THE REPUBLIC OF LEBANON The World Bank Group THIRD QUARTER 2004 A Quarterly Publication of the Lebanon Country Office 37123 Lebanon's Public Debt Crisis In this edition Page · Editorial: The Next Five Months in Lebanon: An Opportunity for Short Term Action and Long Term Reform 3 · Cost of Environmental Degradation in Lebanon 5 · Recent Economic Developments 8 · Bank Group Operations 13 · Benchmarking Lebanon's Investment Climate 15 · News, Recent and Upcoming Acti vities 20 · Recent World Bank Publications 23 Republic of Lebanon Update World Bank Contacts ­ Washington Joseph Saba, Country Director Sabah Moussa, Executive Assistant Tel. (202) 473-2992 - Fax (202) 477-1482 Tel. (202) 473-9019 - Fax (202) 477-1482 E-mail: jsaba@worldbank.org E-mail: smoussa@worldbank.org Osman Ahmed, Lead Country Officer Sereen Juma, Communications Officer Tel. (202) 473-7063 - Fax (202) 477-1482 Tel. (202) 473-7199 - Fax (202) 522-0003 E-mail: oahmed@worldbank.org E-mail: sjuma@worldbank.org Carlos Silva-Jauregui, Senior Economist World Bank Address: Tel. (202) 473-1859 - Fax (202) 477-0432 1818 H Street, NW E-mail: csilvajauregui@worldbank.org Washington, DC 20433 Shaha Riza, Acting Manager www.worldbank.org External Relations and Outreach Tel. (202) 458 1592 - Fax (202) 522 0006 To Order World Bank Publications: Email: Sriza@worldbank.org http://publications.worldbank.org/ecommerce Sophie Warlop, Operations Analyst For Information on World Bank Programs in Lebanon: Tel. (202) 473-7255 - Fax. (202) 477-1482 www.worldbank.org/mna/lebanon E-mail: swarlop@worldbank.org World Bank Contacts ­ Beirut Omar Razzaz, Country Manager Zeina El Khalil, Public Information Associate E-mail: orazzaz@worldbank.org, Tel. Ext. 228 E-mail: zelkhalil@worldbank.org, Tel. Ext. 234 Bassam Ramadan, Lead Operations Officer Chadi Bou Habib, Economist E-mail: bramadan@worldbank.org, Tel. Ext. 226 Email: cbouhabib@worldbank.org, Tel. Ext: 233 Haneen Sayed, Lead Operations Officer Mouna Couzi, Senior Program Assistant E-mail: hsayed@worldbank.org, Tel. Ext. 229 E-mail: mcouzi@worldbank.org, Tel. Ext:231 Radwan Shaban, Lead Country Economist May Ibrahim, Program Assistant E-mail: rshaban@worldbank.org, Tel. Ext. 246 Email: mibrahim@worldbank.org, Tel. Ext. 245 Robert Maurer, Lead Urban Sector Specialist The World Bank Office in Beirut E-mail: rmaurer@worldbank.org, Tel. Ext. 224 United Nations House, Sixth Floor Riad El Solh 1107-2270 Sebastien Dessus, Senior Economist P. O. Box: 11-8577 E-mail: sdessus@worldbank.org, Tel. Ext. 225 Beirut ­ Lebanon Robert Bou Jaoude, Senior Financial Management Tel. (961-1) 987-800 Specialist Fax (961-1) 986-800 E-mail: rboujaoude@worldbank.org, Tel. Ext. 230 www.worldbank.org/lb Hadia Samaha Karam, Operations Officer E-mail: hsamaha@worldbank.org, Tel. Ext. 241 Editorial Team: Lina Fares, Procurement Specialist Chadi Bou Aviv Email: lfares@worldbank.org, Tel. Ext. 244 Farra Choucair Sebastien Dessus Mona Ziade, Communications Officer Zeina El Khalil Email: mziade@worldbank.org, Tel. Ext. 239 Omar Razzaz Joseph Saba Mona El-Chami, Financial Management Specialist Maria Sarraf E-mail: melchami@worldbank.org, Tel. Ext. 223 Paolo Zacchia Mona Ziade Diana Masri, Financial Management Specialist With special thanks to Mary Saba E-mail: dmasri@worldbank.org, Tel. Ext. 238 2 Third Quarter 2004 Republic of Lebanon Update EDITORIAL The Next Five Months for Lebanon: An Opportunity for Short Term Action and Long Term Reform The current Lebanese Government has a short very difficult to fight corruption in a sustainable way. remaining life of less than five months. But this is no A new public procurement law has been drafted by a reason to expect it to be an ineffective government. committee of Lebanese experts. If passed and International experience suggests that some of the most implemented, it would create a quantum leap in the aggressive reforms have been carried out by short-lived fight against corruption. governments In the case of Lebanon, urgently needed reforms have been pending for too long, and concerted effort is needed for the sake of the country, its Fixing the power sector is another major and welcome economy, and its citizens. emphasis by the new Government. Our previous issue of the Update (Second Quarter 2004) discussed the challenges and possible strategies in detail. In The new Government has indeed taken up a number of summary, while reforming the sector and upgrading its issues early on in its life including fighting corruption, facilities is a long term agenda, there are immediate pushing the reform agenda in a number of critical actions which can be taken: i) reducing the cost of fuel sectors such as power and telecom, and most recently through better State to State agreements in the short deliberating on whether or not to prepare a budget for term; ii) improving the management of EdL, mainly 2005. These all send important signals on the through a management contract to a private operator determination of the Government to tackle critical with a clear set of incentives to improve accounting and issues. transparency measures, operational efficiency, and human resource management; and iii) developing and approving a medium term strategy for the development Fighting corruption is critical- it sends a signal about of the sector. Pushing the reform agendas on the power the Government's determination to address the sector, as well as telecom, and water would combine to problem. The challenge for the Government is to reduce the overall cost of production in the country, convince the public that it is systematically fighting the thus enhancing its competitiveness and growth root causes of corruption, rather than targeting a few potential. individuals out of political vendetta. Indeed, corruption is often a symptom of poor governance structures, reflecting weak measures of accountability, and Whether or not to prepare a budget for 2005 by a short transparency. Addressing these structural weaknesses term Government is a legitimate question. The requires revamping key public agencies responsible for argument for a budget for 2005 is that it is a good accountability and transparency including the Civil governance practice to prepare a budget on a yearly Service Board, Central Inspection, and Court of basis as a matter of principle. If the Government and Accounts. A specific example of this in Lebanon is Parliament can agree on a bold budget which reduces public procurement. Several surveys done in the last the deficit, raises primary surplus, cuts wasteful five years have indicated that favoritism in public spending, and targets social spending to the poor, this contracts is among main arenas for corruption. The would be significant accomplishment for the reasons are not hard to understand: i) the regulatory Government, the Parliament, and the country as a framework is totally outdated and governed by more whole. Its positive impact will be felt immediately in than one piece of legislation dating back to 1959 and increased confidence by citizens and investors and in 1963; ii) several public entities operate under different economic indicators. The risk, of course, is that in an internal procedures; iii) public procurement is carried election season, the Parliament might be tempted to out in the absence of a central oversight agency which increase spending rather than reduce it. A protracted would ensure efficient and transparent procurement process of budget debate which exhausts the scarce process or address bidders grievances; and iv) there are time and resources of the Ministry of Finance and fail no standard bidding documents used for all public to produce an austere budget would be a lost procurement. Without addressing these issues, it would opportunity and have the opposite effect on confidence. Third Quarter 2004 3 Republic of Lebanon Update The second best option would be to continue spending Environmental Degradation in Lebanon). Yet, on a 12 month basis according to the approved budget Lebanon still possess some of the most pristine sites in of 2004. But this option has its risks as well. The the region, and some of the most talented professionals approved budget of 2004, as everyone recalls, was a and entrepreneurs. International and regional good will "status quo" budget, that made no attempts to reduce still makes it a destiny for tourists and potential expenditures. As it turned out, actual expenditures investors. In other words, it is not too late to start. were much less than budgeted expenditures. But primary expenditures (excluding debt service) rose compared to 2003. Using the same approved budget of The current Government faces many challenges, but 2004 for 2005, could result in a dramatically worse has a real opportunity to deliver tangible results. outcome in an election year. Whether the Government There are those who are already writing off the next six ends up proposing a new budget or not, the criteria for months as lost time. We hope, for the sake of the its success will be its ability to contain actual country, that they are wrong. The Bank has not expenditures and put time and resources into pending witnessed such an attitude in its discussions with structural reforms. representatives of the new Government and expressed its readiness to be of assistance on a number of policy and investment fronts. We realize that this Government The economic, social, and environmental effects of of short tenure has the international, regional, and years of political paralysis are being felt in the country. national odds stacked up against it. Our reading is that Lebanon has not fared as well as some other countries the Lebanese public understands that, and might of the Middle East and North Africa in terms of its therefore give the Government a lot of credit for what it business environment (see article inside on does manage to achieve in tackling the challenges of Benchmarking Lebanon's Investment Climate). Also, corruption and waste in public spending. But it will in spite of success in the area of human health, the ultimately judge the Government by its actions, not its natural environment has not faired well either since the words. end of the war (see article inside on The Cost of The World Bank Lebanon Office website address has changed. Please take note of the new address: www.worldbank.org/lb Visit our website for information on the World Bank in Lebanon, Projects & Programs, Development Topics, News & Events, Data & Statistics, Publications & Reports. The website also provides resources on jobs & scholarships, and procurement opportunities & tender processes. 