THE REPUBLIC OF LEBANON The World Bank Group THIRD QUARTER 2003 A Quarterly Publication of the Lebanon Country Office In this edition Page · Editorial: Moving Together on the Portfolio 3 · Privatization: From Panacea to Pr econditions 4 · Bank Group Operations 8 · Recent Economic Developments 10 · Fundamental Transitions for the Region's Greatest Challenge 18 · News, Recent and Upcoming Activities 23 · Recent World Bank Publications 25 Republic of Lebanon Update World Bank Contacts ­ Washington Joseph Saba, Country Director Shaha Riza, Acting Manager Tel. (202) 473-2992 - Fax (202) 477-1482 External Relations and Outreach E-mail: jsaba@worldbank.org Tel. (202) 458 1592 - Fax (202) 522 0006 Email: Sriza@worldbank.org Osman Ahmed, Lead Operations Officer Tel. (202) 473-7063 - Fax (202) 477-1482 Sabah Moussa, Executive Assistant E-mail: oahmed@worldbank.org Tel. (202) 473-9019 - Fax (202) 477-1482 E-mail: smoussa@worldbank.org Carlos Silva-Jauregui, Senior Economist Tel. (202) 473-1859 - Fax (202) 477-0432 Sereen Juma, Communications Associate E-mail: csilvajauregui@worldbank.org Tel. (202) 473-7199 - Fax (202) 522-0003 E-mail: sjuma@worldbank.org Sophie Warlop, Operations Analyst Tel. (202) 473-7255 - Fax. (202) 477-1482 www.worldbank.org E-mail: swarlop@worldbank.org To Order World Bank Publications: World Bank Address: http://publications.worldbank.org/ecommerce 1818 H Street, NW Washington, DC 20433 For Information on World Bank Programs in Lebanon: www.worldbank.org/mna/lebanon World Bank Contacts ­ Beirut Omar Razzaz, Country Manager Hadia Samaha Karam, Operations Officer Tel. Ext. 228 Tel. Ext. 241 E-mail: orazzaz@worldbank.org E-mail: hsamaha@worldbank.org Bassam Ramadan, Lead Operations Officer, Human Mouna Couzi, Program Assistant Development Tel. Ext. 231 Tel. Ext. 226 E-mail: mcouzi@worldbank.org E-mail: bramadan@worldbank.org Zeina el Khalil, Program Assistant Sebastien Dessus, Senior Economist Tel. Ext. 234 Tel. Ext. 225 E-mail: zelkhalil@worldbank.org E-mail: sdessus@worldbank.org Robert Bou Jaoude, Senior Financial Management The World Bank Office in Beirut Specialist United Nations House, Sixth Floor Tel. Ext. 230 Riad El Solh 1107-2270 E-mail: rboujaoude@worldbank.org P. O. Box: 11-8577 Beirut - Lebanon Imad Saleh, Senior Procurement Specialist Tel. Ext. 224 Tel. (961-1) 987-800 E-mail: isaleh@worldbank.org Fax (961-1) 986-800 www.worldbank.org.lb Editorial Team: Chadi Bou Habib Sebastien Dessus Zeina El Khalil Omar Razzaz Joseph Saba Paolo Zacchia With special thanks to Mary Saba 2 Third Quarter 2003 Republic of Lebanon Update EDITORIAL MOVING TOGETHER ON THE PORTFOLIO In the past few months, the Lebanese press has actively into full implementation. The Bank introduced the reported on "un-disbursed" loans made by the Bank and ability to correct project design or implementation other donors to Lebanon and the possible cancellation aspects so as to provide the flexibility to ensure that the of such loans. We, in the Bank, applaud the role of the development objectives of the loan are achieved. These press in shedding light on developmental issues in include: minor adjustments to implementation Lebanon and the status of the portfolio. But, we are procedures; project restructuring (changes in also keen to ensure that the measures taken by the Bank components and amounts); or outright cancellation. and the Government are well understood and not This is not, as sometimes perceived in the press, a misinterpreted. Thus, we saw it fit to tackle this issue "punishment" to the country. It is rather, part and of portfolio performance and measures to correct it parcel of proactive portfolio management aimed at upfront in our editorial of the Update. ensuring that the scarce project funds are put to good use, and that the portfolio of projects is relevant to the The Bank does not shy away from risk taking to development agenda of the country and fully "owned" realize development objectives. The Bank in by its implementing agencies. Lebanon, as in other parts of the world, does not shy away from funding risky projects as long as the Corrective measures can be costly, but not as costly development outcomes justify taking such risks. Such as leaving problems unattended. Starting projects and projects are not limited to "brick and mortar" projects, restructuring them midway involves high transactio n but involve new and innovative ways of decision costs, both to the Bank and to the Government. It making; building new capacity for regulation and public underlines the importance of ensuring quality, realism, sector management; trying new approaches for reaching and full readiness at the outset of the process. A the most vulnerable groups and involving them in common misperception, however, is that cancellation setting their own preferences and priorities; and of un-disbursed funds denies the country future challenging old bureaucracies with new syste ms which access to such fund. Not so. The Bank allows for a ensure transparency and higher efficiency. "lending envelop" for any country. The cancellation of funds or the closing of a project that is not fully Implementation problems do occur, and have disbursed simply increases the room for new lending several sources. Given the challenging agenda, it is within this envelop and allows the Bank to focus more not uncommon for