|Paris III aid funds: signed, sealed and still delayed
|Beirut is still negotiating conditions attached to pledges made by donor countries
Last week the Lebanese government met a key condition for the release of aid pledged at the Paris III conference when it signed an agreement with the International Monetary Fund's Post Conflict Assistance Fund to oversee state spending.
But the funds may still be slow in coming because Prime Minister Fouad Siniora's administration is still negotiating with donors to alter the terms attached to much of the aid, Siniora's economic adviser says.
"The role of IMF is crucial to the development of the Paris III project because most - in fact, all - major countries requested that the IMF approve any program to be submitted by government," Mazen Hanna said Tuesday at the second of three Paris III panels being held at the American University of Beirut (AUB). "Lebanon got a lot of project finance pledges, which we are trying to convert into budgetary support or at least to shift loans into expenditures the government would have to make."
Lebanon received pledges for $2.4 billion in loans and $198 million in grants for project financing in January, alongside pledges of $1 billion in grants and $1.4 billion in loans for direct budgetary support.
Increasing the portion going to budgetary support would free up money earmarked for specific reconstruction projects or the support of economic reforms, and allow it to be used to cover non-discretionary spending, such as government salaries or servicing the debt.
Over 70 percent of government expenditures in 2006 went to pay interest on the debt (41 percent) or public-sector wages (31 percent), Hanna said.
Lebanon's fiscal crisis in 2006 could not be resolved by domestic efforts alone, he said, and required an international assistance package. "During the makeup of our economic policy international assistance was always embedded in our thinking, so we chose reforms that would attract donors, not make them shy away from pledging."
Neither of the other two panelists - economists Ghassan Diba of the Lebanese American University and Jad Chaban of AUB - disputed the extent of the debt crisis in 2006, but Diba did criticize the reliance of successive governments on neo-liberal economic models.
"The urgency of economic reforms is difficult for any economic policymakers to contest. But I don't think that reforms [should be imposed] irrespective of their social and economic consequences," Diba said. "In Lebanon we still follow the 'Washington concensus' and there is an impression here that it is only viable development model for Lebanon. This plan is a blueprint for the Washington concensus, but it is not always the case that privatization and total state deregulation creates economic growth. The government has a role in maintaining equity in the economy."
Tax policy is the main problem with the government's reform program, charged Diba, since it does not propose increasing the tax on profits. He proposed raising the corporate tax rate from 15 to 25 percent percent, which is still "well below the international average." While Diba applauded increasing the tax on interest from 5 to 7 percent, he proposed an even more aggressive step: "Why not 10 percent?"
Similarly, Diba called the VAT one of Lebanon's most successful reforms, but encouraged the government to abolish the flat rate and impose different levies on various commodities to minimize the impact on the poor.
Diba said the government's plan to abandon the gas excise tax was also "regressive".
Even advocates of structural adjustment note the distortions of Lebanese taxes. Ex-IMF economist Mounir Rached said the ratios of income tax revenues to both total taxes and to GDP are "much lower than the norm."
He agreed with Diba that "internationalization is not the only solution" to Lebanon's debt, though he understands "why the US and King Abdullah want to support Lebanon."
"I am skeptical about the government's willingness to reform the economy, because they have been talking about the same things since ... 1992," Rached told The Daily Star. "Lebanon has $2 billion still sitting around from Paris II, so this conference was mostly political. It takes pressure off the government because it shows progress, but they have still not made the reforms promised for Paris II."
The Daily Star