4 Third Quarter 2004 Republic of Lebanon Update COST OF ENVIRONMENTAL DEGRADATION IN LEBANON How much is a cleaner environment worth? For policy million per year, or 3.4% of GDP. In addition, the cost makers, that question often goes largely unanswered. to the global environment is estimated at about 0.5% of It's not that the environment is seen as unimportant. It's GDP per year. Estimated costs of damage are broken simply much easier to compare the costs and benefits of down by environmental category in Table 1 and Figure tangible projects such as airports or electrical grids than 1 below. it is to weigh the merits of a landfill cleanup or a change in emissions legislation. Table 1 - Annual Cost of Environmental Degradation (mean estimate, 2000). In the Middle East and North Africa Region(MENA), the World Bank in collaboration with the US$/year LBP/year Percentage Mediterranean Environmental Technical Assistance (millions) (billions) of GDP Program (METAP) is assisting countries to generate Air 170 256 1.0% better estimates of the real economic costs of Water 175 264 1.1% environmental degradation. By putting hard numbers Land & wildlife 100 151 0.6% behind environmental issues, it is providing an Coastal Zones 110 166 0.7% instrument for policy makers to better integrate the Waste 10 15 <0.1% environment into economic development decisions. Sub-total 565 852 3.4% Global 90 136 0.5% STRUCTURE AND OBJECTIVES OF THE Environment Total 655 986 3.9% PROGRAM The Cost of Environmental Degradation program, now Figure 1 - Annual Cost of Environmental under way in 8 MENA countries (Algeria, Egypt, Iran, Degradation by Environmental Category (mean Jordan, Lebanon, Morocco, Syria and Tunisia) consists estimate as a percentage of GDP). of a country wide study and an accompanying training course. The objectives of the program are to estimate 1.20% the cost of environmental degradation as a percentage of gross domestic product (GDP), to enhance local 1.00% capacity in environmental economics and to provide an input to inter-sectoral environmental priority setting. 0.80% The approach relies on existing data and analysis of environmental issues, and it applies commonly 0.60% accepted valuation and quantitative impact assessment methodologies. 0.40% A training manual has also been developed which 0.20% provides explanations of the methodologies used to assign monetary values to environmental degradation. 0.00% Water Air Coastal Land Waste This documentation has been translated into French and Arabic and has been used in training sessions in Egypt, Lebanon and Morocco. Water Pollution. Sub-standard potable water quality and inadequate sanitation facilities have a cost SUMMARY OF FINDINGS to society. In Lebanon, it's estimated that about 260 children die every year (10% of all child deaths) from In 2000, the cost of environmental degradation in diarrhea-related diseases associated with inadequate Lebanon was estimated between 2.8% to 4.0% of GDP potable water, sanitation and hygiene. The same factors per year, with a mean estimate of close to US$565 are also responsible for infectious diseases such as Third Quarter 2004 5 Republic of Lebanon Update intestinal worm infections and non-fatal diarrhea. birds. While it is very difficult to provide a Mortality and morbidity are measured in terms of life comprehensive estimate of the cost of degradation for years lost, productivity loss and the cost of treatment all these issues, an attempt was made to capture at least and care giving. In addition to health costs, Lebanon's part of these costs. Agriculture productivity loss from population consumes a large quantity of bottled water, soil and terrace degradation was estimated between mostly due to the perception that municipal water is of $60­90 million per year. The impact of only 4 non- low quality. While some consumption of bottled water rehabilitated quarries in Mount Lebanon on the is associated with taste and lifestyle preferences, the surrounding settlements was estimated at more than $10 cost associated with the perception that municipal water million per year. This is the result of decline in land and is of inferior quality is estimated at around $90 million apartment prices due to the visual and aesthetic impact per year. This consumption also contributes to of the quarries. The loss of recreational value due to increased plastic and glass bottle waste. deforestation and unplanned construction in Aaley, Kesouran and Maten districts of Mount Lebanon province alone was assessed at a minimum of $10 Urban Air Pollution. Despite significant million per year. improvements in overall air quality levels due, for example, to the recent banning of light diesel vehicle, the impact of air pollution on human health is still Coastal Zone Degradation. The coastal zones of significant. Based on annual average concentrations of Lebanon represent unique cultural, ecological, fine particulates (PM10) monitored in the air of Greater economic and recreational assets for the country. Beirut and estimated for Greater Tripoli, it is estimated However, with more than 50% of the population that about 350 people die prematurely each year due to concentrated on the coast, much of it has been degraded urban air pollution. Additional cases of chronic by pollution (untreated municipal wastewater, seafront bronchitis and other forms of respiratory illnesses are solid waste dumps, etc.) and uncontrolled development counted by the thousands. Lead concentrations in the of resorts and vacation homes right up to the shoreline. air of Greater Beirut is estimated to cost about 0.2% of The degradation is particularly severe in the areas annual GDP and impair neurological development in surrounding Beirut and Jounieh. The only significant children. stretch of beach and coastline that remains relatively unspoiled is in the southernmost part of Lebanon. The cost of coastal zone degradation in terms of domestic Indoor Air Pollution. A less known form of air recreational losses (see Box 1 for more details), pollution is that which occurs indoors. The use of international tourism losses and ecological value is biomass fuel for cooking and heating causes health estimated conservatively at around $115 million per threatening problems, especially for women and young year. children who spend disproportionately more time indoors than men and older children. Indoor air quality monitoring data for Lebanon are not available. Uncollected municipal and household However, based on the consumption of biomass (about waste. Lebanon has witnessed significant 3% of total fuel use), it was estimated that indoor air improvement in the collection of municipal and pollution in rural areas could cause health damage of household waste in major part of the countries over the US$25 million per year, as a result of acute respiratory past decade. However significant impacts on health, infections, chronic obstructive pulmonary diseases and quality of life and natural resources remain from heart disease. unsanitary landfills, open dumps, and the lack of treatment of industrial, hazardous and hospital waste. Unfortunately, no study in Lebanon has quantified the Land degradation and wildlife. High population risk and damage associated with these impacts and density, decades of uncontrolled and unplanned therefore no estimate are provided here. construction, rangeland degradation, and neglect of terraced agricultural land are putting strong pressure on Lebanon's limited land and wildlife resources. In CONCLUSION addition, more than 700 quarries, many abandoned, have destroyed habitats and vegetation and reduced the It should be noted that the results presented are likely to aesthetic value of surrounding properties. The underestimate the total damage costs from destruction of forests and rangeland have also impacted environmental degradation, since no cost estimate is habitats, especially the seasonal homes of migrating provided for many sources of degradation. However, 6 Third Quarter 2004 Republic of Lebanon Update despite the limitations and difficulties involved in Box 1 - Loss in Domestic Recreational Value assigning monetary costs to environmental degradation, from Coastal Zone Degradation such estimates have numerous benefits: Lebanon has a Mediterranean coastline of 225 § They can be a powerful means of raising awareness kilometers. Urbanization, uncontrolled about environmental issues. development of resorts, and the practice of § They provide a useful mechanism for ranking the dumping untreated municipal wastewater and relative social costs of various forms of solid waste into the sea have contributed to the environmental degradation. degradation of the shoreline, especially around § They offer policy makers an instrument for the capital and the Bay of Jounieh. This integrating the environment into economic deterioration has significantly reduced the development decisions. recreational value of the coastline for the Lebanese population and has forced people to § By expressing damage costs as percentages of travel greater distances to reach cleaner beaches. GDP, they allow for comparison with other economic indicators. A survey undertaken in 2002 assessed § They give environment ministries a tool for incremental travel costs as a proxy to quantify discussing the importance of environmental the loss in recreational value. It showed that protection in economic terms; hard numbers are in 415,000­580,000 day trips each year were being the same metric as those used by ministries of made from the Beirut area to five natural beaches finance or the economy. located between 28 and 62 kilometers from Beirut. The incremental travel cost to these areas To obtain a copy of the full report: was estimated at US$21 per day per visitor, on the basis of additional travel distance; a vehicle Visit: http://www-wds.worldbank.org operating cost of US$0.45 per kilometer; a time Or Contact Maria Sarraf: msarraf@worldbank.org value of US$3.7 per hour of travel time per person; and observed vehicle occupancy. Total incremental travel costs came to US$10 million­ US$12 million per year. Environmental Damage Costs - Regional Comparaison (annual costs as percentage of GDP ) 2.00% Algeria 1.50% Egypt Lebanon 1.00% Morocco Syria 0.50% Tunisia 0.00% Water Supply Indoor Air Outdoor Air Coastal Zone Land and Sanitation Pollution Pollution Degradation Degradation Notes : Date of the estimates are 1999 for Algeria, Egypt, and Tunisia, 2000 for Lebanon and Morocco, and 2001 for Syria . Third Quarter 2004 7 Republic of Lebanon Update ECONOMIC DEVELOPMENTS IN THE THIRD QUARTEROF 2004 Recent developments over the third quarter unproductive public expenditures should be targeted in reinforced the likelihood of a