projects to run into implementation of its own resources on addressing current needs rather problems. Sources of problems vary. First, in than trying to salvage old operations. designing projects, we sometimes run the risk of "over - shooting," and ending up with over-designed projects The task ahead for both the Bank and the Government which are too ambitious or far exceed existing of Lebanon is to continue to ensure the relevance and capacities. Second, we sometimes find that exogenous effectiveness of the portfolio in meeti ng the priority factors affect project performance such as natural needs of the people of Lebanon. This partnership is disasters, conflict, change of government, macro- indeed underway, and is being reflected in improved economic difficulties, etc. These often disrupt project disbursement, shorter ratification of loans by performance in ways that are hard to predict or prepare Parliament, willingness to restructure/close projects, for. Third, we sometimes find that the "development and jointly thinking of new priorities within the next objectives" for which the project was initially designed period of the Country Assistance Strategy. are no longer a priority, either because they have been addressed through other means, or because other This Update covers a number of areas directly relevant pressing priorities have come to the surface. Finally, to policy debate in Lebanon. The economic quarterly some projects face problems from within: competency update takes stock of recent developments and points to of the implementing team, delays in decision making, the risks of giving up on an aggressive reform strategy etc. Some of these problems are within the Bank's to reverse the debt dynamics. The article on control, others are within the Government's control, and privatization takes on the issue of "preconditions" to yet others are beyond both the control of the Bank or successful privatization. Another article provides the the Government. gist of the four reports produced by the Bank for the MENA region (trade and investment, governance, labor Corrective measures are there to ensure that markets, and gender). This Update also contains the development objectives are realized and scarce regular sections on the portfolio, recent and upcoming resources not wasted. A lot can happen between the events, and recent Bank publications. time a Bank project is designed, and the time it goes Third Quarter 2003 3 Republic of Lebanon Update PRIVATIZATION: FROM PANACEA TO PRECONDITIONS This essay summarizes the theoretical debates and of privatization techniques ranging from free share empirical evidence from around the world, and draws distribution to the population to negotiated deals. useful lessons. The evidence, coming mostly from the Eastern block and, specifically, the telecom sector, Who is the best new owner? sheds a more nuanced light on this particular policy and identifies preconditions for its success. The empirical literature on the privatization effect on restructuring in Eastern Europe and the FSU is now Privatization has been touted as a solution to two main endowed with at least 30 studies. A review of these problems: (i) revitalizing the private sector by studies shows the following main conclusions: improving the management of assets previously owned by public enterprises, encouraging investments and § Privatization to concentrated owners not linked technological catch up, and closing up incestuous to the preexisting management or employees relations between the State and public firms which has been the most beneficial to the restructuring prevent fair competition; and (ii) helping out the of privatized enterprises. distressed finances of heavily indebted governments. § Privatization to diffused owners and to enterprise workers and/or mangers has not been The common assumption is that the value of the beneficial. enterprise (measured by the satisfaction of its consumers) in private hands is higher than in public One reasonable hypothesis for the ineffectiveness of hands, and that the productivity of public money diffused or insider ownership is the lack of mechanisms (measured by the satisfaction of citizens with the in these countries to protect minority shareholders and delivery of public services) is higher than that of private to establish clear corporate governance rules. This money. Of course, there is no strong theoretical reason allows some of the new owners to "cannibalize" the to uphold these assumptions all the time, and all assets of the privatized enterprises (asset stripping) for possible configurations can apply. Empirically, though, their own interest (see the Box on Kazakhstan on the the economic literature generally finds private firms following page). Another reasonable hypothesis is the superior to public firms in terms of micro-economic reduced ability of diffused ownership to bring capital or performance. Of 52 empirical studies reviewed by knowledge to the firm. Shirley and Walsh (2000), 32 found that the performance of private firms are significantly superior Within the concentrated owner category, the studies to public firms, while 15 found no or ambiguous show that: relationships between ownership and performance. As for the difference between the social productivity of § Enterprises controlled by strategic investors money