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

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

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: Where Would Lebanon Be in 2010 With No Reforms? 1 Monetary Pressure on the exchange rate Weakened banking sector, due to increased exposure to sovereign risk 2 Real growth rates Starting this year, real growth will stagnate at 1% similar to 2005 level, leading to increased unemployment 3 Interest rates With difficult financing conditions, interest rates will rise dramatically to reach, on average, 13% on LL & 11% on FX by 2008 4 Debt Service Debt Service alone will absorb 100% of total government revenues by 2010 5 Fiscal Deficit 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 6 Gross Public Debt 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)

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

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 increasing 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

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

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

PILLARS OF THE ECONOMIC PROGRAM OF GOVERNMENT Economic Policy Growth-enhancing reforms, including developing financial markets and promoting good governance Privatization 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 Social sector reform Improve social indicators, strengthen social safety nets to protect the most vulnerable segments of the population and improve the social returns from social expenditures Fiscal Consolidation Fiscal adjustment that is aiming to reduce deficit and public debt to a sustainable level Monetary policy Maintaining price stability, facilitating credit to the private sector, and maintaining a sound banking system International Support International financial assistance to complement domestic adjustment efforts

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

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

IMPROVING BUSINESS ENVIRONMENT 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 2007-08 Expediting the clearance of imports, including by increasing further automation, and reducing the cost of export at the Port of Beirut (2006)

HELP THE PRIVATE SECTOR IN LEADING GROWTH Improving Investment Climate Support for SMEs 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 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

FOSTERING GROWTH THROUGH TRADE LIBERALIZATION 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 1st 06 after its ratification of all EU members A National Indicative Program (NIP) for 2005- 2006 covering a series of bilateral activities between the EU and Lebanon signed in Nov 05 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.

DIALOGUE WITH THE PRIVATE SECTOR ILLUSTRATIVE DETAILS OF SELECT INITIATIVES ISSUE PROPOSAL MEASURES 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

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

PRIVATIZATION PROGRAM AND ASSET MANAGEMENT Improving efficiency in delivery of services, reducing cost, improving competitiveness, and fostering growth Progress Along Privatization Steps (end 2005) Telecom (Fixed) Telecom (Mobile) EDL Water Airport MEA Ports 1 Sector Strategy Two new GSM companies expected to take place at end-September 2006 Privatizing the fixed line (Liban Telecom) is expected by mid-2007 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 2 Privatization Strategy 3 Sector Laws 4 Regulatory Authority 5 Regulatory Decree 6 Licensing 7 Corporatization N/A 8 Privatization N/A Not started Completed

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

MONETARY AND EXCHANGE RATE POLICIES Monetary & exchange rate policy aims at maintaining price stability, facilitating private sector credit & maintaining a sound banking system 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

CAPITAL MARKET DEVELOPMENT MAJOR REFORMS UNDERWAY 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 Enhancing Dialogue with Market Participants Various workshops on themes of interest to MOF & market participants Establish “Capital Markets Advisory Team" Listing of Republic’s Eurobonds on Beirut Stock Exchange 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 Remote Trading And Accessibility to Information 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 Tax Incentive Continue to offer a tax incentive for companies listing on the BSE, by reducing the dividend tax from 10 % to 5 %

CAPITAL MARKET DEVELOPMENT (cont’d.) MAJOR REFORMS UNDERWAY 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 Enactment of Financial Legislation 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) Develop Secondary Market Liquidity 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 Establishing a Specialized Court 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

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

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

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.

IMPROVE SOCIAL POLICY MAKING PRELIMINARY The aim is to redirect expenditures in social sectors to better target lower income groups and disadvantaged areas without increasing cost 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

Increase efficiency in Health & Education PRELIMINARY SOCIAL SECTOR REFORM PROGRAM Increase efficiency in Health & Education Pension reform Social Safety Nets 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 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