decline in the debt to priority. Some of them are easy to identify, like GDP ratio in 2004 ­ the first time since 1992. Fiscal transfers to Electricité du Liban (EDL) for instance. revenue continued to increase in the third quarter 2004, Others are less obvious, and the World Bank the result of accelerated economic activity and greater forthcoming Public Expenditure Review will try to tax collection. On the expenditure side, Lebanon is now identify waste and inefficiency in public spending fully benefiting from the mechanical effect of the Paris which, if cut, would allow Lebanon scope for II financial package on its debt service. On the other expanding and improving public services and social hand, and in contrast with the first six months of 2004, expenditures with potentially high positive impact. primary expenditures severely slipped over the third quarter of 2004. As a result, the primary surplus could Greater fiscal credibility could also help in lowering approach 3.5 percent of GDP in 2004 - against 4.3 Government borrowing costs. The Lebanese percent forecasted three months back. The debt to GDP Government has little control on interest rates, but ratio would hence drop by approximately 3 percentage could also lower its borrowing costs by convincing points of GDP in 2004 compared with a year earlier, investors of its capacity and will to tighten its fiscal against 4 percent forecasted three months back. policy. But there is no miracle there to meet this daunting challenge: reforms will need to be anchored in Debt sustainability, though, is not yet guaranteed. credible commitments and supported by a broad-based Most of the financial benefits of the Paris II package consensus. Enhancing the credibility of the adjustment will disappear after 2005 (soft loans from commercial requires tackling governance issues ­ the overall use of banks in particular) and the external environment might public funds - at their roots. Only when policy not always be as favorable to Lebanon as it is today - measures are viewed as long term and credible will nominal interest rates in particular, which have started borrowing costs decline. In this regard, a good to grow again on the domestic financial market. While communication strategy and some key institutional the risk of a financial contingency is limited in the short reforms can pay off rapidly. Gaining broad-based run -- as most of the foreign currency denominated-debt political support for the adjustment will require to maturing in 2004-5 has already been rolled over, distribute the burden evenly and to reinforce social Lebanon has not yet emerged from its macro- protection in the process. imbalances and will continue to remain vulnerable to a sudden reversal in confidence until it manage to restore full credibility through sound fiscal consolidation. REAL SECTOR DEVELOPMENTS Additional fiscal reforms are needed to push the The regrettable absence of updated economic debt ratio on a steep declining slope and restore a statistics precludes the rigorous monitoring of macroeconomic environment more conducive to economic activity. Not only national accounts are growth. Lebanese authorities are fully cognizant of the missing, but also up-to-date information on households' need to reduce fiscal imbalances and have undertaken living conditions and unemployment, which makes any major efforts in this regard, mainly through increased policy step speculative. The World Bank is encouraged tax collection, debt restructuring, and the adoption of by recent efforts exerted by the Government to develop privatization laws. Yet, debt sustainability analyses quantitative information, notably regarding national suggest that privatizations and tighter debt management accounts and households' living conditions. The will not suffice to put the debt to GDP ratio on a steep Government's efforts should be sustained to make declining curve, unless accompanied with much higher permanent the production and dissemination of reliable primary surplus than realized in 2004. This will statistics in these fields, as a critical element for good necessarily include a containment of non-debt governance. expenditures. International experience suggests that fiscal stabilization that concentrates on expenditure side Indirect indicators point to a significant acceleration cuts rather than tax-based adjustment is more likely to of economic activity in the first nine months of 2004 succeed in reducing the debt to GDP ratio, as it better compared with the same period in 2003. The preserves growth, and does not let the private sector International Monetary Fund estimates that real GDP bear the whole burden of adjustment alone. Obviously, could grow by 5 percent in 2004 (against 3 percent in 8 Third Quarter 2004 Republic of Lebanon Update 2003), while the Audi Bank estimates that it could grow have actually decreased in real terms since 2000,1 by approximately 4 percent (against 3 percent in 2003). illustrating the absence of domestic investment The coincident indicator computed by the Central Bank counterpart to the current positive external shocks. The (Banque du Liban, BDL) is recording a 9.6 percent bulk of private investment (domestic and foreign) finds growth rate in the first nine months of 2004 (compared little room in which to base its potential for growth, with a 5.5 growth rate in 2003). One of the most other than non-traded goods and services ­ land, real reliable indicator of economic transactions is the estate and Government debt. evolution of compensated checks, which grew by 7.6 percent in real terms in the nine months of 2004 compared with the first nine months of 2003. The same FISCAL ACCOUNTS indicator had registered a 3.8 percent growth between 2002 and 2003. The rapid growth in airport passengers, Public finance continued to improve in 2004. Total +22 percent, tourism, +29 percent, and foreign trade, deficit decreased to 27 percent of total payments in +29 percent, suggest a rise in tourism and trade 2004, down from 37 percent in 2003. Primary surplus activities. On the other hand, construction activity reached 10 percent of expenditures, up from 6.3 percent (measured by cement deliveries, +6 percent), which had a year earlier. As a ratio of GDP, prolonging the trend been one of the main growth drivers in the first half of observed over the first nine months of the year, primary 2004, seems to have decelerated over the third quarter surplus is forecasted to reach approximately 3.5 percent of 2004. of GDP at year-end, a ratio comparable to that of 2003 (3.2 percent of GDP). Nevertheless, the primary surplus Private consumption and exports became the main requested for the stabilization of the debt to GDP ratio drivers of growth between 2003 and 2004. is now at only 1.4 percent of GDP, as debt service Seemingly, GDP growth was driven in the first nine largely decreased in 2004. months of 2004 by exports of goods (+23.4 percent over the first nine months of 2003, some of which are Increased revenues remain the main engine of the re-exports) and services (tourism in particular), public fiscal consolidation. Revenues increased by 14 percent and private consumption of goods and services (some in 2004, and by 19.5 percent annually on average since of which are domestic, some of which are imported, as 2001. Average annual nominal GDP growth over the reflected in the rapid growth of imports in the first nine same period should seemingly not exceed 5 percent. months of 2004, +34.8 percent compared with 2003). The share of public revenue to GDP is hence believed Some of these trends have now been sustained for to have increased from 17.6 percent in 2001 to 23.5 several years, and could continue to represent major percent in 2004. The main increases in revenues in sources of growth in the foreseeable future, should the 2004 is due to greater VAT collection. The latter regional situation stabilize. In particular, tourism increased by 30 percent over the first nine months of activity seems to be very promising, with an annual 2004, the result of greater domestic activity, imports, growth rate in the number of tourists of approximately and the lowering of the exemption threshold. Increase 6-7 percent a year since 1998, with a strong in VAT explains two-fifth of the total revenue increase. acceleration over the last two summers. Lebanon seems Other tax revenues, principally tax on interest revenues to have regained part of its market shares and reputation and real estate taxes, increased by 21 percent compared enjoyed before the war, in particular vis-à-vis to 2003 and contributed for one-third of the total neighboring Arab tourists, which constitute the bulk of increase. Non-tax revenues, mainly Telecom receipts, new-comers. Foreign trade activity seems also to be increased by 14 percent and represent the remaining back on a solid growth track, as currently benefiting one-fourth of the total increase in revenues. from the surge in Iraq's reconstruction needs. On the other hand, growth in public absorption remains undesirable in the face of fiscal imbalances, investment concentrated in real estate, and the overall surge of economic activity continues to be driven, for a large share, by external and volatile factors (Gulf tourism, remittances and investments 1Between December 2000 and Septemb er 2004, commercial banks' related to oil prices, reconstruction in Iraq), as the same credits to the private sector grew by 6 percent (source: Banque du acceleration is observed elsewhere in the MENA Liban, BDL). During the same period the consumer price index rose region. In Lebanon itself, in spite of rapid broad money by 9 percent (source: Consultation and Research Institute), and money supply (M3 plus non re sidents' deposits) increased by 40 growth, banking credits to the domestic private sector percent (source: B DL). Third Quarter 2004 9 Republic of Lebanon Update Table 1 ­ Fiscal Accounts denominated in foreign currencies) stood at 52 percent in September 2004, compared to 53 percent a year Figures in US$ million 2001 2002 2003 2004 earlier. Commercial banks held 46 percent of the debt Total receipts 2,234 2,876 3,252 3,711 in September 2004, against 49 percent a year earlier. Budget receipts 2,054 2,646 3,025 3,502 The Central Bank detained 20 percent of the debt, Tax revenues 1,428 1,983 2,193 2,558 against 15 percent a year earlier. Other public VAT 0 434 632 823 institutions, like the Social Security and the Institute of Customs 762 788 795 807 Guarantee of Deposits, as well as residents of Lebanon Other tax revenues 666 760 766 927 now hold 8 percent of the debt against 12 percent in Other 626 663 831 944 Treasury receipts 180 230 