and the private one, this depends very much on have performed better than those controlled by the quality of the public expenditures. financial institutions (investment funds) or holding companies. § Enterprises sold through transparent and PRIVATIZATION AND REVITALIZING competitive bids have generally attracted better THE PRIVATE SECTOR owners, outperforming enterprises sold directly to politically connected parties, frequently at Probably the largest experiments on privatization aimed highly subsidized prices. at strengthening the private sector and the telecom sector have occurred in countries of East Europe and How fast to privatize? Which legal and the Former Soviet Union (FSU). Privatization has been institutional environment do you need? key in the transition from plan to market in the FSU. It was a way of imposing discipline and promoting The right speed of privatization also depends on whom restructuring of the ailing state-owned industrial sector; public assets are sold to. Selling to diffused owners and a way of creating a demand for stronger property rights and institutions of corporate governance. through distribution or share auctions can be done quite quickly. On the other hand, preparing a company for a Different countries have tried a wide range successful bid to strategic investors requires more time. 4 Third Quarter 2003 Republic of Lebanon Update The two approaches require, in fact, different legal and Why did privatization fail in Kazakhstan? institutional infrastructures: Economic restructuring in the late 1990s in § If countries choose privatization to concentrated owners, it is necessary to give the Kazakhstan is the story of a failure. All sectors agency which will be in charge of carrying out except oil and gas experienced declining output and productivity. Empirical studies on a sample of the privatization strong autonomy from 6,600 firms from 1996 to 1999 show that while political powers. newly-established enterprises performed better § If countries choose the diffused privatization, than state-owned firms, privatized enterprises strengthening external supervision and control performed as badly, and often worse than state- of internal management and protection of minority shareholders is key. When court owned enterprises. Perversely, distressed privatized enterprises received more financing from the enforcement of contracts is weak, strict market government budget than either state-owned regulation for financial intermediaries should enterprises or newly-established firms. These be strengthened to give more authority to results match the anecdotal evidence that investment funds and brokers to monitor privatization in Kazakhstan fell prey to powerful compliance by all participants in the financial business groups organized around top central and markets. regional government officials. But in both cases, a clear lesson from the first decade of Source: Why did privatization fail in Kazakhstan? S. transition economies is the need to strengthen corporate Djankov, T. Nenova, Working Paper (2000) governance, despite opposition form oligarchs and insiders. of the privatization on the social value of the enterprises Ex-post, in transition economies, the question has newly acquired by the private sector. arisen of whether it might not have been preferable in some countries to keep assets in State hands, waiting to Empirically, the question of sequencing has been identify and then sell the enterprise to reliable strategic researched more accurately in the telecom sector. investors. The experience of Eastern Europe and the Wallenstein (2002), using a sample covering 200 FSU shows that a positive answer would have to rely countries from 1985 to 1999, finds granting monopoly on two conditions. First, the privatization agency needs rights does increase the price fetched in telecom the autonomy to carry out its functions with privatization. However, in a sample of about 20 transparency and without political interference. Second, countries which privatized their telecom companies he there has to be enough institutional capacity to prevent also found that investment was substantially lower in asset stripping by state managers in the interim. In countries that gave exclusivity periods to private many countries these conditions were not met, entailing investors (in particular for international calls) than in that the permanence in State hands brought countries that encouraged competition. A similar result "spontaneous" privatization by the current managers applies to internet penetration, which is larger in while enterprises were still owned by the State. countries with greater market openness in telecoms. The empirical studies also found that investors were Liberalize, regulate, privatize: which one first? also willing to pay substantially more for telecom firms in countries where regulatory reforms took place before The trade-off between privatization and liberalization privatization, and that establishing a credible regulatory stems from the fact that privatizing a firm that operates authority before privatizing is correlated with improved in a monopolistic environment will bring higher telecommunication investment and telephone proceeds to the government, as the expected stream of penetration. profits will be higher for the new private owners, and therefore