Iraq and the IMF
Lebanon and the IMF
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Transcript of a Press Conference by IMF Deputy Managing Director Agustín Carstens, and Lebanese Minister of Finance Fuad Siniora
MR. SINIORA: I would like to present Mr. Agustín Carstens, the Deputy Managing Director of the IMF, heading a delegation to Lebanon, and this is the highest-ranking delegation ever that came to Lebanon, and this trip covered so many meetings that started yesterday morning, and many officials were met, and at the same time the meetings with the representatives of the private sector, and the discussion centered on all aspects of relations between Lebanon as a government and the Ministry of Finance, the central bank, with the IMF, with all the support and technical assistance as well that's being provided by the IMF to us.
Mr. Carstens is going to deliver his speech. After that, he will be ready to answer any question that you have in mind or any other question that you would like to address to myself. Mr. Carstens?
MR. CARSTENS: Thank you. Well, first of all, I want to thank the Minister of Finance, Mr. Siniora, for his very warm welcome here to Lebanon and, more than anything, to have arranged a very pleasant environment to have very fruitful discussions, at least viewed from our point of view.
I also want to thank all of you for having come this Friday afternoon to this press conference, and, as the Minister mentioned in his introductory remarks, I will make just a few statements which in a way are he highlights of my visit. A more complete statement is available for you with, I would say, more of the content and details of the discussions we have had.
As I mentioned already, I had the pleasure of holding detailed discussions with the Minister and the Finance Ministry staff during the past two days. The meetings have been candid and insightful, and we agreed that the Fund and the authorities will remain in close contact as part of the IMF's continuing effort to maintain an open dialogue and to provide appropriate technical assistance to Lebanon.
I would also like to thank the Prime Minister, other members of parliament, and the Governor and Deputy Governors of the central bank for graciously taking time to review the current state of the economy and monetary policies and developments in Lebanon. These discussions were also candid and very, very informative.
This is my first visit to Lebanon, and the discussions held over the last two days have given me a greater sense of the accomplishments that Lebanon has achieved and for the challenges that it faces going forward.
The main points that have come out of the discussions are the following:
First, it has been very clear to me that Lebanon has made remarkable strides to rebuild itself over the last ten years, and it is noteworthy that the government has supported this recovery through its own reconstruction effort and by adopting open market policies. Lebanon has much to be proud of.
But as you know, Lebanon faces a substantial debt overhang, and much remains to be done for Lebanon to establish stronger growth and job creation. It will be important for the government and the parliament to work actively on the necessary and appropriate economic measures to address this debt overhang and to create conditions for strong growth and job creation.
The confidence-boosting benefit of the Paris II conference has provided a narrow window of opportunity for Lebanon and its leaders to start dealing with the debt overhang. Progress has been slow, and I hope the opportunity will not be missed.
A strong, timely, and firm commitment to budget deficit reduction that protects priorities in the social sectors is necessary, and it is my hope that the government and the parliament will find a way to bring the necessary fiscal measures into place, including a rationalization of government spending and the reform of loss-making public enterprises.
And, lastly, before I open the floor to questions, let me stress that strengthening institutions in Lebanon is also critical for long-run growth and development. The institutions that affect budgeting, monetary policy, and financial sector supervision and regulation strongly influence expectations about economic policies and, therefore, investor confidence. Strong institutions in Lebanon will bring investment and growth. These institutions must be strengthened, created through economic reforms so that Lebanon can realize its full potential.
I want also, before opening the floor, to introduce the members in the mission that accompanied me here to Lebanon. To my left is Mr. Shakour Shaalan. He is Executive Director. He's the representative of--I don't know, for how many countries?
MR. SHAALAN: Thirteen.
MR. CARSTENS: Thirteen countries of the region, including Lebanon. Mr. George Abed, he's the Director of the Middle East and Central Asia Department of the IMF. And Mr. Edward Gardner, who is the mission chief for Lebanon. Alfred Kammer is my advisor, and Mr. William Murray is from the External Relations Department of the IMF.
So, again, we're very pleased to be here. We are very pleased to have this opportunity to have a dialogue with you, and thanks again to the Government of Lebanon and, in particular, to the Minister, and we're open to some questions that you might have.
QUESTION: Always the IMF stresses the need of privatization and securitization, but since Paris II nothing has happened. It's almost been a year. And you know the (?) politics, I am sure. Some say that because of political differences among politicians, the privatization has been delayed, and there's some concern that privatization will be delayed for another year. Now, if privatization does not take place within the next seven or eight months, what is the impact of this on the public debt?
And, second, you mentioned in your staff report that even if the government reduced the debt through privatization, the debt-to-GDP would reach 130 percent, which is still alarming.
Can you give me your comments? Thank you.