227 209 September 2003. The remainder, 26 percent in 2004 Total payments 4,163 4,772 5,181 5,093 and 24 percent in 2003, is mainly held by non-residents, Excluding debt service 1,615 1,847 1,996 2,149 including foreign Governments and international Debt service 2,037 2,096 2,257 1,888 financial institutions. in LBP 1,650 1,527 1,461 1,108 in FX 387 569 796 780 Treasury payments 510 830 928 1,056 EXTERNAL ACCOUNTS Surplus / Deficit -1,928 -1,897 -1,929 -1,382 Source: Ministry of Finance Private capital inflows are on the rise, but insufficient to compensate for the decline in public transfers. Net capital inflows continued to decrease The drop in debt service was almost offset by a throughout the year 2004. Cumulated net capital rapid slippage of primary expenditures in the third inflows in September 2004 reached US$5.8 billion, quarter of 2004. While expenditures decreased by 7.3 against US$7.3 billion in September 2003. If we percent in the first half of the year, they increased by 11 exclude Paris-II inflows though, net private capital percent in the third quarter, which brings the total inflow for the nine months of 2004 exceeds that of decrease over the nine months down to a mere -1.7 2003 by US$0.6 billion. However, in June, the percent. The decrease in overall (debt and non debt, additional private net capital inflow for 2004 compared budget and treasury) expenditures is the result of a 16 to 2003 reached US$0.7 billion. This suggests a percent drop in debt service. Debt service is now decrease in the net private capital inflow by US$145 absorbing 51 percent of revenues, against 73 percent in million in the third quarter of 2004 compared to the 2003 and 93 percent in 2001. In contrast, primary same period of 2003. The fact that such a development expenditures increased by 9.6 percent over the first nine occurred while Lebanon had supposedly one of its best months of 2004. The most rapid increase occurred in tourist season in the last decade is noteworthy. the third quarter and reached 22 percent compared to the third quarter of 2003. The ratio of primary Figure 1. Cumulated Net Capital inflows over expenditures to GDP increased from 17 percent to 20 nine months (US$ million) percent between 2001 and 2003 and could reach 20 percent at year-end 2004. 8,000 Paris-II inflows The debt dynamic has been contained in 2004, and 7,000 its profile (maturities) improved. Public debt increased by 7.0 percent between September 2003 and 6,000 September 2004, and amounted, by that time, at 5,000 US$34.9 billion in gross terms. A year earlier, debt increased by only 5.4 percent. However accelerating in 4,000 2004, debt growth remains largely contained compared to the pre-Paris II period, when it reached 14 percent on 3,000 average between 1999 and 2002. The weighted average 2,000 life of Lebanese Pound TBs increased to 449 days in September compared to 407 days in June and to 327 1,000 days in September 2003. Following swaps on maturities 0 in August, average life of Eurobonds increased to 6.14 2000 2001 2002 2003 2004 years in September, up from 5.8 years in June. The share of public debt in LBP (versus the debt Source: World Bank Staff calculations 10 Third Quarter 2004 Republic of Lebanon Update The trade deficit widened by US$1.5 billion in the increased by US$ 2.6 billion since September 2003 and first nine months of 2004 compared with 2003. While by US$950 million since June 2004. merchandise exports continued to grow in 2004 (+23.4 percent, to reach US$1.3 billion), they grew insufficiently to cover additional imports and maintain FINANCIAL MARKETS DEVELOPMENTS the trade deficit at its 2003 level. Imports, through the combination of higher prices (the depreciation of the Money growth decelerated in the third quarter of LBP vis-à-vis the Euro) and higher demand grew up by 2004. Money supply growth remains critical to finance 34.8 percent to reach US$6.8 billion. Consequently, the Government deficit. Money supply increased by 6.4 cumulated trade deficit widened and amounted by end- percent over nine months since December 2003 September 2004 at US$5.5 billion. Prolonged over the compared to a 9.6 percent increase between year-end last three months of the year, it would correspond to a 2002 and September 2003. The deceleration in 2004 is deficit at approximately 36 percent of GDP. mainly due to the low 2 percent growth in M3 between June and September, the half of the growth rate in 2003 Figure 2. Cumulated Merchandise Trade Deficit during the same period. Growth in money supply was (US$ million) driven by the increase in domestic credits by 5 percent, while net foreign assets only increased by 2 percent 6000 2003 2004 since end 2003. Credits to the Government rose by 6.7 percent while credits to the private sector increased by 5000 3.3 percent since year-end 2003. 4000 Figure 3. Counterparts of money supply 3000 (US$ million) 900 2000 1000 600 0 300 Jan Feb Mar Apr May Jun Jul Aug Sep Source: World Bank Staff calculations 0 Higher trade deficit and lower net capital inflows -300 Net Foreign halted the growth in banks' net foreign assets. In Assets Other items cumulated terms, change in Lebanon's net foreign -600 assets was hence limited to +US$0.3 billion compared with the first nine months of 2003. The third quarter Q 1 - 02 Q 2 - 02 Q 3 - 02 Q 4 - 02 Q 1 - 03 Q 2 - 03 Q 3 - 03 Q 4 - 03 Q 1 - 04 Q 2 - 04 Q 3 - 04 2004 was particularly deceptive in this regard, as net Source: World Bank Staff calculations foreign assets (in commercial banks as well as the Central Bank) merely increased by US$30 million during the summer. Gross reserves at the Central Bank The movement of dollarization accelerated in the decreased by US$260 million compared to June and by third quarter of 2004, to reach 67.9 percent of US$225 million compared to September 2003. deposits in September, compared to 67.1 percent in Symmetrically, commercial banks' foreign assets grew June and 66.1 percent at year-end 2003. The drop in the by US$520 million between September 2003 and 2004. spread between the US$ and LBP remuneration on This movement principally reflects the growing deposits might have contributed to this increase in dollarization of deposits, by one percentage point in dollarization until August. However, as half of the 2004 (see below), through conversions to foreign overall increase in dollarization seems to have occurred currencies. But the mechanical effect on the Central in the month of September, this suggests that political Bank's gross reserves was mitigated by the emissions tensions dominated the market evolution starting this of Eurobonds in September and voluntary deposits in date. Interest rates on deposits witnessed contrasted foreign currencies of commercial banks at the Central evolutions in the third quarter of 2004. Average interest Bank. We estimate those special deposits to have rate on LBP denominated deposits remained unchanged at 6.92 percent between June and September 2004 after Third Quarter 2004 11 Republic of Lebanon Update decreasing from 7.79 percent at end 2003. Average Figure 4. Average Lending Rates interest rate on US$ denominated deposits increased to 9.8 16.5 3.30 percent in September from 3.17 percent in June, US$ LBP 9.7 16.0 but remained below the 3.43 percent of December 9.5 15.5 2003. The spread between average rates on deposits in 9.4 15.0 LBP and US$ has then decreased to 362 basis points 9.2 14.5 (bps) in September, down from 375 bps in June 2004 9.1 14.0 and 436 in December 2003. US$ 8.9 13.5 LBP 8.8 13.0 Lending interest rates continue to decline. Interest 8.6 12.5 rates on private lending decreased in the third quarter. 8.5 12.0 Average interest on US$ denominated loans decreased 8.3 11.5 to 8.07 percent in September from 8.41 percent in June 8.2 11.0 and 8.81 percent in December 2003. Interest rates on 8.0 10.5 LBP loans continued to decrease and reached 10.69 percent in September against 10.95 percent in June and Dec - 02 Mar - 03 Jun - 03 Sep - 03 Dec - 03 Mar - 04 Jun - 04 Sep - 04 11.32 percent at year-end 2003. The spread between Source: Banque du Liban lending and depositors interest rates in LBP decreased to 377 bps in the third quarter from 403 bps in June but remains higher than the spread at year-end 2003 (353 Structure of assets continues to reflect the tight link bps). The spread between lending and depositors' between the banking sector and the public sector interest rates in US$ continued to decrease and reached (Government and Central Bank). Commercial banks' 477 bps in September compared to 524 bps in June and deposits at the Central Bank amount to 31 percent of to 538 bps in December 2003. The decrease in lending banks total assets. Commercial banks' loans to the interest rates is consistent with the stagnation of lending Government in LBP and foreign currencies absorb to the private sector and with the change in the structure another 23 percent of banks' assets. While these ratios of lending, increasingly towards subsidized loans. remain stable since December 2003, the exposure on the public sector increased by US$700 million between Government borrowing costs on the rise. In contrast, June and September 2004 and by US$2.2 billion since average interest rates on LBP denominated Certificates end 2003. Foreign assets of banks reached 18 percent of of Deposits issued by the Central Bank and held by the total assets in September compared to 17 percent June commercial banks reached 9.47 percent in September, 2004, due to the increase in the dollarization of banks' compared to 9.44 percent in June and to 9.07 percent in deposits. December 2003. Interest rates on US$ assets are varying between 3.9 percent and 4.0 percent since May 2004, after a sharp drop from 5.07 percent in December 2003. All in all, and despite the decrease in interest rates on loans to the private sector, the tendency is for a rise in interest rates. The swap of Eurobonds and new emissions in August (for a total amount of US$1.5 billion) occurred at 50 to 60 bps above the rates on the latest Eurobonds issuance in May. For the swap of LBP denominated Treasury Bills announced in October (for an amount of three thousand LBP billion, or US$2 billion), the additional rates over primary market issuances varied from 45 bps to 100 bps according to maturities. 