the price they are ready to pay. On the other hand, the social value of the firm might not increase after privatization, as it retains its monopoly power, to the detriment of consumers. Still, the decision to privatize might be justified if the use by the government of privatization proceeds generates sufficient satisfaction among citizens to offset the limited impact Third Quarter 2003 5 Republic of Lebanon Update Liberalization in Telecoms in MENA Syria S. Arabia Qatar Oman Libya Iran Kuwait Yemen 2001 Tunisia Lebanon 1998 Egypt Bahrain Algeria Jordan Morocco 0 1 2 3 4 5 6 7 8 9 10 Restricted Limited Moderate Full Liberalization Index Source: Rossoto et a l. (2003) but can conversely be used in the calculation of gross PRIVATIZATION AND FISCAL public debt to GDP ratios. ADJUSTMENT This approach to treating privatization proceeds has a The second main motivation for privatization is using number of important consequences: the proceeds of sale of assets to help adjust government finances. The rationale is that under difficult fiscal · Since privatization proceeds are not revenue, conditions, the State may not have sufficient resources they cannot be spent to increase expenditures to provide basic social services to its citizens. In without increasing the deficit. They should, particular, in highly indebted countries, debt service therefore, be used in priority to retire debt tends to absorb a large part of revenues and crowds out (except the possibility of very specific one-off primary expenditures, thus countries become more expenditure items). vulnerable to financial crises. Under these conditions, it · When privatization proceeds are used to retire is generally considered that, if well used, the proceeds debt, their direct social impact is non-existent. from privatization can improve the welfare of the The actual impact is an indirect one that works nation by allowing to crowd-in primary expenditures through a reduction in interest payments (which and by reducing the risk of fiscal collapse. gives the government greater flexibility to increase primary expenditures or reduce taxes) The main issue, however, is that privatization proceeds and through a reduction of the risk of financial are not a permanent source of income and cannot be a crises. definitive solution to fiscal problems. This has become · When privatization proceeds are used to retire explicit in the now accepted way of accounting for debt in a situation that is structurally privatization receipts in the budget. The 1986 unsustainable from a financial point of view, Government Finance Statistics (GFS) Manual of the the reduction in interest payments will be short- IMF treated privatization as revenue, but IMF practice lived, and a perverse debt dynamics will has changed over time, and the revised GFS standard resume as soon as privatization proceeds run treats privatization as an asset operation, not revenue out. The potential positive effect of counting towards reduction of the fiscal deficit. The privatization proceeds will, therefore, be European Commission also considers in its various wasted if they are not used in the context of an treaties and pacts privatization proceeds as financing overall fiscal consolidation agenda. and not as revenue. Such proceeds cannot be incorporated in the calculation of deficit to GDP ratios, 6 Third Quarter 2003 Republic of Lebanon Update The experience of fiscally-led privatizations in the opposed to increasing expenditure). However, unless 1990s sheds some light on how countries have dealt this is carried out in the context of a comprehensive with the issues mentioned above. An empirical study by fiscal consolidation agenda, the positive effects will be the IMF, using data for 18 different countries, reports short-lived and the perverse debt dynamics will resume that, on average, privatization proceeds were in the once the privatization proceeds run out. This article has majority of cases used to reduce debt, and were not focused on the preconditions necessary to realize the used to finance larger deficits. But in at least two economic benefits of privatization. A follow up article countries, Argentina and Turkey, this was less the case, in the next edition of this review will address the issues and both endured serious financial crisis. As Gary S. of the social and environmental impact of privatization. Becker, the 1992 Nobel Laureate for economics remarked about Argentina in an article in Business week: " ... [Argentina's policy] did not eliminate the tendency for the provincial and central governments to spend much more than they collected in taxes. References Spending by these governments grew to more than 30% of gross domestic product. These budget deficits were IMF, Government Finance Statistics Manual, 2002. hidden during the first half of the 1990s by revenues from the sale of government companies." A study by Gary S. Becker, Economic Viewpoint, Business Week, the Economic Research Forum for Arab Countries, Iran February 11, 2002. and Turkey (ERF) on the fiscal situation in the MENA region and Turkey's situation in the years preceding the Economic Research Forum, Economic Trends in the crisis concluded that "when privatization revenues and MENA Region 2002/2003, Cairo, Egypt. interest payments on public debt not recorded in conventional measures are factored