Ministries of Finance and Economy Social Funds (ESFD and CDP) SOCIAL SECTOR REFORM PROGRAM Existing Social Safety Nets in Lebanon 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 Ministry of Social Affairs Social Development Centers Non-governmental education, targeting: Elderly Orphans Delinquents Disabled Social Funds (ESFD and CDP) Community development SME support Employment generation Ministry of Displaced Grants for housing for the displaced Other socio-economic assistance for displaced Ministry of Health Discounts on Medications Waive co-hospital fee for poor patients As I already pointed out, given the fact that infrastructural foundations for further private sector development have been put in place, we have been able to shift priority on our economic policy. Reducing public sector role and its financing needs have become key goal of our new economic strategy. The current government has put its policy statement in a 5 – Year economic program, which sets a fiscal deficit target to 4.5% of GDP by 2003, stabilization of debt levels at 96% of GDP by 2003. This will allow for a decrease of real interest rates, which in turn will release substantial resources in our financial system to private sector financing. To that aim, we plan a number of policy measures both on revenue and expenditure side. We plan a wide-scale modernization of the tax system, which will entail tax rate increases, introduction of VAT and general income tax. We plan a review and reform of tax administration. We believe, we have enormous growth potential on the tax front, given that our tax rates are at extremely low levels. Privatization program should bring $4-5 billion by 2003. It will be discussed in greater detail later. We plan to use these resources entirely to repay our outstanding debt. On the expenditure side, we plan to freeze public sector wages and salaries, lower current expenditure through the reform of administration . We are also planning to enter a liability management progamme of the public debt. This forthcoming Eurobond issues aims at extending the average maturity and lowering the cost of our public debt. Other Ministries Social allowances In addition to other informal subsidy schemes including transfers, family networks, charity organizations and others

Social Safety Nets reform SOCIAL SECTOR REFORM PROGRAM Social Safety Nets reform Problems with current system Reformed System 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 Strengthening existing social safety nets Alleviate poverty Increase efficiency of spending Better targeting mechanisms based on means-tested Minimize regional disparities 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.

IMPROVE SOCIAL CONDITIONS THROUGH TARGETED PROGRAMS

Integrating the three existing systems into one modern scheme PENSION REFORM PROGRAM Expected application in 2008 Current System Reformed System 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 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 Integrating the three existing systems into one modern scheme

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

MEDIUM TERM FISCAL BALANCE PERIOD OF RISING DEFICITS GOVERNMENT MEDIUM TERM TARGETS OVERALL IMPROVEMENT IN FISCAL BALANCES Evolution of Primary Balance and Budget Deficit 1993 - 2010 MEDIUM TERM FISCAL BALANCE STRONG ADJUSTMENT Primary @ 8% of GDP Overall @ -3 % of GDP PERIOD OF RISING DEFICITS Primary @ 5%/GDP Overall @ -10%/GDP Primary @ -10%/GDP Overall @ -19% of GDP

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 2010. PRE-PARIS II POST-PARIS II MEDIUM TERM TARGETS 185% 138% 134% 50%

FISCAL ADJUSTMENT – EXPENDITURE MEASURES Rationalizing current expenditures through: 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 2005-2010 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

Expenditure Measures – Reform of EDL PRELIMINARY Restructuring Initiatives Timing Transformation Strategy: Adopt long-term sector plan Entrust auditing of EDL financial statements 2001-2005 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 Mar 08 Long Term Initiatives Timing Inputs: Secure supply of liquefied natural gas to Zahrani Network: Complete 220 KV network Dec 06 (Decision) Jun 07

Expenditure Measures – Reform of EDL (cont’d.) PRELIMINARY Short Term Initiatives Timing 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 Jun 06 Ongoing Mar 07 => Savings of [2-3] % of GDP - This is crucial for reducing expenditures and achieving a sustainable fiscal position

STRUCTURAL EXPENDITURE REFORMS Transparency Accountability Pension Debt Mgt 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 (2006-07) 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

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

EVOLUTION OF PUBLIC EXPENDITURES IN THE MEDIUM TERM Primary Expenditures Reduction in the Next 5 Years (2005 - 2010)

FISCAL ADJUSTMENT – REVENUE MEASURES Revenues measures 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-2008 Raising tax on interest income from 5% to 8% in July 2006, generating about 0.7- 0.8 percent of GDP in additional revenues Introducing a global income tax (GIT) by 2007-2008, which would generate about 1 percent of GDP of additional revenue over three years, 2007-09 Settling seashore violations, generating LL 135 billion in penalties in 2006 and about LL 45 billion a year in rent 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