12 Third Quarter 2004 Republic of Lebanon Update BANK GROUP OPERATIONS IBRD Ongoing Projects The current World Bank portfolio in Lebanon consists Ba'albeck Water and Wastewater Project. (US$43.5 million). The major development objectives of the of nine Projects for a total commitment amount of US$387.82 million, of which US$134.31 million has Project include: (a) improving the access of satisfactory been disbursed through October 31, 2004. water supply and wastewater services to the region's residents; (b) introducing appropriate sector reforms­ particularly the development and strengthening of the Revenue Enhancement and Fiscal Management Technical Assistance Project (REFMTAP). (US$25.25 capacity of the existing Ba'albeck Hermel Water and million). The Project seeks to support Government Irrigation Authority and, once it is established, the Bekaa Regional Water Authority; and (c) involving the efforts to enhance revenue and strengthen fiscal management. private sector in the operation and maintenance of water and wastewater facilities by preparing for a Management Contractor (MC) through a lease or National Roads Project (NRP). (US$42.0 million). concession contract that would secure the long-term The objective of this Project is to improve the capacity financial needs for sector investments. The Board of of the road administration to undertake the Directors approved the Project in June 2002. rehabilitation of the primary road network. Urban Transport Development Project (UTDP). Agriculture Infrastructure Development Project (US$65.0 million). The Project's objectives are to (AIDP). (US$24.0 million). The Project's objectives provide the city of Beirut and the Greater Beirut Area are: (a) increasing farmers' incomes and conserving the with the basic institutional framework that is currently environment through land terracing and development lacking, and to support critical investments needed to and storage of runoff water; (b) improving access to maximize the efficiency of existing urban transport rural areas; and (c) upgrading institutional capabilities. infrastructure. The Board of Directors approved the Project in June 2002. Education Development Project (EDP). (US$56.6 million). This Project is designed to Commitments and Disbursements support the Government's efforts to as of June 30, 2004 enhance the capacity of the Ministry Approval Loan Amount of Education to function as an Project Name Year Amount Disbursed effective manager of the education US$ Million sector and to restore the credibility of Revenue Enhancement and Fiscal the Public Education System. 1994 25.25 23.89 Management Technical Assistance National Roads 1996 42.00 36.36 First Municipal Infrastructure Agriculture Infrastructure Development 1996 24.00 18.80 Project (MIP-I). (US$80.0 million). Education Development 2000 56.57 4.50 This Project aims at addressing urgent Municipal Infrastructure ­ I 2000 80.00 44.63 municipal works while setting the Community Development 2001 20.00 1.46 stage for the gradual assumption of Ba'albeck Water and Wastewater 2002 43.50 1.43 responsibility for municipal services Urban Transport Development 2002 65.00 2.04 at the local level. Cultural Heritage and Urban Development 2003 31.50 1.20 TOTAL 387.82 134.31 Community Development Project (CDP). (US$20.0 million). This Project is designed to Cultural Heritage and Urban Development Project raise living standards in targeted poorer communities, (CHUD). (US$31.5 million). The Project will finance and to raise economic activity levels in such site conservation, enhancement investments, and communities by investing in grass-roots social and associated urban infrastructure improvements in small infrastructure activities, and in employment selected sites, and provide technical assistance to creation. strengthen the capacity of the Directorate General of Antiquities, Ministry of Tourism, and targeted municipalities in cultural heritage preservation and Third Quarter 2004 13 Republic of Lebanon Update tourism development. A signing for implementation of the Project was held in July 2003. IFC Projects in Lebanon Lebanon Leasing Company (LLC). The Project Uniceramic. The Project supports the modernization involves the establishment of Lebanon's first leasing of the company's existing production line and the company, providing lease finance to local small- and expansion of the plant's capacity of glazed ceramic medium-size enterprises. It also includes two credit floor tiles. lines from IFC to fund LLC's leasing activities. Bank of Beirut and the Arab Countries (BBAC) Middle East Capital Group (MECG). The Project Credit Line. The Project offers innovative residential consists of the establishment of the first regional mortgages to middle income customers. investment bank in the Middle East, and is headquartered in Beirut. Banque Saradar SAL. The Project involves an equity investment in common shares of the company. Banque Libano-Française. The Project offers innovative residential mortgages to middle income customers. Byblos Bank Syndicated Credit. The Project aims at providing long-term project finance to small- and Bank of Beirut Lebanon Credit Line. The Project medium-sized enterprises in Lebanon for consists of credit lines to four Lebanese private sector infrastructure project finance, and to increase its commercial banks for on-lending to local small- and housing loan portfolio. medium-sized enterprises in the private sector, and to middle income families to finance either the purchase of Société Générale Libano-Européenne de Banque. their first residence, or the expansion of their existing IFC extended a Line of Credit to Société Générale home. Libano-Européene de Banque to be utilized in support of its housing finance program. Idarat, SAL. The Project funds the company's investment program in hotels and restaurants and is Fransabank. IFC extended a credit line to designed to help revive the tourism industry, which is Fransabank to support its housing finance program. a key sector in Lebanon. Agricultural Development Company (ADC). The Idarat SHV (Société Hôtelière "de Vinci" SAL). Project is designed to rehabilitate and expand the The Project supports the Company's investment in a existing facilities of ADC, which is involved in the Greenfield 5-plus stars "boutique" all suites hotel in poultry business, into an integrated broiler meat an up-scale residential district of Beirut. production facility. 14 Third Quarter 2004 Republic of Lebanon Update BENCHMARKING LEBANON'S INVESTMENT CLIMATE Introduction Since the end of the war, Lebanon has attempted to a business, Lebanon ranks 2nd in the MENA region, regain its regional position as a center for trade, requiring six procedures, which is equal to the OECD investment and finance. The country has clearly made average, and well below the MENA average. significant progress in a number of areas, and a number of sectors, such as real estate and tourism, have As for the time required for opening a business, regained their dynamism. But the overall record Lebanon ranks 8th in MENA measuring slightly worse remains mixed, calling for concerted attention to areas than the average of 40 days, but way behind the OECD of weakness. This article relies on the World Bank's average of 25 days. This is a somewhat surprising Doing Business 20051 database to assess the strengths result: It calls into question why these procedures, and weaknesses of the Lebanese business environment. though limited in number, are so protracted. The Lebanese figures are contrasted to the average for the Middle East and North Africa (MENA) and the Starting a Business - Time in Days Organization for Economic Cooperation and Development (OECD) regions, as well as to individual 70 countries such as Singapore. The figures provide useful 60 benchmarks against which Lebanon can measure its 50 performance. The business environment is assessed 40 along seven criteria: starting a business, hiring an d 30 firing workers, registering property, getting credit, 20 protecting investors, enforcing contracts and closing a 10 business. 0 Starting a Business Iran AlgeriaEgypt UAE JordanKuwait AvgOECD LebanonMorocco OmanArabia SyriaTunisia Yemen The ease of starting a business is assessed in terms of Saudi MENA the number of procedures required, duration in days, cost of starting the business measured as a percentage Source: Doing Business Database of gross national income (GNI) per capita and minimum capital requirement as a percentage of GNI The cost of starting a business in Lebanon is one of the per capita. In terms of number of procedures for starting highest in MENA with only Yemen behind it. Lebanon ranks 12th in MENA. Again, a surprising result given the few procedures involved. Having the same number Starting a Business - Number of Procedures of procedures as OECD, starting a business in Lebanon costs 16 times more than in any OECD country. 16 14 Starting a Business - Cost in Percentage of GNI 12 10 300 8 6 250 4 2 200 0 150 100 Iran AlgeriaEgypt UAE JordanKuwait AvgOECD LebanonMorocco OmanArabiaSyriaTunisia Yemen 50 Saudi MENA 0 Iran AlgeriaEgypt JordanKuwaitLebanonMoroccoOman ArabiaSyriaTunisiaUAE Yemen Avg OECD MENA 1 Doing Business in 2005 is part of the annual World Bank Saudi reports investigating the scope and manner of regulations that enhance or constrain business activity. It offers quantitative Source: Doing Business Database indicators on business regulations and their enforcement compared across 145 countries. Third Quarter 2004 15 Republic of Lebanon Update The minimum capital for opening a business compared they tend to grow to more efficient sizes and pay taxes, to per capita income is relatively low in Lebanon, the increasing the tax base for government revenues. third lowest in the MENA region. Still it is almost double the requirement in OECD. Hiring and Firing Workers Starting a Business - Minimum Capital as a The data is based on an assessment of employment laws Percentage of GNI per Capita and regulation as well as specific constitutional provisions governing this area. 6000 5000 The index may take values of 0-100 with higher values 4000 indicating more rigid regulation. The indicator gives 3000 businessmen an idea of the impending indirect costs 2000 linked to their ability to adjust to shocks, such as new 1000 technologies, macroeconomic shocks and privatization. 