MR. CARSTENS: Yes. These meetings were very reassuring for us in some respects. We were not aware of the magnitude of, let's say, capital diversion towards Lebanon that has taken place as a result of the situation in the Middle East, and that has given some support to the economy for the time being. Certainly that has given some time for privatization and securitization to be implemented when there is a better political environment to do so.
Nevertheless, I also see that some important discussions about privatization have taken place. What I see from my talks with the parliament and with the government is that there is a genuine concern about undertaking privatization in the best possible terms so that there is no worry that the assets of the government will not be sold or dis-attached at an inconvenient price. And I also feel that there is a sense of responsibility in accompanying these privatization with the adequate regulatory environment.
In our international experience, this has proven to be the right attitude to have successful privatizations. So, again, there has been some time gained. I mean, there has been the possibility of moving forward with privatizations. But, nevertheless, it is important for those privatizations to be undertaken relatively soon.
Now, I think that Lebanon needs to make more definite progress in strengthening its financial situation, and we hope that the political environment will allow this progress to take place soon. Lebanon should not depend on positive external shocks to be able to continue performing in an appropriate fashion. And hopefully in the next years to come, this more fundamental strengthening of the economy will be achieved.
What was the second part of your question? Sorry?
QUESTION: [inaudible, off microphone.]
MR. CARSTENS: About the level of debt.
QUESTION: If the government privatized, generated US$4 or US$5 billion, the GDP will reach 130 percent. That was six months ago. Now it's--what will happen? But you're concerned about it. So even with privatization, the debt-to-GDP remains high.
MR. CARSTENS: Yes. I mean, there is broad evidence in the world, not only about emerging markets but industrialized economies and very poor economies, too, that very high debt is a deterrent to growth. Why? Because a lot of the financial resources that the country can generate or attract are devoted to servicing the debt, in a way the government would be crowding out private sector resources--resources that can be used in a more productive way, that can be invested, that can generate employment, that can generate a better living standard for the population.
Even if the resources stay in the government, we were made aware yesterday by the Minister that 46 percent of the total expenditure budget goes to servicing the debt, and 37 percent goes just to finance current expenditure, service--
MR. CARSTENS: Which is current expenditure, no?
MR. CARSTENS: So I think that there is a lot of room...to reduce as much as possible the debt-service component, and to free up some of those resources to be employed in a more productive way.
So both from the perspective of having higher private sector participation and more investment, it's urgent that the debt overhang is brought under control. And, second, I think that even inside the budget, a lot can be done to make more efficient use of the resources, to not have waste, and to bring better services and more welfare and social services to the population.
And, in addition, it's always a challenge to be able to find financing and to do the rollover of such a large debt. Again, important progress has been made. The situation--the external factors and the efforts that have been made internally have led to a sustainable situation, at least in the near term. But that progress should be used as a platform to continue addressing the medium- and long-term challenges that the country is facing.
QUESTION: Do you consider that you're positive or negative about the economic policies that have been taken, and especially if you take in consideration the budget, the 2004 budget, even though I know, Mr. Minister, he (?) really agree with the budget that he's done. But how do you see it? And how do you think that this budget--will it help, would it help, would it serve whatever you're talking about? Because the way we see it, it's really going down the drain, not the other way.
MR. CARSTENS: Again, I think you have to put things in perspective. I think that the effort that the economy has made in the last two or three years has been remarkable. The improvement in the primary surplus has been extremely important, and that's a very, very solid step forward.
We have to say that hopefully there is still some time and hopefully there are ways in which the parliament can react and produce a stronger budget for 2004. I would characterize the actual deficit as just good enough to keep going, but it's not really addressing the medium- and long-term challenges of the country. So hopefully this pause in the progress will be followed by more and more decisive measures as time comes.
I understand that the government has done everything it can in presenting its budget, and it's up to finding the political consensus to move ahead.
So, in summary, I think that the 2004 budget is sufficient to keep going, but that as soon as the political situation allows it, much stronger measures should be undertaken.
QUESTION: When will you start really ringing the alarm?
MR. CARSTENS: The alarm has to be rung by the market, by market participants. There are appropriate flows right now into Lebanon. Again, there exists a medium- and long-term strategy that makes sense, and hopefully the application of that strategy will be improved soon.
So there have been positive developments, developments that were not anticipated probably in the sense that flows have come from Lebanon due to the situation in the Middle East. But these positive shocks should not be taken for granted, and that's why I think that at some point in the future the effort towards further reforms are needed. So this transitory pause in the reforms should be that, the pause should be transitory. Lebanon should go back to the trend of strong policy applications as soon as possible.
QUESTION: Is there any special comment from the IMF to the Lebanese government about the expansion of taxes?
MR. CARSTENS: Well, given the level of debt, given the level of expenditure, there need to be more taxes. There is no two ways about it.
