterly basis starting July 2006 until reaching pre- cap rate by end  Introducing a global income tax (GIT) by , which would generate about 1 percent of GDP of additional revenue over three years,  Raising tax on interest income from 5% to 8% in July 2006, generating about percent of GDP in additional revenues  Settling seashore violations, generating LL 135 billion in penalties in 2006 and about LL 45 billion a year in rent

40 GOVERNMENT MEDIUM TERM TARGETS GOVERNMENT MEDIUM TERM TARGETS REVENUE ENHANCEMENT TO COMPLIMENT EXPENDITURE CUTS % of GDP INTRODUCTION OF VAT INTRODUCTION 5% TAX ON INTEREST INCREMENTAL TAX RATE CHANGES, GIT & TELECOM PRIVATIZATION LOSSES 15%/GDP 20%/GDP

41 REVENUE MEASURES- STRUCTURAL REFORMS Structural Revenues Reforms As a result, more transparency and more efficiency in revenue collection Expanding the Large Taxpayer Office (LTO) and Creation of MTO (Medium Taxpayer Office) ( ) Modernizing Tax offices in Beirut and Mount- Lebanon (2006) Modernizing tax services including electronic taxation (2006) Modernizing business activity code, and ensuring accurate recording of taxpayers (2006) Unification of overall tax procedures under a unique ‘tax procedure code’, a prerequisite for the GIT (2006) Reforming property tax administration ( ) Establishment of an Integrated Tax Administration ( )

42 GOVERNANCE REFORM: MAJOR PILLAR IN THE PROGRAM  Auditing public finances and government accounts since 1990 by an international reputable auditing firms—work should begin in (Q )  Submit to Parliament a revised and modern public procurement law for more transparency (Q2 – 2006)  Reduce waste and corruption at the agency level starting with one or two ministries (or agencies) as pilot cases to be extended in time to other government agencies (2006)  Enhance the role of the Court of Accounts as an ex-post monitoring agency to ensure that public spending is in line with budgetary allocations (End 2006)  Continue the streamlining and automation of work procedures to reduce the citizen interface with public sector employees and reduce the risk of corruption (2007)  Adopting transparent, merit-based, and proper procedures for public sector recruitment to isolate recruitment from political considerations (started) Governance

43 Presentation Overview I.Objective of the reform program II.Pillars of the reform program - Growth-enhancing reform measures - Privatization program - Prudent monetary policy and financial sector reform - Social sector reform - Fiscal adjustment and structural fiscal reforms III. Medium-term framework and international support

44 We Are Aiming for a More Prosperous Future for Lebanon and International Support Can Play a Key Role Higher levels of economic growth More than ever, the Lebanese are determined to resolve the debt and fiscal challenge, triggering a virtuous cycle leading to economic and social stability Attraction of larger investments Renewed confidence in the Lebanese economy Lower fiscal deficits More jobs Improved overall risk profile Economic & Social Stability

45 GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS GDP per Capita (In million LBP) Source: Ministry of Finance Nominal GDP (In Billion LBP) Projected Macroeconomic Indicators ( ) Deficit (As % of GDP) Public Debt (As % of GDP)

46 GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Source: Ministry of Finance Projected Fiscal Deficit ( ) Decreasing Deficit (As % of GDP) Rising Deficit (As % of GDP) With ReformNo Reform

47 GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Source: Ministry of Finance Projected Public debt ( ) Public Debt (As % of GDP) With ReformNo Reform Public Debt (As % of GDP)

48 GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Source: Ministry of Finance Projected Growth Rates ( ) Real Growth Rates (In %) Real Growth Rates (In %) With ReformNo Reform

49 EVOLUTION OF GROSS PUBLIC DEBT WITH AND WITHOUT REFORMS GVT REFORM PGM

50 TOWARDS HIGHER GDP GROWTH TOWARDS HIGHER GDP GROWTH STABLE GROWTH RATE IN MEDIUM TERM ECONOMIC BOOM FOLLOWING END OF CIVIL WAR STAGNATION AMID RISING FISCAL CHALLENGES ECONOMIC REFORMS SPURS REBOUND MEDIUM TERM TARGETS 14% Nominal Growth -1% Nominal Growth 9% Nominal Growth 6-8% Nominal Growth

51 TIME LINE OF MEDIUM TERM REFORMS TIME LINE OF MEDIUM TERM REFORMS EXPENDITURE MEASURES STRUCTURAL & OTHER MEASURES REVENUE MEASURES RAISE VAT ( range 12%-15%) GASOLINE PRE-CAP LEVEL REVAMP PROPERTY & INHERITANCE TAX REVIEW SALARY & BENEFIT STRUCTURE IN PUBLIC ENTITIES REDUCE GASOLINE & COMMUNICATION SPENDING WASTE ELIMINATE CARRY-OVERS on CURRENT EXPENDITURES & TREASURY ADVANCES CONTAIN WAGE BILL BY REPLACING ONLY PARTIALLY RETIRED EMPLOYEES REDUCE OFFICIAL TRAVEL EXPENSES STAFF & MODERNISE TAX ROLL UNIT TREASURY SINGLE ACCOUNT GLOBAL INCOME TAX ELECTRONIC FILING SYSTEM for LTO VAT 15% RAISE TAX on INTEREST (7% or 8%) TAX PROCEDURE CODE SETTLE SEASHORE VIOLATION RAISE SLIGHTLY CAPITAL EXPENDITURES TO 3% of GDP & IMPROVE EFFICIENCY INCLUDE in BUDGET DONOR FINANCED CAPITAL SPENDING & EDL TRANSFERS LIMIT CDR ROLE to LARGE SCALE INVESTMENTS CLOSE FUND for DISPLACED & COUNCIL of the SOUTH ADOPT PERFORMANCE BUDGETING TARGET for FINANCIAL ACCOUNTABILITY LAW PRIVATIZING MOBILE OPERATORS PRIVATIZING FIXED LINE LAUNCH OF EDL PRIVATIZATION PROCESS EDL: CREATION of PRODUCTION & DISTRIBUTION COMPANY EDL: CREATION of ELECTRICITY REGULATORY AUTHORITY MEA & CASINO du LIBAN PRIVATIZATION REALIZATION of EURO-MED & FTA AGREEMENTS

52 INTERNATIONAL ASSISTANCE  A debt-to-GDP ratio of 138% remains too high by any standard  Public debt in Lebanon is sustainable if the debt-to-GDP ratio declines noticeably over time  While fiscal adjustment over the next 5 years is significant, this could not be sustained in LT  The Debt-to-GDP ratio, after falling to about 138% in 2010, would increase to 152% by 2020 without international support International support is crucial for a steady decline in the debt ratio over LT  Different forms of international support: grants, concessional loans, loans guarantees, etc,…  Grants would have the greatest impact on debt stock, while highly concessional loans would affect the debt ratio through a reduction in debt service  In addition, reform and International financial support would help boost growth  For every 1% increase in the growth rate, the debt-to-GDP ratio would decline by 1.7% a year


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