0 Lebanon ranks third in the MENA region in terms of rigidity of employment, doing well above the MENA Iran average and close to that of OECD. AlgeriaEgypt JordanKuwaitLebanonMoroccoOman ArabiaSyriaTunisiaUAE Yemen AvgOECD Saudi MENA Source: Doing Business Database Hiring and Firing Workers - Rigidity of Employment Index On average, out of four indicators for starting a business, Lebanon ranks 6th in the region. Lebanon has 80 70 scored relatively well when it comes to the minimum 60 capital required and the number of procedures. But this 50 positive score is offset by the long duration for starting 40 a business and the high cost accompanied with it. 30 20 10 This suggests that there remains scope for cutting the 0 costs of setting up a business as well as the minimum capital required to do so. Some countries have Iran AlgeriaEgypt Oman ArabiaSyriaTunisiaUAE Yemen AvgOECD combined several administrative functions into a single JordanKuwaitLebanonMorocco Saudi MENA access point for would-be entrepreneurs; others improved information systems. More procedures mean Source: Doing Business Database more delays and more opportunities for bureaucrats to extract bribes. Two procedures are enough to start a Lebanon has adopted redundancy as grounds for business in New Zealand: notification of existence, and dismissal. However, high firing costs - 103 weeks of registration for tax and social security. The time and wages, as compared to the regional average of 74.3 - cost to set up a business go hand in hand. Lebanon can might be its downside especially with the relative high reduce the number of procedures while maintaining the minimum wage of the Lebanese workers as compared same level of regulation. Turkey was able to do this by to that of the Syrians. This has led many businessmen launching one-stop registration through combining to employ non-Lebanese workers informally to preserve seven procedures into a single visit to the company their competitive ability in the Arab market. registry. When compared to Singapore, Lebanon is well behind. Reducing costs can be straightforward. Scrapping Lebanon's working conditions should be more focused minimum capital requirements is a difficult reform on comparing them to the region. because it requires legislative change. But Lebanon was able to do it once by revising its company legislation in Registering Property 1998, which cut capital requirements to 82 percent of its per capita income. Lebanon can cut the minimum Heavy regulation and weak property rights act as an capital requirement to even less than the 82 percent. implicit tax on the value of property. They also increase the transaction cost of trading. High costs of registration Experience with reform shows that new entry of formal and land use/urban planning rigidities can hurt the poor businesses grows when regulation is relaxed and the in restricting them to owning informal assets that administrative process simplified. Enticing enterprises cannot be used as collateral to obtain loans. Hernando to the formal economy has two economic benefits for 16 Third Quarter 2004 Republic of Lebanon Update De Soto calls this "dead capital." Considerable benefits debtors by increasing their chances to access credit. can be achieved when the process of formalizing Credit markets work best with an effective assessment property rights is combined with improvements in the of the borrower's credit history, an ability to use a wide land registry, collateral registry and access to credit. range of assets as collateral cheaply and enforcement of collateral out of court. It takes 24 days to register property in Lebanon, well below the MENA average of 54 days and OECD's The data on credit information sharing institutions norm of 34 days. confirms the presence/absence of public credit registries and private credit information office. A public credit Lebanon ranks 5th when it comes to the cost of registry is defined as a database managed by the public registering property, close to OECD's 5 percent. sector, usually by the Central Bank, which collects information on the standing of borrowers in the financial system. It role is to facilitate exchange of Registring Property - Cost (% of property per capita) credit information among banks and financial institutions. The coverage indicator reports the number 35 of individuals and/or firms listed in the private credit 30 bureau as of 2004 with current information on 25 repayment history, unpaid debts, or outstanding credit. 20 The number is scaled to the country's population (per 15 1,000 capita). A coverage value of 0 indicates that no 10 bureau operates. 5 0 Getting Credit - Public Credit Registry Coverage Iran (borrowers per 100 adults) AlgeriaEgypt JordanKuwaitLebanonMoroccoOman ArabiaSyriaTunisiaUAE Yemen Avg OECD Saudi MENA 120 Source: Doing Business Database 100 80 60 When compared to Singapore, Jordan and Turkey, the 40 process of registering property is complicated by the 20 long period of time needed to get the job done, which 0 inevitably leads to high costs associated with the process. This indicator, however, is expected to Iran UAE improve substantially in next year's assessment as AlgeriaEgypt JordanKuwaitLebanonMorocco OmanArabiaSyriaTunisia Yemen AvgOECD Lebanon has made significant improvements in the land Saudi MENA registration system through automating the procedure with funding from the World Bank. Source: Doing Business Database During the last two years, Lebanon introduced new In terms of public registry coverage, Lebanon ranks 3rd, legislations and decrees. It has amended the 1969 law while in terms of private coverage only Kuwait has on the acquisition by foreigners of real estate and real such coverage. The MENA region is well behind when estate rights in Lebanon. But the investors are required compared to the OECD average of 76 in public and to obtain a license granted by decree from the Council private credit registry coverage. of Ministers upon proposal of the Minister of Finance, a limitation which leaves room for bureaucratic processes In Lebanon, the issue is not so much whether there is to delay the acquisition (it was initially imposed to access to credit, but who has access to such credit. restrict Palestinian refugees from owning real estate in Observing the Lorenz Curve describing banking credit Lebanon). This law, which was amended primarily to allocated to the private sector in Lebanon, one can infer encourage investors, might not be effective if not that there is inequality in the distribution of cred it. One accompanied by the simplification of the process. percent of the borrowers get 52 percent of the banking credit, while 45 percent get only two percent of the Getting Credit credit. Having access to credit is directly linked to investment and job creation, especially within small and medium enterprises (SME). The concentration of credit Improving credit information and the laws to create and in the hands of few family-owned businesses is a major enforce collateral - both in and out of bankruptcy - is constraint to the development of small and medium not just about creditor rights. It also benefits deserving Third Quarter 2004 17 Republic of Lebanon Update enterprises. The establishment of "Kafalat" as a way to Enforcing Contracts reach SMEs is a step in the right direction. The DBD contains two main indicators of efficiency of the judicial system on the enforcement of commercial Protecting Investors contracts. The first is the number of procedures mandated by law or court regulation, requiring DBD distinguishes three dimensions of investor interaction between the parties or between them and the protection: disclosure of ownership and financial judge or court officer. The second indicator is an information; legal protection of small investors; and estimate ­ in calendar days ­ of the duration of the enforcement capabilities in the courts or security dispute resolution. Time is measured as the number of regulators. DBD 2005 focuses on the first two. The data days from the moment the plaintiff files the lawsuit in comes from a survey of corporate and security lawyers court until the moment of actual payment. and is based on relevant corporate governance laws and regulations applicable to a standard company. Lebanon ranks 5th in the number of procedures for enforcing contracts a bit below MENA average but The index captures seven ways of enhancing disclosure double that of the OECD It varies between 0 and 7, with higher val ues indicating more disclosure. The country does much worse in terms of the duration for enforcing contracts, ranking last. It takes firms triple Lebanon ranks 8th in the disclosure index, well below the time to enforce a contract in Lebanon than the the average of the MENA and OECD. OECD average. Protecting Investors - Disclosure Index Enforcing Contracts - Duration in Days 7 800 700 6 600 5 500 4 400 300 3 200 2 100 0 1 0 Iran UAE Egypt Algeria Jordan Kuwait Oman Syria Avg Arabia Tunisia Yemen OECD Iran UAE Lebanon Morocco AlgeriaEgypt JordanKuwait OmanArabia AvgOECD MENA LebanonMorocco SyriaTunisia Yemen MENA Saudi Saudi Source: Doing Business Database Source: Doing Business Database In Lebanon, debt recovery takes two years. The The Lebanese securities market is small in relation to problem does not lie in the quality of judges or the lack the country's economy and to other markets i n the of resources, but in the overly bure aucratic judicial region. Banks are the only source of finance for most procedures that judges and the litigants face when Lebanese. This situation is no surprise when taking it resolving a dispute. In the absence of efficient courts, into the context of corporate governance. Family fewer investments and business transactions take place. ownership, indirect ownership, beneficial ownership and voting agreements among shareholders are not The debt collection can be simplified by establishing disclosed. Audit committees are not established. summary proceedings and introducing case Ownership and financial information is not publicly managements, which would reduce corruption. Appeals available. should also be limited. Increasing the free of appeal could help. Lebanon can decrease its debt-recovery Lebanon needs to increase its disclosure requirements. cost, which is running 26 percent of the debt, by But these work only if they are backed by sufficient enhancing the efficiency in enforcing judicial rulings. penalties and enforcement. Judicial reforms in Jordan has accounted for more than half the debt recovery progress. 