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French Version

Azour steps up appeal for international aid

Debt crunch could produce 'social and political unrest,' minister warns world bank/imf meeting

Lebanon's finance minister warned on Monday of social and political unrest if international financial assistance is not introduced to help the government cut the size of the public debt.

"In the absence of international support, further cuts in spending or more increases in taxes would be necessary to reach sustainable debt levels - steps that would stifle economic activity and provoke social and political unrest," Jihad Azour said at a World Bank/International Monetary Fund meeting in Singapore.

The minister, who traveled with a delegation to Singapore to discuss aid options, also said the Israeli war on Lebanon has shrunk the economy, cut revenues and increased spending.

Azour said that without the support of the international community, Lebanon faces great economic and financial risks that could threaten social and political stability, radicalize the populace and jeopardizing Lebanon's democratic process.

Lebanon's Council for Development and Reconstruction estimated the cost of material damage at $3.6 billion, but indirect losses are believed to be much higher.

Azour earlier projected that the public debt would rise to $41 billion by the end of the year due to the unforeseen war.

He added that the government may be forced to rethink the draft economic and financial plan that was presented before the war and which called for wide-ranging reforms such as cutting spending, increasing taxes and privatizing state-owned companies.

"The very large improvement in public finance, which took place in the 12 months preceding the war, is expected to be reversed and the budgetary impact of the conflict will be substantial, estimated at $1.6 billion in 2006 alone, stemming from a sharp loss of revenue and large expenditure needs," Azour said.

He added that revenue had already declined by more than $300 million in the two months since the beginning of the war. By the end of the year, revenue was expected to come in at $900 million less than previous expectations owing to the contraction in economic activities and as a result of air and sea blockades which lasted about two months.

Azour said that current government spending will have to increase to pay for emergency relief and basic services such as healthcare, water and electricity. Additional money will be needed to bring back into the army a few thousand reservists as part of the government's commitment to deploy 15,000 troops in the South to help in the implementation of the UN Resolution 1701, Azour said.

"As for capital expenditures, they too are expected to rise to contribute to the rebuilding of infrastructures and productive capacity, although financial contributions from Lebanon's friends should go some way in helping the reconstruction process," he said.

Azour said that the debt-to-GDP ratio will likely increase from 175 percent in 2005 to more than 190 percent in 2006 and the fiscal outlook for the medium term is likely to remain difficult given the massive cost of rehabilitation and reconstruction, as well as the needs of the population that was badly affected by the war and which would stretch over a number of years.

"At the same time, the ability of the government to restore revenues will take some time," Azour said. "Unless generous external support is received soon, the debt could spiral out of control as a result of worsening primary surplus, higher interest rates associated with higher risk premium, and a slow down in GDP growth."

Azour also highlighted the high cost of reconstruction in Lebanon after the war.

"While it is too early to have a full and credible assessment of the economic and financial impact of the war, it is by all means substantial," he said. "The cost of reconstruction exceeds the capacity of any middle-income country, let alone a country that has been saddled with a very large public debt and a country that has just come out of a major setback associated with the assassination of former Prime Minister [Rafik] Hariri early last year which has left deep scars on the political landscape."

Azour added that in the next few weeks, the government will replace the draft reform plan promulgated before the war with a program of measures designed to spur recovery. The new moves will include reconstruction, as well as changes aimed at addressing the country's debt-sustainability problem and laying the foundations for sustained economic growth.

Beirut 19-09-2006
Osama Habib
The Daily Star

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