joe Faddoul speech
Challenges facing Lebanon’s Economy
Ladies and Gentlemen,
Dear Friends,
Dear Friends,
The organizers of this nice event distributed this afternoon session in two:
This session is dedicated to the threats and difficulties facing Lebanon Economy and one of the distinguished speakers represents the Hotels and Tourism sector, who has been the most affected by the 2 last years events.
This session is dedicated to the threats and difficulties facing Lebanon Economy and one of the distinguished speakers represents the Hotels and Tourism sector, who has been the most affected by the 2 last years events.
While the following session is dedicated to Challenges and Opportunities and the speakers represent respectively Telecom, one of the most promising sectors, and Manufacturing, a sector who showed a remarkable resilience and is witnessing a surprising growth.
And yet, within the Threats and Difficulties lie a lot of opportunities if some simple measures were applied.
So let us review briefly the major Threats and Difficulties facing the Economy of Lebanon and explore the solutions and the possible opportunities lying underneath.
Many problems are plaguing our Economy, among others:
– A very low growth rate
– Underemployment, Elite expatriation
– High cost of credit, scarcity of finance etc…
– A very low growth rate
– Underemployment, Elite expatriation
– High cost of credit, scarcity of finance etc…
However the central problem remains the government budget deficit: The government spends more than he is able to collect. The deficit is financed by borrowing. The public debt stands now at more than 40 billion dollars i.e. roughly at 180% of GNP, one of the highest, if not the highest, worldwide figure.
A- Why is the budget deficit the central problem?
1- In order to raise finance, (this need is a result of the budget deficit) the State is obliged to offer to the banks financing him very attractive (i.e. very high) interest rates.
Those high interest rates result in two major consequences.
+ A great part of Banks deposits are lended to the State and consequently are no more available to finance the Economy or the Business community.
+ what remains available to finance the Economy is proposed at very high costs, and thus, contributes to lessen the competitiveness of the local firms.
Briefly, local firms are left with little financing possibilities at a very high cost.
2- Due to its financing needs the State is inclined to increase the fiscal pressure, to increase taxes. This tax pressure is now nearing its saturation point. If it reaches that point, it will negatively impact the growth rate, which is already at modest levels.
3- Another threat resulting from the State borrowing policy is that around 50% of banks resources are now in a way or another lended to the State either through Treasury Bonds or through deposits at the Central Bank.
In case, for any reason, there is a panic with massive withdrawals, the Central Bank is not in a position to reimburse the Banks and a catastrophic scenario is foreseeable: The krach of most of the local banks.
Public debt being a result of the budget deficit, budget deficit IS the central problem.
B- Why is there a huge budget deficit?
What happened?
Budget deficit went out of control as of 1991, when the whole of Lebanon become under Syrian domination.
Basically, what happened is that major revenues of the State were diverted and went mainly to the Syrian establishment and accessorily to their local proxies.
The rhetoric then was that this was corruption. It was not corruption. It was a highly organized, mafia like, system based on the coercitive power of the Syrian occupation army, which otherwise would have gone to the State.
Some examples:
1- Diversion of international phone traffic:
Part of the Incoming international calls, initiated by private operators worldwide went through illegal exchanges in Lebanon instead of being channeled through official government exchanges. The then Minister of Post and Telecommunications estimated that around 30 million minutes per month went through illegal operators. This figure represents around 50% of total incoming calls at that time. Let us have a look at the financial impact. At that time one minute was billed 80 cents. 30 million minutes amount to 24.000.000$ per month or 288 million $ per year. Over 15 years this represents 4.3 billion $. If we add on average interest as actually paid by the Government, the total would add to 7.5 billion $. In other terms without the pirating of phone traffic, the public debt would have been reduced by 7.5 billions $.