18 Third Quarter 2004 Republic of Lebanon Update Closing a Business Conclusion The cost measure is defined as the cost of the entire Based on the Doing Business Database, Lebanon needs bankruptcy process, including court costs, insolvency to improve the investment climate, given t he significant practitioners' costs, the cost of independent assessors, progress in neighboring countries like Jordan, Turkey lawyers, accountants, etc... The Time Measure is the and Tunisia (one of the regional leaders). Overall, average duration that insolvency lawyers estimate is Lebanon is doing reasonably well, but it risks necessary to complete a procedure. regression if it fails to push forward with reforms, especially that other emerging economies ­ in the Gulf Lebanon ranks 6th in the number of years for closing a for example - are aggressively reforming their business business, just above the average of MENA but double procedures. that of OECD. Lebanon has a rare wealth of development ingredients - Lebanon, however, does much worse in terms of overall a talented workforce of professionals and entrepreneurs. cost of closing a business, ranking 11th in MENA But it lacks some of the most basic ingredients that region and costing 2.6 percent more than the OECD most countries have come to take for granted average. (transparent, predictable, and enforceable rules and regulations for doing business)! Acquiring the latter is The reverse is true in Jordan, which has introduced purely a matter of will. reforms such as limiting appeals, having specialized expertise in the courts and paying administrators for Closing a Business - Time of Insolvency maximizing the exit value. The effort to develop bankruptcy laws has been misdirected into establishing complex procedures for reorganizing businesses in 5 distress. Simplifying the process, reducing the number 4 of procedures and moving the process out of the courts would decrease the actual cost of closing a business in 3 Lebanon. 2 1 Closing a Business - Cost of Insolvency 0 Jordan Lebanon Singapore Turkey MENA Avg OECD 20 15 Source: Doing Business Database 10 5 0 Jordan Lebanon Singapore Turkey MENA OECD Avg Source: Doing Business Database Compared to the selected countries, Lebanon falls behind in when it comes to the complexity and difficulty the businessmen face in trying to exit the business. Third Quarter 2004 19 Republic of Lebanon Update NEWS, RECENT AND UPCOMING ACTIVITIES Lebanon Development Marketplace 2005 "Harvesting Youth and Community Ideas for a Better Environment" The World Bank launched on Organic Pollutants (POP), Pollution Management (air, November 26, 2004 the Lebanon sea/river water...), Recycling, Waste Management Development Marketplace 2005 (solid waste, hospital waste, wastewater..) Water competition entitled "Harvesting Resources Management, Etc... Youth and Community Ideas for a Better Environment" in coordination with the UNDP FINANCING LIFE Programme and Al Bia Wal Tanmia magazine. So far, a total grant amount of US$130,000 has been The Lebanon Development Marketplace (LDM) is a raised for the competition, with the World Bank country-level replica of the international competition, contributing US$100,000 and the UNDP (the LIFE which the World Bank organizes yearly at its Programme) and the UN Resident Coordinator Office headquarters in Washington D.C. It provides a better contributing US$30,000. Depending on the number focus on local development issues, and tailors and size of finalist proposals, it is envisaged that 5 to 8 solutions to country needs and circumstances. awards will be provided to participants (with a maximum award size of US$20,000 per proposal). "Harvesting Youth and Community Ideas for a The number of final awards may be increased with Better Environment" is aimed at supporting additional contributions to the pot from other donors. community innovations and initiatives to clean up and The World Bank and UNDP are seeking the support of protect the Lebanese landscape, air and water. It aims international and national partners either financially or at linking social entrepreneurs, with poverty fighting in kind. and development ideas in the domain of Environment, to partners with the resources to implement them. COMPETITION PHASES The objective of the competition is to raise awareness Phase 1 - Call for Proposals (November 26, 2004 ­ about environmental degradation; involve the youth January 14, 2005). Proposal outlines conforming to and local communities in creative thinking and competition eligibility criteria and conditions should implementation; and pilot new ideas on the be typed in Arabic or English and submitted by mail environment which could be scaled up at the national to the World Bank Country Office. level, through a venture capital approach, while diversifying risk and encouraging innovation. Phase 2 - Review of Proposals (January 15, 2005 ­ March 7, 2005). Organizations whose proposals are ELIGIBILITY AND THEMES selected by assessment panels comprising experts in the environment field, including the competition's The LDM is an open, transparent and competitive sponsors, academia and NGOs. will be requested to initiative open to youth groups, local communities, submit full-fledge detailed proposals. national NGOs, academic institutions in both urban and rural communities. While municipalities are not Phase 3 - Final selection (April-June, 2005). eligible for competing on their own, community- Finalists will be invited to display their projects on based organizations are encouraged to coordinate Innovation Day (to be announced), where an with their local municipalities the implementation of independent panel of jurors comprising reputed the proposed initiatives. experts will evaluate each exhibit against an objective scorecard and announce winners. The competition is open along a long list of For more details on the Lebanon DM process, environmental sub-themes, which include, among eligibility criteria, and application templates: others: Biodiversity, Climate Change, Coastal and www.worldbank.org/lb or www.undp.org.lb Marine Management, Desertification, Energy, Forest and Forestry, Land Resources Management, Persistent 20 Third Quarter 2004 Republic of Lebanon Update Computer Donation Program of the World Bank The World Bank has recently launched a worldwide maternal and child health, adult literacy mentoring donation of recycled computers, office equipment and and other critical community services with non- supplies and furniture to non-profit NGOs located in profit status in the country in which they are Washington DC and other countries where the Bank located are eligible to apply to this donation has facilities. program. The second phase of the program has been announced. Interested NGOs may apply for the computer Nonprofits NGOs located in countries where the Bank donation program through an application process has a presence are invited to apply to the program. posted on the web. NGOs will be served on a first- come first-serve basis. Nonprofits/NGOs which provide programs in the areas of education, job training, opportunities for youth, For more information, visit: www.worldbank.org/lb or contact Guitta El Alam, gelalam@worldbank.org Development Marketplace 2005 Development Marketplace (DM), a World Bank program that helps to In the past, Global DMs have supported a broad identify and directly support range of initiatives. DM 2005 will set the stage for a innovative bottom-up development new thematic approach. The idea behind this ideas that deliver results, is approach is to incubate solutions to some of the most launching its call for proposals for 2005. DM is an demanding challenges in a particular sector and to excellent opportunity for the Bank to support use the results to inform the thinking and knowledge innovative local ideas, engage members of civil sharing within the World Bank and in the society, private sector and so forth. Since its development community at-large. inception in 1998, DM has awarded roughly US$25 million to more than 500 projects through Global Proposals can be sent from November 19 through and Country-level Marketplaces. January 21, 2005 and submitted through the DM website. Finalists will be announced in late-March This year DM will focus entirely on a global 2005. The Bank will award roughly US$3 million in initiative on the environment, calling for proposals grants to the best project ideas. The maximum award on Innovation for Livelihoods in a Sustainable amount will be US$150,000. This is a public event Environment. The objective is to engage the open to all in the development community. development community in productive environmental initiatives and inventive partnerships Unlike the country-level competition, the global DM that will test new approaches and offer high potential is a broader level competition where applicants impact in poverty reduction, economic development, compete against each other at the international level. and environmental sustainability. For more information about Development Proposals are welcome from a range of development Marketplace, visit: Innovators; civil society groups, social entrepreneurs, private foundations, academia, private sector www.developmentmarketplace.org corporations, as well as, staff from the World Bank and other donor organizations. Third Quarter 2004 21 Republic of Lebanon Update Small Grants Program 2005 in Lebanon The World Bank Lebanon Office organizations which have not been previously will launch the new round of the supported by the SmGP. Small Grants Program in January 2005. The SmGP in Lebanon The Small Grants Program (SmGP) was created in The Lebanon Country Office has been part of the 1983 to complement and facilitate the social Program for five consecutive years now. Previous development agenda of the World Bank. The SmGP grantees of the SmGP in Lebanon are: Save the provides, through Country Offices, grants to civil Children, Center for Research and Training on society organizations (CSOs) engaged in initiatives Development, Imam Sadr Foundation, Amel aiming at empowering groups and individuals that Association, National Association for the Rights of have been marginalized and excluded from the Disabled, Sesobel, Soins Infirmiers et participating in the public realm. The purpose of the Developpement Communautaire, Association for Small Grants program is to support the Volunteer Services, Lebanese Development Forum, empowerment of citizens to have greater ownership Mouvement Social and the Lebanese Association of of development processes, thereby making these Educational Studies. processes more inclusive and equitable. Small Grants cannot fund: Research programs, The SmGP supports activities that promote dialogue, formal academic training programs, operational dissemination, and linkages among organizations to projects, ongoing institutional core support (such as foster civic engagement. Civic engagement is equipment), scholarships, fellowships, study defined as: citizen, either individually or as programs, individuals applying on their own behalf, organized groups, interacting with the public sector or nonlegal entities. Proposed activities should not to strengthen mechanisms for inclusion, compete with or substitute for regular World Bank accountability and participation in order to influence instruments; the activity should be clearly development outcomes. It is important to distinguish distinguishable from the Bank's regular