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French Version

Corm : Only producers can save economy (Daily Star)

Corm : Only producers can save economy - former finance minister says sell-offs not sufficient
‘Some people were hoping that Lebanon would become one day the capital market of the Arab world. This is a crazy dream’

Privatization, securitization, taxes and cutting spending are among the solutions the government is seeking to tackle the high public debt. But will these measures be sufficient to regain the health of the state’s finances? “Definitely no,” George Corm, former finance minister, answered.

Corm, who served under former Prime Minister Salim Hoss from 1988 to 2000, believes the key to the reduction of public debt and stimulating the economy lies in one important factor: production. “Production, production and production is what we need right now,” Corm told The Daily Star.

He refuted the long-standing argument that Lebanon should be the financial hub of the Middle East. “Let’s face it. Lebanon lost this position after the war as most Arab states have strong banking and financial centers, especially Dubai.”

Lebanon was considered the financial center of the Middle East before the war but this position was gradually lost to other states that liberalized their economies.

Tourism is also one of the main pillars of the economy, but this sector represents only 12 percent of the country’s gross domestic product.

Prime Minister Rafik Hariri, who has been accused by some critics of causing the public debt, is struggling to restore the glorious image of Lebanon in the region by promoting both the banking sector and tourism. “Some people were hoping that Lebanon would become one day the capital market of the Arab word. This is a crazy dream,” Corm said.

He added that opening a few restaurants and hotels would not solve the problems. “The economy is currently depressed because most of the money is frozen in banks and real estate,” the former minister said. He added that no one would be interested in investing in an industrial project while interest rates on bank deposits are still high. “Who wants to invest in a project if an investor can get 12 percent on his deposit in the bank?”

Interest rates on deposits and Treasury bills fell by 600 basis points after Hariri secured a $4.4 billion soft loan pledge from the donor states that met in Paris in November last year.

But despite this drop, most economists say that interest rates are still much higher than most countries. Corm said these economic realities penalize producers. He added that very few countries offer high returns on deposits.

Bank deposits in Lebanon are almost 250 percent higher than the country’s gross domestic product. Corm added that this ratio is one of the highest in the world.

He also lamented the fact that so many highly skilled youths have emigrated to other countries to seek their fortune. “We have lots of universities but not too many research and development centers or laboratories,” Corm said.

Recalling his days in the government, Corm said that he tried to persuade investors and businessmen to pay more attention to the productive sectors of the economy. He admitted that his attempts did not pay off because of the general atmosphere in the country.

Corm said that he supports subsidizing industrial innovation, much as Taiwan and Hong Kong do. “Our tax system is penalizing producers while sparing those who have deposits in the banks,” Corm said, adding that only recently the government agreed to impose a 5 percent tax on interest from deposits. He added that some local industries managed to find new markets outside the country, such as wine.

But most industrialists complain that the high cost of production, which comes from high prices for electricity, labor, land and fuel oil, is hindering growth. Industrialists also say that smuggling and cheap imported goods are taking their toll on industry.

Commenting on the efforts to securitize the Regie’s revenues (the state-owned tobacco monopoly) and cellular networks, Corm said this step will negatively affect the budget deficit. “Full securitization of the revenues means that the government will not get any more income from certain sectors.”

But Corm said that it would be better to securitize part of the revenues. “The rational solution is to securitize the additional revenues of the cellular networks after the government canceled the build-operate-transfer agreement with Cellis and LibanCell.” He added that this step will bring a substantial amount of money to the Treasury.

Corm said that all the proceeds from securitization should go directly to lowering the public debt. He added that partial securitization is now better than privatization because the market for privatization is not very encouraging. Asked about the impact of “Paris II” conference, Corm said that the most positive thing about this step is that we do not have foreign creditors, as Brazil and Argentina do.

He added that Paris II only gave Lebanon breathing space. “Dollar interest rates in Lebanon are still too high,” Corm said, adding that Paris II did not address the real structural issues.

He said that reducing the size of the public sector or laying off hundreds of civil servants will not cut spending by a large amount. “Reducing debt servicing by only 1 percent can save more money than throwing out a few civil servants,” Corm said.

He added that the banks could have reduced the interest rates without the need to convene Paris II. “The crux of the problem is the debt servicing. We cannot continue with the same monetary system,” Corm said.

He added that bankers refused to cut interest rates when he was a minister, because they feared that such a move would affect profitability. “Banks have no interest in stopping lending to the state, because 30 percent of their assets are in public debt.” Corm said he wondered how long this game could continue.

Beirut 15-09-2003
Osama Habib
The Daily Star

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