1- Diversion of international phone traffic:
Part of the Incoming international calls, initiated by private operators worldwide went through illegal exchanges in Lebanon instead of being channeled through official government exchanges. The then Minister of Post and Telecommunications estimated that around 30 million minutes per month went through illegal operators. This figure represents around 50% of total incoming calls at that time. Let us have a look at the financial impact. At that time one minute was billed 80 cents. 30 million minutes amount to 24.000.000$ per month or 288 million $ per year. Over 15 years this represents 4.3 billion $. If we add on average interest as actually paid by the Government, the total would add to 7.5 billion $. In other terms without the pirating of phone traffic, the public debt would have been reduced by 7.5 billions $.
Most of the revenues of the illegal operators went to their Syrian sponsors: the ruling family in Damascus or the Syrian military authorities in Lebanon.
This is only one example. Other examples are related to
– The overbilling of fuel for the Electricity Authority
– Overbilling and monopolistic practices for domestic gas
– Overbilling of public works: some anecdotal facts
– The overbilling of fuel for the Electricity Authority
– Overbilling and monopolistic practices for domestic gas
– Overbilling of public works: some anecdotal facts
One kilometer of highway in California, cost of land included, in the mid nineties used to cost 935.000$. one kilometer of highway in South Lebanon at the same period costed 4 million $. Guess who was the Contractor: Assioun, the Syrian Government owned company.
– “Forbidden Zones” in the Port of Beirut, the Airport and the military road” at Masnaa frontier post where smuggling was performed provided that a fraction of custom duties were paid to Syrian Officers.
– Plundering of Casino du Liban, etc…
– Plundering of Casino du Liban, etc…
That sort of direct diversion of State resources can easily be estimated at one billion dollars per year.
Another indirect diversion of government resources occurred: it consisted, in order to gain the loyalty of certain political parties, to allow parts of the population not to pay for utilities.
Another indirect diversion of government resources occurred: it consisted, in order to gain the loyalty of certain political parties, to allow parts of the population not to pay for utilities.
Some examples:
– Part of the population was allowed not to pay electricity bills. I would just like to remind that the deficit of Electricity Authority in 2006 exceeds one billion $.
– The Social Security Fund was a cash cow to socially support parts of the population affiliated to Syrian sponsored parties, while the order part of the population and the business Community were financing it.
– Lawless zones: In the Southern Suburbs of Beirut manufacturing plants were note registered at the Ministry of Finance, would not pay value added tax, nor income tax would evade social security payments and pay no electricity.
This kind of diversion of Government revenues also accounted for more than one billion$ per year.
In other words more than 2 billions dollars per year were diverted from government income for 15 years, that makes 30 billions dollars for the whole period and if we add interests it would add to more than 50 billion $ more than the public debt.
In other words more than 2 billions dollars per year were diverted from government income for 15 years, that makes 30 billions dollars for the whole period and if we add interests it would add to more than 50 billion $ more than the public debt.
That means that, we should have an excess in the budget – like it was before 1975, despite the “normal” corruption.
3- Where do we stand now?
3-1 what was corrected
– International phone traffic piracy disappeared (except in the southern suburbs where we do not know what the situation is)
– Over billing of fuel for Electricity disappeared and Government to Government agreements replaced the imposed brokers.
– Plundering at Casino du Liban disappeared.
– Smuggling at the Port and Airport practically disappeared.
3-1 what was corrected
– International phone traffic piracy disappeared (except in the southern suburbs where we do not know what the situation is)
– Over billing of fuel for Electricity disappeared and Government to Government agreements replaced the imposed brokers.
– Plundering at Casino du Liban disappeared.
– Smuggling at the Port and Airport practically disappeared.
3-2 What is still not corrected?
– Non payment of electricity bills in certain regions is still there.
– Situation at Social Security Fund is still chaotic.
– Lawlessness still prevails in the Southern Suburbs with the resulting failure of the State to collect its dues there.
– Non payment of electricity bills in certain regions is still there.
– Situation at Social Security Fund is still chaotic.
– Lawlessness still prevails in the Southern Suburbs with the resulting failure of the State to collect its dues there.
In view of all the above, how can we speak about opportunities?
