Transcript of a Press Briefing on the IMF's Executive Board Decision on Emergency Post-Conflict Assistance for Lebanon, By Mohsin S. Khan, Director of the Middle East and Central Asia Department
April 10, 2007By Mohsin S. Khan, Director of the Middle East and Central Asia Department; and Edward Gardner, Mission Chief for Lebanon, Assistant Director, Middle East and Central Asia Department,
International Monetary Fund,
Washington, DC, April 9, 2007
MS. STANKOVA: Good afternoon. I am Olga Stankova with the IMF's External Relations. Welcome to a press briefing on the IMF's Executive Board decision today on the post-conflict assistance for Lebanon. The briefing will be conducted by Mr. Khan, Director of the Middle East and Central Asia Department, and Mr. Gardner, the Mission Chief for Lebanon. Mr. Khan will make brief introductory remarks and then we will take your questions. Mr. Khan, please.
MR. KHAN: Thank you very much. As Olga was saying, the Executive Board of the IMF approved this morning about a $77 million loan to Lebanon in the form of Emergency Post-Conflict Assistance (EPCA). Following the July 2006 conflict with Israel, IMF staff have worked closely with the Lebanese authorities to complete a medium-term strategy that allows for relief and reconstruction spending, at the same time as it addresses Lebanon's very large debt overhang and its financial vulnerabilities.
The authority's reform program which they had developed last year and then updated this year was endorsed by donors at the so-called Paris Three donors' Conference in Paris on January 25 of this year. EPCA is part of a concerted international effort to provide financial assistance to Lebanon.
I will just say briefly what are the elements of this program. Basically, the authority's medium-term reform program, which is in the public domain, targets an ambitious reduction of the debt to GDP ratio over the next 5 years. This will be brought about by fiscal adjustment and by privatization mainly. Donors have pledged to support the authority's efforts through grants and concessional loans. However, 2007 is shaping up to be a difficult transition year and,under EPCA, the authorities committed themselves to containing the fiscal deficit while still at the same time allowing for relief and reconstruction spending. The authorities' financing strategy for this year relies on timely disbursement of donor support which they have been promised, and that is going to be very important in limiting further buildup of government debt.
Lebanese authorities remain committed to exchange rate stability. That means they will maintain the exchange rate peg. Domestic and regional and political environment does expose Lebanon to possible swings in confidence, and the authorities intend to maintain a comfortable level of international reserves as a buffer against exchange rate pressures.
The Lebanese authorities will initiate a number of important structural reforms in 2007. These structural reforms will support medium-term reform and debt reduction objectives, as outlined in their Paris III document. In particular, this year the authorities will seek to strengthen public financial management with a view to keeping expenditures in line with budget priorities; and they will initiate reforms in the social security system and in the energy sector in cooperation with the World Bank in order to reduce budgetary transfers. The authorities also are planning this year to take steps toward introduction of a global income tax, to be introduced in the future.
That is in a nutshell what happened this morning and what is expected in the coming year from the Lebanese government. Edward and I are here to answer any questions that you might have about this.
QUESTION: What is the mechanism you are going to use?
MR. KHAN: The financing will be made available to Lebanon right away. I think at most it would be a matter of a couple of days or so.
QUESTION: You mean the whole 770 dollars?
MR. KHAN: Its $77 million, and it will be made available to them immediately. Today's Board decision confirms that.
QUESTION: Is this connected at all with the discussions with the Paris Club? Can you amplify at all on Lebanese dialogue at the Paris Club?
MR. GARDNER: There really has not been any connection with the Paris Club in large part because Lebanon's debt is mostly to domestic creditors, mostly to banks, so it is a separate exercise really from the traditional Paris Club support.
MR. KHAN: What it is is basically related to what is being called Paris III which is the donors' meeting that came up with a total package of $7.6 billion. EPCA is related to that. A number of donors had said that they would like the IMF to be involved in this effort and therefore it's part of that effort rather than the Paris Club as such.
QUESTION: It's part of the 7.6 billion this amount of funds.
MR. KHAN: That's right.
QUESTION: This is a grant or a loan?
MR. KHAN: This is a loan.
QUESTION: A loan?
MR. KHAN: Yes.
QUESTION: For how long?
MR. KHAN: The term of the loan is 3 to 5 years.
QUESTION: When it will be disbursed?
MR. KHAN: It will be disbursed right away. I mean, it could be -- it becomes a matter of transferring to their account -- to the Lebanese account here in the Fund in the first instance, and then to wherever they wish to put it, basically.
QUESTION: That means the Lebanese government signed the agreement?
MR. KHAN: That's correct. Basically what happens mechanically is that the Lebanese government sends the IMF what is called a letter of intent and that letter of intent is part of the package of papers that goes to the IMF Board. So it is a request for a program, and to support that program it is a request for $77 million as well.
QUESTION: Of this $7.6 billion, a lot of money for a small country, but I know the level of devastation is immense, how much of that has been disbursed? Or is this the usual situation where the Fund is giving its seal of approval so that the money now can be released from this Paris III?