Now, the whole problem does not only consist in having more taxes. It also consists in having an efficient overall tax regime, to have a tax reform that is comprehensive and that tries to eliminate the most possible distortions. There has to be also progress in terms of making it easier to the taxpayer to comply, to have more confidence in the way they can comply with their obligations, and improve from the Ministry of Finance the services that they provide to the taxpayer. And we feel very pleased with the ideas that the Minister has in these respects.
In a country, for its population to be willing to pay more taxes, there needs to be also the certainty that the resources are well used, and that's why I also feel that the efforts towards making better use of government resources is important. More efforts need to be done to be more efficient in the way resources are spent and that spending is rationalized.
Regretfully, the country took decisions in the past, decisions of spending, decisions of contracting debt, that now it has to serve, and that implies more taxes. So you have to move in that direction, and there are better ways and more efficient ways of going about it. And some of the discussions that we have had have addressed the issue of how to move ahead with introducing the least possible distortions into the economy.
QUESTION: If the government--according to the Paris II paper, they were supposed to increase VAT to 12 percent in 2004, but the government decided not to do that for certain reasons. Do you think the government should raise the VAT and other taxes?
MR. CARSTENS: I think eventually it has to do it. I mean, it would be an important step.
QUESTION: You described capital inflows as positive shocks from the outside, and you just said that taxes should be implemented without distortions on the economy. What would be your comment on the idea of imposing taxes on capital inflows?
MR. CARSTENS: I think that that would not be a very good idea.
MR. CARSTENS: Why? Because capital is very mobile, and they would go wherever the highest expected return is provided. And to impose taxes on capital inflows also generates uncertainty, not only on the net return that they will obtain at that moment or that they know they expect to obtain, but it also generates negative expectations or doubts about the future. So it's much better not to touch capital inflows because that taxable base, I would say, is extremely unpredictable.
QUESTION: Could you give us the latest figures at hand as regards the balance of payments surplus and the ratio and the debt--the ratio of--the debt-to-GDP ratio? That's on the one hand.
On the other hand, would you comment on the strong rise in the euro and its effect on the Lebanese economy, on the one hand? And, on the other hand, how will it affect its repayment of some of its foreign debt?
QUESTION: I don't like to take your position.
MR. CARSTENS: That's okay.
MR. SINIORA: I'd like to touch on a number of issues that were being raised here, including yours.
The first of your questions is how much is the balance of payments surplus. Up until the end of October, which is the most available figures, we have total surplus now of balance of payment of about US$3.3 billion, and this is one of the highest ever attained by Lebanon in terms of balance of payments surplus.
On the other hand, as far as debt-to-GDP ratio, the net debt-to-GDP ratio, it is going to be about 1.80 gross, the debt-to-GDP, which is--which shows an improvement over the figures that we had in November of 2002. And this has been due to the result of what has been the achievements out of Paris II in terms of debt reduction, and at the same time of the growth that we have achieved in terms of GDP. It was at about 185 when it was in November '82.
The third question that you have raised that has to do with the impact of the euro, Lebanon, in fact, the overall, let's say impact of the improvement in the value of the euro, one can say it has been positive. Why? Because it's true that Lebanon imports about 45 percent of its imports from the euro area. Definitely in some of these goods and services, it became more expensive, and this would give Lebanon the possibility to ship to other sources of exporters into Lebanon.
But, on the other hand, this really benefits Lebanon on two aspects. In terms of exports to the euro area, we are gaining more competitiveness in this regard. And in terms of the tourism from the euro area into Lebanon, again, this would be beneficial and helpful to Lebanon.
On the other hand, I think there are some questions that have been raised regarding the privatization that was raised to Mr. Carstens. I'd like to really put in here that the privatization is an important, let's say, segment and element of the total reform that Lebanon has been embarking on. There have been some delays in certain reforms that were supposed to be introduced, but the privatization is an important one. And let me make it very clear here that our interest in privatization is not only for the sake of the flow of funds that's going to happen out of this process of privatization, which is very essential and important, and mind you, the government would not indulge into this process unless it is beneficial. It's not our purpose to offload our assets at any price at all. It is our intention to have a very transparent process of privatization, and that has to be beneficial to the economy and to the country. And we have to keep in mind that this process of privatization is supposed to really bear fruits and be helpful in terms of the improvement to the sector that will have to be privatized, and as well to contribute to the process that the government is taking towards having a slimmer government, slimmer size of the government.
It is very important to mention here that what you have asked in terms of the question about the privatization alone, no, the privatization is very important, but it has to be coupled with the other types of projects, particularly to the various government organizations that would have to be slimmed down, would have to be run more efficiently and be able to render better services and less costly. We have to really exert more effort in terms of the reform projects that would have to be carried on in order to be able to have a better, effective, and more return on the amount of spending that we have to incur, and at the same time to see how we can improve our revenue. So the target will have to continue, besides the process of privatization, in order to make our spending more effective and more efficient and better results-oriented, and at the same time to see how we can improve our revenue so that we can carry on the process that we have started and that we have generated up to now in terms of more primary surplus that would really put us more and more on the right track towards addressing the problem of the budget deficit and debt.