in, total Public Steven Barnett, Evidence on the Fiscal and Sector Borrowing Requirement (PSBR) for 1998 Macroeconomic Impact of Privatization, IMF Working increases from 8.7 to 10.5 percent of GNP. When net Paper No. 00/130, July 1, 2000. expenditures on quasi-fiscal activities of state-owned banks are factored in, PSBR rises even further, to 15 Scott Wallenstein, Does Sequencing Matter?: percent. After the corrections, the 1998 operational Regulation and Privatization in Telecommunications deficit increases from near zero to about four percent of Reforms, World Bank Policy Research Paper 2817, GNP." Using privatization to hide an otherwise April 2002. unstable fiscal situation is therefore a strategy that needs to be avoided. Rossotto, Sekkat, Varoudakis, Opening Up Telecommunications to Competition and MENA Integration in the World Economy, MENA Working CONCLUSION Paper No.33, July 2003. Speaking about the right preconditions for privatization World Bank, Transition, The First Ten Years: Analysis will certainly be taken by some as an argument for and Lessons for Eastern Europe and the Former Soviet indefinitely postponing privatization plans. Overall Union, The World Bank 2002. experience with privatization has shown that the economic benefits of a well-prepared privatization Shirley and Walsh, Private vs Public Ownership: The policy are important, so moving on privatization, in a State of the Debate, Washington (2000). open and transparent way, is likely to bring good economic pay-out. However, when the aim of privatization is to retire debt, two cautionary notes have to be made. First, an exclusive pre-occupation with privatization proceeds hides the fact that higher proceeds can sometimes be obtained at the expense of competitiveness and future private capital investments in the sector. This can be extremely detrimental in the Lebanese context where competition and capital investments are needed in both the power and telecom sectors. Second, using privatization proceeds to retire debt represents the best use of such proceeds (as Third Quarter 2003 7 Republic of Lebanon Update BANK GROUP OPERATIONS IBRD Ongoing Projects to rural areas; and (c) upgrading institutional The current World Bank portfolio in Lebanon consists capabilities. of 13 Projects for a total commitment amount of US$534.75, of which US$184.70 million has been Vocational and Technical Education Project (VTEP). disbursed through October 31, 2003. (US$29.0 million). The Project's objective is to improve the performance of the VTE System by making it more demand-driven and responsive to Irrigation Rehabilitation and Modernization Project (IRMP). (US$57.23 million). The Project is designed market needs. to help increase agricultural production, agriculture- General Education Project (GEP). (US$56.6 million). based income and employment in previously neglected rural areas, and achieve improved sustainable This Project is designed to support the Government's management of water resources. efforts to enhance the capacity of the Ministry of National Education to function as an effective manager Revenue Enhancement and Fiscal Management of the education sector and to restore the credibility of Technical Assistance Project (REFMTAP). (US$25.25 the Public Education System. million). The Project seeks to support Government efforts to enhance revenue and strengthen fiscal First Municipal Infrastructure Project (MIP-I). management. (US$80.0 million). This Project aims at addressing urgent municipal works while setting the stage for the gradual assumption of responsibility for municipal Health Sector Rehabilitation Project (HSRP). services at the local level. (US$35.7 million). The objective of this Project is to improve Lebanon's health conditions through better allocation and use of resources in both the public and private sectors. Commitments and Disbursements as of October 31, 2003 Solid Waste / Environmental Approval Loan Amount Management Project (SWEMP). Project Name Year Amount Disbursed (US$25.0 million). This Project is US$ Million designed to help improve the methods Irrigation Rehabilitation and Modernization 1994 57.23 50.84 of solid waste collection and disposal; Revenue Enhancement and Fiscal improve cost recovery and modernize 1994 25.25 19.12 Management Technical Assistance municipal management and finance Health Sector Rehabilitation 1994 35.70 26.75 systems; and strengthen the Solid Waste/Environmental Management 1995 25.00 8.54 management capacities of sector National Roads 1996 42.00 26.55 institutions. Agriculture Infrastructure Development 1996 24.00 15.78 Vocational and Technical Education 1998 29.00 4.64 National Roads Project (NRP). General Education 2000 56.57 2.24 (US$42.0 million). The objective of Municipal Infrastructure ­ I 2000 80.00 28.41 this Project is to improve the capacity Community Development 2001 20.00 0.74 of the road administration to Ba'albeck Water and Wastewater 2002 43.50 0.44 undertake the rehabilitation of the Urban Transport Development 2002 65.00 0.65 primary road network. Cultural Heritage and Urban Development 2003 31.50 0.00 TOTAL 534.75 184.70 Agriculture Infrastructure Development Project Community Development Project (CDP). (US$20.0 (AIDP). (US$24.0 million). The Project's objectives million). This Project is designed to raise living are: (a) increasing farmers' incomes and conserving the standards in targeted poorer communities, and to raise environment through land terracing and development economic activity levels in such communities by and storage of runoff water; (b) improving access investing in grass-roots social and small infrastructure activities, and in employment creation. 