INCREMENTAL TAX RATE CHANGES, GIT & TELECOM PRIVATIZATION LOSSES GOVERNMENT MEDIUM TERM TARGETS REVENUE ENHANCEMENT TO COMPLIMENT EXPENDITURE CUTS INCREMENTAL TAX RATE CHANGES, GIT & TELECOM PRIVATIZATION LOSSES INTRODUCTION OF VAT INTRODUCTION 5% TAX ON INTEREST 2010 TARGET @ 24% of GDP 20%/GDP 15%/GDP

Structural Revenues Reforms REVENUE MEASURES- STRUCTURAL REFORMS Structural Revenues Reforms Expanding the Large Taxpayer Office (LTO) and Creation of MTO (Medium Taxpayer Office) (2006-07) 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) Reforming property tax administration (2006-07) Establishment of an Integrated Tax Administration (2007-08) Unification of overall tax procedures under a unique ‘tax procedure code’, a prerequisite for the GIT (2006) As a result, more transparency and more efficiency in revenue collection

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 (Q3- 2006) 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)

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

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

GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Projected Macroeconomic Indicators (2005-2010) Nominal GDP (In Billion LBP) Deficit (As % of GDP) Public Debt (As % of GDP) GDP per Capita (In million LBP) Source: Ministry of Finance

GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Projected Fiscal Deficit (2005-2010) With Reform No Reform Decreasing Deficit (As % of GDP) Rising Deficit (As % of GDP) Source: Ministry of Finance

GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Projected Public debt (2005-2010) With Reform No Reform Public Debt (As % of GDP) Public Debt (As % of GDP) Source: Ministry of Finance

GOVERNMENT’S TURNAROUND STRATEGY FOR LEBANON IN THE NEXT FIVE YEARS Projected Growth Rates (2005-2010) With Reform No Reform Real Growth Rates (In %) Real Growth Rates (In %) Source: Ministry of Finance

EVOLUTION OF GROSS PUBLIC DEBT WITH AND WITHOUT REFORMS (% of GDP) 213.7% 136.6% 90.00% 110.00% 130.00% 150.00% 170.00% 190.00% 210.00% 230.00% 2004 2005 2006 2007 2008 2009 2010 BASELINE (No Fiscal + Higher i rates) GVT REFORM PGM

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

TIME LINE OF MEDIUM TERM REFORMS 2005-2010 EXPENDITURE MEASURES TREASURY SINGLE ACCOUNT ELIMINATE CARRY-OVERS on CURRENT EXPENDITURES & TREASURY ADVANCES RAISE SLIGHTLY CAPITAL EXPENDITURES TO 3% of GDP & IMPROVE EFFICIENCY REDUCE GASOLINE & COMMUNICATION SPENDING WASTE CONTAIN WAGE BILL BY REPLACING ONLY PARTIALLY RETIRED EMPLOYEES ADOPT PERFORMANCE BUDGETING REDUCE OFFICIAL TRAVEL EXPENSES CLOSE FUND for DISPLACED & COUNCIL of the SOUTH REVIEW SALARY & BENEFIT STRUCTURE IN PUBLIC ENTITIES TARGET for FINANCIAL ACCOUNTABILITY LAW INCLUDE in BUDGET DONOR FINANCED CAPITAL SPENDING & EDL TRANSFERS LIMIT CDR ROLE to LARGE SCALE INVESTMENTS 2006 2007 2008 2009 2010 REVENUE MEASURES RAISE VAT ( range 12%-15%) GLOBAL INCOME TAX Arrive @ VAT 15% RAISE TAX on INTEREST (7% or 8%) TAX PROCEDURE CODE ELECTRONIC FILING SYSTEM for LTO GASOLINE EXCISE @ PRE-CAP LEVEL STAFF & MODERNISE TAX ROLL UNIT REVAMP PROPERTY & INHERITANCE TAX SETTLE SEASHORE VIOLATION 2006 2007 2008 2009 2010 PRIVATIZING MOBILE OPERATORS PRIVATIZING FIXED LINE MEA & CASINO du LIBAN PRIVATIZATION REALIZATION of EURO-MED & FTA AGREEMENTS STRUCTURAL & OTHER MEASURES EDL: CREATION of PRODUCTION & DISTRIBUTION COMPANY LAUNCH OF EDL PRIVATIZATION PROCESS EDL: CREATION of ELECTRICITY REGULATORY AUTHORITY

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