Despite the above, despite the war of July 2006 and despite the multiplication by 4 of the fuel prices, the budget deficit has been reduced to around 35% of the total budget, while it was around 40% the last years of Syrian domination with spikes at 50%. The 2008 budget project to reduce the deficit to 25%.
We are again witnessing a primary excess in the budget, if we don’t account for the debt servicing.
The contribution of the Telecom sector to the Government budget has exceeded one billion dollars, the latest budgetary year. If we add to those improvements the Government plan as presented to the Paris 3 Conference which included, besides the Administration reform measures, a privatization process for Telecom, Electricity, other utilities, other government owned businesses we end up with sales proceeds in the range of 10 to 12 billions $, that, if allocated to amortize the public debt, would reduce the annual interests paid by a little less than one billion $.
But there are other advantages to privatization:
– Triggering a competition process between utilities suppliers will probably reduce costs, improve the service to users, thus improving the competitive edge of businesses.
– Triggering a competition process between utilities suppliers will probably reduce costs, improve the service to users, thus improving the competitive edge of businesses.
– This is itself would increase the growth rate of the whole economy hence increasing state revenues.
– In the other hand we can safely project that a privatized electricity sector will end up with balanced accounts. This means that the State will save the one + billion $ yearly deficit.
– In the other hand we can safely project that a privatized electricity sector will end up with balanced accounts. This means that the State will save the one + billion $ yearly deficit.
If the deficit is reduced by 2 billions $ per year, it is practically eliminated. The marginal balance of the deficit, in hundreds of millions can be eliminated in the foreseeable future. The projected deficit for 2008 is only 2 billion $.
But this is not all, there are even better news:
There is a lot of positive political impact in privatization, yes, Political…
For 15 years those enterprises were used to give phoney jobs to pro Syrian clientele. Some examples: in the mid 90’s MEA, the national carrier, used to have a headcount of more than 4000 to operate 9 aircrafts, knowing that the standard ratio is 100 employees for one aircraft i.e. MEA should have had 900 employees instead of 4000. the result was that MEA was an ailingduck with losses peaking at 80 million $/year. Among the excess employees there were more than 200 carpenters… while the fleet was composed of Airbus jets.
There is a lot of positive political impact in privatization, yes, Political…
For 15 years those enterprises were used to give phoney jobs to pro Syrian clientele. Some examples: in the mid 90’s MEA, the national carrier, used to have a headcount of more than 4000 to operate 9 aircrafts, knowing that the standard ratio is 100 employees for one aircraft i.e. MEA should have had 900 employees instead of 4000. the result was that MEA was an ailingduck with losses peaking at 80 million $/year. Among the excess employees there were more than 200 carpenters… while the fleet was composed of Airbus jets.
The personnel in excess were in their majority Amal “protégés”. The deficit was financed by the Central Bank i.e. the tax payer was paying 80 million$/year to finance Amal power in Parliament.
Then the Central Bank took over. More than 2000 employees were discharged, with hefty indemnities and MEA returned to profit. In 2006 despite the war, the company recorded more than 30 million $ profits.
To get back to the subject privatized ex-government owned businesses will probably eliminate this hidden subsidy to pro Syrian parties, they will also create more jobs where merit will be the main criterion and not political loyalties.
It is expected that privatization will greatly reduce the artificial constituency of pro Syrian parties and consequently their political influence. It will also retain in the country recognized talents, who otherwise would emigrate.
Ladies and gentlemen,
Dear friends,
Ample proof has been given, despite adverse circumstances, that the situation can be corrected.
What we need now is to push for the privatization process. This will help to eliminate the budget deficit then to bring back the Public Debt at sustainable levels. And, as a cherry on top of the cake, to reduce illegitimate, artificial, negative influence in our politics.
Dear friends,
Ample proof has been given, despite adverse circumstances, that the situation can be corrected.
What we need now is to push for the privatization process. This will help to eliminate the budget deficit then to bring back the Public Debt at sustainable levels. And, as a cherry on top of the cake, to reduce illegitimate, artificial, negative influence in our politics.