8 Third Quarter 2003 Republic of Lebanon Update Ba'albeck Water and Wastewater Project. (US$43.5 provide the city of Beirut and the Greater Beirut Area million). The major development objectives of the with the basic institutional framework that is currently Project include: improving the access of satisfactory lacking, and to support critical investments needed to water supply and wastewater services to the region's maximize the efficiency of existing urban transport residents; introducing appropriate sector reforms­ infrastructure. The Board of Directors approved the particularly the development and strengthening of the Project in June 2002. capacity of the existing Ba'albeck Hermel Water and Irrigation Authority and, once it is established, the Cultural Heritage and Urban Development Project Bekaa Regional Water Authority; and involving the (CHUD). (US$31.5 million). The Project will finance private sector in the operation and maintenance of site conservation, enhancement investments, and water and wastewater facilities by preparing for a associated urban infrastructure improvements in Management Contractor (MC) through a lease or selected sites, and provide technical assistance to concession contract that would secure the long-term strengthen the capacity of the Directorate General of financial needs for sector investments. The Board of Antiquities, Ministry of Tourism, and targeted Directors approved the Project in June 2002. municipalities in cultural heritage preservation and tourism development. A signing for implementation of Urban Transport Development Project (UTDP). the Project was held in July 2003. (US$65.0 million). The Project's objectives are to IFC Projects in Lebanon Uniceramic. The Project supports the modernization of Lebanon Leasing Company (LLC). The Project the company's existing production line and the involves the establishment of Lebanon's first leasing expansion of the plant's capacity of glazed ceramic company, providing lease finance to local small- and floor tiles. medium-size enterprises. It also includes two credit lines from IFC to fund LLC's leasing activities. Bank of Beirut and the Arab Countries (BBAC) Credit Line. The Project offers innovative residential Middle East Capital Group (MECG) The Project mortgages to middle income customers. consists of the establishment of the first regional investment bank in the Middle East, and is Banque Saradar SAL. The Project involves an equity headquartered in Beirut. investment in common shares of the company. Banque Libano-Française. The Project offers Byblos Bank Syndicated Credit. The Project aims at innovative residential mortgages to middle income providing long-term project finance to small- and customers. medium-sized enterprises in Lebanon for infrastructure project finance, and to increase its housing loan Bank of Beirut Lebanon Credit Line. The Project portfolio. consists of credit lines to four Lebanese private sector commercial banks for on-lending to local small- and Société Générale Libano-Européenne de Banque. medium-sized enterprises in the private sector and to IFC extended a Line of Credit to Société Générale middle income families to finance either the purchase Libano-Européene de Banque to be utilized in support of their first residence or the expansion of their existing of its housing finance program. home. Fransabank. IFC extended a credit line to Fransabank Idarat, SAL. The Project funds the company's to support its housing finance program. investment program in hotels and restaurants and is designed to help revive the tourism industry, which is a Agricultural Development Company (ADC). The key sector in Lebanon. Project is designed to rehabilitate and expand the existing facilities of ADC, which is involved in the Idarat SHV (Société Hôtelière "de Vinci" SAL). The poultry business, into an integrated broiler meat Project supports the Company's investment in a production facility. Greenfield 5-plus stars "boutique" all suites hotel in an up-scale residential district of Beirut. Thrid Quarter 2003 9 Republic of Lebanon Update ECONOMIC DEVELOPMENTS IN THE THIRD QUARTEROF 2003 A year has passed now since the Government of But more importantly, the recent ratification by the Lebanon (GOL) convened the Paris II donors' Cabinet of a "status quo" budget for 2004 signifies that meeting. In Paris, the GOL presented a set of policy the authorities have given up, at least for the time being, intentions aimed at reversing the debt dynamics and to pursue their strategy presented at Paris II. fostering growth under three major pillars. The first Consequently, the debt will continue to grow pillar was fiscal, and reflected a major effort to bring the exponentially next year ­ the result of ongoing deficits, primary surplus to 8-9 percent of GDP by 2007 (from an and the burden of adjustment will increase accordingly. estimated 1 percent in 2002). Current and capital While the current level of foreign reserves at the Central expenditures (excluding social