Then I wanted to ask you, the Parliament is not meeting, I understand.
MR. KHAN: That's correct.
MR. WOOD: How strong is the government's capacity to implement fiscal discipline, and what is to be privatized?
MR. KHAN: There are several questions in that. I will address them in reverse order. Privatization is primarily concerned with the telecommunication sector, which is set to be the first one to be privatized. There are other enterprises slated for privatization down the road.
Coming back to your first question, the $7.6 billion is commitments over a 5-year period because the government's program is a 5-year program. And the disbursements are not linked -- conditional on the IMF's seal of approval, they are linked to what the government's execution of its program.
What we are going to be doing is monitoring the situation, monitoring developments in Lebanon, and reporting on them. I expect that the donors will take our report into account in their decision as to whether to disburse or not, or when to disburse.
On the question of the government's ability to maintain fiscal discipline and execute the program, I would say that they have the ability to control the fiscal program. Parliamentary action will be needed in some areas, for instance to approve many of these loan agreements, not with us, but with other donors. Even though there is presently a stalemate, and parliament has not been convened, our understanding is that there have been discussions between the government and the Speaker of the Parliament, Nabih Berri, that loans associated with Paris III will in fact be approved, that Parliament will be called into session to approve these loans. That is what we have been told, so we will have to wait to see.
QUESTION: How much of this $7.6 has been disbursed?
MR. KHAN: None at the moment as far as we know. it's all in the pipeline, and as far as I know, the only loan agreement that has -- and Edward you can correct me if I'm wrong, the only loan agreement that has been in fact signed is with the UAE, with the Emirates. That loan has been signed. We don't know what the state of play is with the other big loans from the Gulf. I think the U.S. has to go to Congress, and all these things take time
QUESTION: How much confidence do you have in the Lebanese government, its ability to repay the loan if we know that the general Lebanese debt now is more than $40 billion?
MR. KHAN: This is a question that is often raised. I should say that --
QUESTION: I mean, it is political assistance more than --
MR. KHAN: The public debt is indeed $40 billion now, or almost 180 percent of GDP. However, the idea is that over a 5-year period, assuming everything goes well, this debt will be brought down to about 130 percent of GDP. So it is coming down at a ratio of GDP.
In terms of Lebanon's ability to repay, it should be noted that through the most difficult times Lebanon has had an exemplary record of repayment of its loans. Through the civil war, for example, they continued to make payments. So I think that their reputation in terms of repayments is very good and I think people are not concerned about that ability. They have kept current with their loans and their loan payments even this year, even despite the conflict they have kept up repayments. They have not defaulted or delayed or gone into arrears which is pretty amazing for a country that has been at war, both in the civil war and then this year -- in 2006.
QUESTION: It seems that they are repaying loans by getting more loans.
MR. KHAN: Yes, but I mean the advantage of course is that if you are paying off more expensive loans with cheaper loans, which will help reduce the overall debt burden over time.
QUESTION: But I mean, how much is the interest paid -- the interest for the --
MR. KHAN: For our loan it's about 5 -1/2 percent.
QUESTION: Were you suggesting, Mr. Khan, that the Parliament has to approve --
MR. KHAN: Not this one.
QUESTION: -- most of these loans in this $7.6 billion package?
MR. KHAN: That's correct. Parliament has to approve --
QUESTION: You would think that would be an incentive. If they can't get the cash until the Parliament meets, do you expect that to happen and when?
MR. KHAN: As I said, yes, the loan agreements require Parliamentary approval, and in fact, they require the President's approval as well. We have been told, as I mentioned, that they have an agreement or there have been discussions with the Speaker of the Parliament that for Paris III loans they will in fact -- they will convene Parliament to approve those loans. If Parliament is convened, the government has the majority so they could approve the loans. The question is will the Parliament be called into session. I assume the government is waiting for the right time or, if you like, the critical mass of loans -- loan agreements that need to go to Parliament to ask the Speaker to convene Parliament. Yes?
QUESTION: Sorry, just quickly, is this a stepping stone toward a larger stand-by credit for --
MR. KHAN: This is a transition to a stand-by arrangement next year.
QUESTION: Do you have a sense of how large that could be or conditionality?
MR. KHAN: At this point not really, and I say that it is a transition to the stand-by arrangement because all emergency post-conflict assistance loans in fact are expected to be transitions to a stand-by arrangement with the sort of amount to be determined and the conditionality to be determined at that time in the negotiation.
QUESTION: Was there a date on that or just --
MR. KHAN: No, no date. It will be next year. This EPCA is supposed to last about a year.
QUESTION: Iraq had something like this -- $660 million -- quite detailed timetables to reducing inflation and these other things.
MR. KHAN: All those things are part of the stand-by or will be part of the stand-by because they are part of virtually all stand-bys, you see.
MS. STANKOVA: Maybe one or two more questions. If there are no more questions at this time, thank you very much.
MR. KHAN: Thank you very much.