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French Version

World Bank : Delays to economic reform endangering ‘Paris II’ (Daily Star)

The World Bank has expressed deep concern about the delays in administrative and fiscal reforms in Lebanon, warning that “Paris II” will be in danger if no action is taken soon.

The report, which was carried by Saradar Weekly Monitor on Thursday, said Paris II did not translate into economic growth, adding that structural reform is the key to stimulating growth and restraining the debt dynamic in the medium and long term.

It added that Lebanon was not able to generate a substantial surplus in the first half of the year and is unlikely to meet its fiscal target for 2003. The government projected a deficit spending of 25 percent at the end of the year.

But most economists said a 25 percent deficit was too optimistic, adding that the government will end up with a deficit between 30 and 35 percent.

The World Bank warned that the positive effects of Paris II would evaporate without the implementation of credible steps on fiscal policy, debt management, financial sector development and privatization.

It stressed that the success of the privatization program remains the cornerstone for reducing the public debt and called for ensuring efficiency, competition and a rational tariff structure in the new entities, which would play a key role in long-term growth.

But privatization of state-owned assets is very unlikely as the division between President Emile Lahoud and Prime Minister Rafik Hariri still runs too deep. The government was hoping to generate more than $5 billion from the privatization of the telecommunications and electricity sectors in two years to reduce the $32 billion public debt.

Observers believe that the government may opt for securitizing the receipts of the cellular networks and the tobacco monopoly company Regie in the next few months.

The report said that most indicators converge to signal a continued slow GDP in the second quarter, as increased financial stability did not reduce interest rates enough to stimulate domestic investments or to increase foreign direct investment.

“Despite the decline in interest rates on two-year Treasury bills from 16.34 percent to 9.41 percent, and the decrease in the average yield of eurobonds from 13.6 percent to 5.7 percent during the October to June period, interest rates on deposits and loans even widened,” the report said.

The World Bank attributed the slow decline in lending to the perceived sovereign risk premiums that remain substantial as reflected by the yields on three-year certificates of deposits that reached 13.32 percent.

The report added that the decline in Eurobond yields did not translate into a decrease in the borrowing cost of the government in foreign currency, since there were no issuances or renewals. The budget deficit in the first eight months of this year fell to only 38 percent from 39 percent in the same period of last year.

Among the positive indications of Paris II, the World Bank said, were higher foreign currency reserves at the Central Bank, massive exchange of dollars into Lebanese pounds, lower dollarization rates and positive inflows of private funds.

Beirut 29-09-2003
Osama Habib
The Daily Star

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