expenditures) were to be Bank (Banque du Liban, BDL) limits the risk of a reduced across the board and tax revenue significantly financial crisis in the short run, it can by no means be raised. The second pillar was financial, and consisted of considered as a sufficient solution to address the restructuring the public debt towards longer maturities overriding economic policy issue in Lebanon, the and lower interest rates. The third pillar of the program sustainability of the public debt. considered the privatization of major state -owned companies, and/or the securitization of their future Table 1. Paris II Developments revenue, whose proceeds would be entirely used to September 2002-September 2003 reduce the stock of the debt. Under the assumption of a full and timely implementation of the plan, GDP growth Jan-Sep Jan-Sep was supposed to resume (to reach a steady 4 percent 02 03 annual growth rate by 2007 onwards) as a result of Net Public Debt (LBP billion) 44,346 46,118 declining interest rates. Net debt was expected t o Public Deficit (LBP billion) 2,859 2,908 decline sharply, from approximately US$30 billion in Primary Balance (LBP billion) 300 495 2002 to US$21 billion in 2007. Gross Foreign Reserves (US$ million) 3,557 10,194 But financial, fiscal and privatization developments Net Capital Inflows (US$ million) -236 3,275 since Paris II have fallen short of initial expectations. Dollarization Rate 72.2% 66.7% Although Paris II cash flows definitely helped to Interest Rate on 24-month TBs/ stabilize the financial situation, increase foreign reserves Certificates of Deposits 14.1% 8.5% and lower borrowing costs for the Government (see Average Lending Rate to Private Table 1), they were not supported by enough progress on Sector (lending in US$) 9.8% 8.6% the fiscal and privatization fronts to start reversing the Source: World Bank Staff calculations based on MOF debt dynamics. Donors' and banks' contributions were and BDL. lower than initially anticipated. Sustained progress in raising tax revenue was offset by a slippage in Treasury In all cases, this sudden halt in the reform process expenditures and higher-than-expected debt service. calls for a deep and open reflection on what would Consequently, the deficit (Budget plus Treasury) to constitute the right reform package in the face of expenditures ratio culminated at 37 percent after nine current political and economic conditions in Lebanon months, against 27 percent targeted for the whole year today. Two dimensions warrant particular attention. 2003. On the privatization front, divergences among the The first one relates to the design of an "optimal" authorities on which strategy to adopt, blocked any macro-economic package and concerns primarily fiscal tangible steps forward, with no proceeds in sight in the and monetary policies, as well as debt management and foreseeable future. Meanwhile, the "real" economic the privatization program. The second is more political activity remains subdued. While the Third Quarter (Q3) in nature, and relates to how the cost of adjustment 2003 showed some slight signs of improvement, there is would be shared among the population ­ with a no evidence at present to support the view that economic particular view on its most vulnerable segments. A (non) activity could resume on a sustainable basis in the face option, which would consist in eventually letting the of current macro-economic imbalances. country confront financial turbulence bears enormous risks, not only for its devastating consequences on the As a result, the net public debt continues to escalate, social fabric, but also for its likely negative impact on and peaked at US$30.6 billion by end-September institutions and the quality of public governance which 2003. By way of comparison, in November 2002 the commonly magnifies the severity of crises and GOL was foreseeing a net debt at US$26.3 bi llion by undermines the potential for future recovery. end-2003 without any external support from Donors. 10 Third Quarter 2003 Republic of Lebanon Update Using the most recent data available, the following The CPI is a combination of domestic and imported briefly summarizes economic developments during the goods' prices. As far as imports are concerned, a rough period July-September 2003: Real Sector Indicators; calculation shows that approximately half of imports Balance of Payments; Public Finance and Public Debt; originate from the Euro Zone (Source: Directorate and the Financial Sector. General of Customs). This share has remained fairly constant over the last year, in spite of large fluctuations between the LBP and the Euro. For the first nine REAL SECTOR INDICATORS months of 2003, the Euro appreciated 20 percent over the LBP (compared to the same months in 2002 ), The absence of national accounts regrettably prevents a mechanically exerting an upward pressure on the price rigorous monitoring of the economic activity in of imported European goods. In 1997, the last year for Lebanon. Unlike the financial and public sectors which which national accounts were disposed (Source: are well covered statistically (see sections below), Ministry of Economy and Trade), imports constituted observers have no choice but to rely on indirect approximately 28 percent of total domestic absorption information to appraise the evolution of