QUESTION: I have a question.
MR. SINIORA: Yes, please.
QUESTION: For Mr. Carstens. Have you visited the Minister of Finance? What do you think about the reform program there?
MR. CARSTENS: That he has put together? I think that the program that he has put together is a strong program. It makes sense. The issue is the implementation of it, and hopefully the opportunities will come to move ahead with it.
But I have to say that it's a very well-thought program, very comprehensive. It's a program that doesn't only address the urgent matters of the moment, but it is a program that wants to strengthen the operational capacity of the Ministry of Finance. And we have seen in the IMF that the most successful countries are the ones who have strong institutions, and moving in that direction is really commendable and we support it strongly.
QUESTION: [Inaudible, off microphone] -- about inflows into Lebanon, basically buying the government more time in order to reform. And you said that that had to do with the region. Are you talking about money that's come into Lebanon from the Gulf as a result of the war in Iraq? Or can you be more specific about how much money and why that money is coming to Lebanon as opposed to anywhere else?
MR. CARSTENS: Well, we have seen some indication that money from different parts of the world is coming to Lebanon. We have seen recently reports from the BIS and the OECD that indicate that. We have seen the aggregate figures, but probably the Minister can have more detailed information about the nature of these flows.
MR. SINIORA: Well, actually, the flows that we are having, it has nothing to do with Iraq. It is flowing from Lebanese residing abroad and from Arab nationals, and this is really coming in based on a number of positive factors--despite the fact, by the way, that this year we have introduced a 5-percent tax on interest. Despite this, the money from non-residents has increased, and at the same time, deposits of residents have been increasing. So we are seeing, let's say, a growth in the M3 of more than 14 percent this year, which is quite remarkable and significant. And this is coming to Lebanon based on the soundness of the banking system, on the one hand, and that Lebanon has managed to lift itself out of the FATF list of non-cooperative countries, and as well with the promising efforts that are being exerted by the government in order to address the problem of the budget deficit, and the promises of the government that it will carry on with the process of reform.
So altogether, actually, it is leading towards more comfort among depositors, and the fact that the economy has started to generate growth, and that the economy started to be a center of attraction for investors, on the one hand, and for [inaudible] in Lebanon in terms of tourism, in terms of summer seasons and the like. So all these factors are contributing towards attracting more and more funds flow into Lebanon.
QUESTION: Sorry. Can you--I mean, what kind of funds? Where is this money going? What's it being invested--
MR. SINIORA: Into the banking system in terms of deposits.
QUESTION: In deposits.
MR. SINIORA: Yes.
MR. SINIORA: Some of it, in fact, is going into direct investment in terms of companies that are being established, industrial, touristic, real estate projects. We are witnessing a very active real estate demand by Arab nationals to establish, let's say, residence for themselves or to establish certain hotels and the like. So this is a very active season that we have experienced during the summer and that we are seeing more and more of it now.
QUESTION: Sorry, just to be clear. When you were saying earlier about this being to do with the regional situation, the capital--the inflows coming into the country, I mean, I'm a bit confused now. Is it to do with the regional situation or not?
MR. SINIORA: Well, you asked the question about Iraq. I said that it has nothing to do with Iraq. But, I mean, because of the--let's say, all the developments that have been taking place over the past two or three years, there is some sort of a return of Arab funds into the Arab world. And Lebanon is quite a good center for attracting these deposits into the Arab world and to be deposited in Lebanon.
MR. MURRAY: Thank you, Minister.
I think we've pretty much run out of questions. If there's anyone that hasn't asked a question and would like to pose something before we wrap this up--one last one, okay.
QUESTION: When do you expect a lowering of the [inaudible]? You've been talking about this for some time.
MR. SINIORA: I think what has been going on during the past few months, we are seeing that there is a very soft landing of the interest rate that is being determined by the market forces. And the Ministry of Finance is back into the market, and it is raising funds in the normal course as it used to be in the past. Every week we are coming into the market offering our treasury bills, one week for three and six months, another week for one year, two years, or three years. This is something that we have introduced recently, that we are helping ourselves in terms of reprofiling the debt and extending its duration. But at the same time, this is helping us as well in gradual lowering, as commanded by the market. So the interest rate is responding to that, and it is declining very softly.
MR. MURRAY: Thank you for coming today.
MR. SINIORA: Yes, I'd like to thank all of you very much for being with us today. I'd like to thank Mr. Carstens for attending this press conference. I hope that he will enjoy Lebanon not only professionally but from a tourism point of view as well tomorrow.
MR. CARSTENS: Thank you.
IMF EXTERNAL RELATIONS DEPARTMENT