programs. between direct service delivery (which the SmGP does not support) and activities that foster new How to Apply for a Grant? relationships, and ideas about civic engagement. The 2005 call for proposals will be initiated early Proposals and Funding January 2005 to a long list of NGOs, and through the country office website. The call for proposals will Activities supported by the SmGP may include, but comprise of the SmGP guidelines and eligibility are not limited to, workshops and seminars to criteria, in addition to an application template. enhance civic engagement skills and /or knowledge, Applications received will be screened and reviewed appropriate communication campaigns to influence by a Small Grants Committee to ensure that the policymaking or public service delivery, costs of criteria are met, after which the awarding decision publications or audio-visual materials or other will be communicated to the winning CSOs in May innovative networking efforts that small 2005. organizations generally find difficult to fund through their regular program budgets. For more information about the Small Grants The activity should be completed within one year of Program in Lebanon, visit: the date the grant is awarded and the budget should www.worldbank.org/lb or contact not exceed the maximum amount of US$15,000. The Zeina El Khalil, zelkhalil@worldbank.org Small Grants Program rarely funds more than half of the proposed budget for an activity, and therefore prefers that its grants help leverage additional contributions from other sources. Priority is given to 22 Third Quarter 2004 Republic of Lebanon Update RECENT WORLD BANK PUBLICATIONS Doing Business in 2005: Removing Obstacles to action for some environmental issues. The cost of Growth (ISBN: 0-8213-5748-4; SKU: 15748). Doing remediation has been estimated for a limited number of Business in 2005: Removing Obstacles to Growth is the actions for each environmental category, and, although second in a series of annual reports investigating the the cost of remediation is the focus here, and mainly of scope and manner of regulations that enhance business investments and programs, a discussion of the policy activity and those that constrain it. New quantitative context is warranted. Reducing degradation, and indicators on business regulations and their protecting the environment should be viewed in the enforcement can be compared across 145 countries-- context of economic and sector policies and from Albania to Zimbabwe--and over time. development, and in the broader framework of environmental management. A comparison of benefits The previous report, Doing Business in 2004: (reductions in damage) and costs (remedial actions), Understanding Regulation, presented indicators in five can be useful to point to environmental issues, for main topics: starting a business, hiring and firing which benefits of remediation are likely to exceed the workers, enforcing contracts, getting credit and closing cost of remedial actions. a business. Doing Business in 2005 updates these measures and adds another two sets: registering property and protecting investors. The indicators are Current World Trade Agenda: Issues and used to analyze economic and social outcomes, such as productivity, investment, informality, corruption, Implications for the Middle East and North Africa unemployment and poverty, and identify what reforms Region (Working Paper 27396). The Paper discusses have worked, where and why. the imperatives for trade reform in the MENA region and presents an overview of the process and rules of In Doing Business in 2005, you will also find answers multilateral negotiations and MENA countries' to such questions as: Which are the Top 10 reformer involvement. It also examines the three sector areas of countries since last year? Which are the Top 20 agriculture, services, and textiles and clothing. This economies for doing business?, as well as Which Paper focuses on three key questions for the MENA countries implemented more harmful regulations? region: (1) How will trade liberalization in agriculture, services and implementation-completion of the textiles and clothing agreements affect MENA prospects?; Cost of Environmental Degradation - The Case of (2) How should the MENA countries position Lebanon and Tunisia (Working Paper 29902). This themselves going forward in these negotiations?; and Paper is the first step in a process supported by the (3) How can the MENA countries shape their domestic Mediterranean Environmental Technical Assistance policies and unilateral/multilateral trade policies to Program (METAP), towards using environmental maximize the gains and minimize potential downsides, damage, and cost assessments as instruments for from such prospective and far-reaching negotiations? integrating environmental issues into economic and social development. The specific objectives of this Paper are threefold: (1) provide an estimate of the cost Reforms and Growth in Middle East and North of environmental degradation; (2) provide an analytical Africa Countries: New Empirical Evidence (Working framework that can be applied periodically by Paper 29886). This Paper analyzes the linkages among professionals to assess the cost of environmental economic reforms, human capital, physical degradation over time; and, (3) provide a basis for a infrastructure, and growth for a panel of 44 developing training program for ministries, agencies, institutes and countries over the period of 1970-80 to 1999. The other interested parties to incorporate assessments of authors generate aggregated reform indicators using environmental degradation costs into policymaking and principal component analysis and show that the growth environmental management. The Paper also provides performance of the MENA region has been cost estimates of select remedial actions that may be disappointing, because these economies have lagged necessary to protect and restore the environment, and, behind in terms of economic reforms. However, the presents a discussion comparing damage and analysis also reveals that the growth dividend of some remediation costs and the potential benefits of remedial reforms has been small. This is the case when structural Third Quarter 2004 23 Republic of Lebanon Update reforms are implemented in an unstable and the tax revenues governments can draw on to fund macroeconomic environment (which corresponds to the health, education, and other services. Their contribution situation of the MENA countries in the 1980s), and depends largely on the way governments shape the when macroeconomic reforms are accompanied by a investment climate in each location--through the low level of structural reforms (as observed during the protection of property rights, regulation and taxation, 1990s). strategies for providing infrastructure, interventions in finance and labor markets, and broader governance features such as corruption. Deeper Integration and Trade in Services in the Euro-Mediterranean Region: Southern Dimensions The World Development Report 2005 argues that of the European Neighborhood Policy (ISBN: 0- improving the investment climates of their societies 8213-5955-X SKU: 15955). The Arab countries of the should be a top priority for governments. Drawing on southern Mediterranean rim have long suffered from surveys of nearly 30,000 firms in 53 developing economic stagnation and an increasing marginalization countries, country case studies, and other new research, in the global economy. Deeper economic integration the Report explores questions such as: with the enlarged European Union--accounting for a quarter of global GDP and foreign direct investment-- · What are the key features of a good investment could become a main driver for economic development climate, and how do they influence growth and in the southern Mediterranean countries. The planned poverty? Euro-Mediterranean free trade area for goods is a first · What can governments do to improve their step in that direction, but additional measures are investment climates, and how can they go needed to translate geographic proximity into economic about tackling such a broad agenda? growth; especially, the removal of non-tariff barriers, · What has been learned about good practice in the liberalization of services trade, and comprehensive each of the main areas of the investment behind-the-border policy reforms. The European climate? Neighborhood Policy, launched in 2003, could provide · What role might selective interventions and an appropriate policy framework for an integration international arrangements play in improving strategy between the EU and its southern periphery. the investment climate? · What can the international community do to This Report analyzes the adjustment needs and policy help developing countries improve the options associated with deeper integration between the investment climates of their societies? two sides of the Mediterranean Sea. It puts specific emphasis on the dynamics of deeper integration at the Ordering World Bank Publications company level, including issues such as outward Phone: (001) 1-800-645-7247 or (001) 703-661-1580 processing trade, supply-chain integration, and the Fax: (001) 703-661-1501 outsourcing of back-office functions. In addition to a On-Line: http://publications.worldbank.org/ecommerce general discussion of deeper integration and trade in E-Mail: books@worldbank.org services liberalization, the title also contains a detailed Research and working papers are also available in assessment of individual sectors­especially the electronic format free of charge at: backbone services and other markets of particular http://econ.worldbank.org/ relevance for deeper integration. Even though the main focus is on regional integration, the title also factors multilateral liberalization issues into its analysis, as Data and Statistics well as options, for the pursuit of an open regionalism. The World Bank offers multiple databases online, some free of charge, and some on an annual subscription basis. Almost all the data reported in the site mentioned World Development Report 2005: A Better below are derived, either directly or indirectly, from Investment Climate for Everyone (ISBN: 0-8213- official statistical systems organized and financed by 5682-8 SKU: 15682). Firms and entrepreneurs of all national governments. types--from micro-enterprises to multinationals--play a central role in growth and poverty reduction. Their To access the on-line databases, visit: investment decisions drive job creation, the availability http://www.worldbank.org/data/ and affordability of goods and services for consumers, 24 Third Quarter 2004