Lebanon's GDP (intermediate consumption, public and private final and its various components, not to mention the absence consumption of goods and services, investment of any regular information on labor markets' expenditures), excluding housing. The fact that developments and households' living conditions. European imports still continue today to represent 13 to 14 percent of total absorption, implies that the price of Continued low consumers price inflation. The the remaining 86-87 percent (other imports and domestic monthly Consumer Price Index (CPI) computed by the goods) declined approximately 2 percent over the first Consultation & Research Institute (CRI) gives some nine months of 2003. Unless offset by a strong decrease indication of the tension between demand and supply. in the price of imports from other regions (mainly from Over Q3-2003, price levels were, on average, 0.5 the United States of America, the Arab countries and percent higher than that of the Second Quarter. The f act Russia), such estimates suggest, at best, a stagnation of that the Third Quarter is generally characterized by domestic prices, and accordingly, of the remuneration of higher than average price levels (due in particular to domestic factors. Over Q3-2003 though, the Euro tourism inflows), probably means that the gap between depreciated by 1 percent (compared to Q2 -2003), while demand and supply did not significantly narrow over the prices rose 0.5 percent, suggesting a slight rebound in summer of 2003. As a matter of fact, consumer prices the price of domestic goods. declined by 0.4 percent between Q2 and Q3-2003 when the index was adjusted to control for seasonal effects. Strong imports growth over the Third Quarter of On a year-to-year basis (Q3-2003 against Q3-2002), 2003. According to the same national accounts, imports consumer prices rose 0.2 percent. For the first nine represented 55 percent of the total absorption of goods months of 2003, consumer prices were 1 percent higher (excluding services) in Lebanon in 1997. As such, a than that of the first nine months of 2002. change in imports largely contributes to a change in the absorption of goods. Besides, one can assume that Figure 1. Consumer Price Index almost all imports are consumed by private agents, given (Index 100: September 2002) the structure of public demand, mainly composed of services.1 During the first nine months of 2003, imports 103 grew in value by 6.6 percent, but most likely less in 102 volume given the appreciation of the Euro vis-à-vis the 101 LBP. Most of the increase actually took place over Q3 - 100 2003, during which imports grew 17 percent in value compared with Q2-2003. This suggests a significant 99 increase in private demand over the summer of 2003. 98 The extent to which this increase also reflects an 97 increase in the demand for domestic goods and services 96 Seasonally is unknown, but the previous indication that price 95 adjusted stagnated in Q3-2003 could suggest a lower growth in CPI 94 the demand for domestic goods than that for imports. Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Source: World Bank staff calculations based on CRI 1In 2002, the Government's purchases of material, supplies, and equipment represented less than 5 percent of Likely stagnation in the prices of domestic goods in current and capital expenditures , excluding debt service 2003, slight rebound over the Third Quarter of 2003 . (Source: Ministry of Finance). Third Quarter 2003 11 Republic of Lebanon Update Likely stagnation of investment in 2003, slight marked a significant decline compared to the first six rebound over the Third Quarter of 2003. Imports of months of 2003, with public consumption 1 percent equipment, which constitute an indication for investment lower than during Q3-2002. Export receipts, on the (in 1997, the acquisition of equipment represented 36 other hand, continued to grow rapidly during Q3 -2003. percent of total investment expenditures), followed a Over the first nine months, export receipts were 37 somewhat different path, with an 8 percent decline in the percent higher than that of 2002. Q3-2003 marked a value of imports of machinery and electrical instrument s small deceleration, with exports 30 percent higher than (a proxy for imported equipment) over the first nine that of Q3-2002. months of 2003 compared to the same period in 2002. Q3-2003 also marked a rebound, with these imports 11 All in all, the impression left from these indirect percent higher than that of Q3-2002. The evolution of indicators is that of a slight acceleration of economic the other component of investment expenditures ­ activity over the summer of 2003, maybe building on a construction services, tends to confirm the view that renewed confidence following Paris II and seemingly investment grew less rapidly than consumption over the relaxed regional tensions. Demand for domestic goods first nine months of 2003. Investment expenditures of continued to be pulled by public consumption and construction services might at best be approximated by exports growth, while investment expenditures remained the volume of cement deliveries (expressed in tons).2 weak. Private consumption seems also to be on the rise, The latter grew by 1 percent over the first nine months but the extent to which it is directed towards domestic of 2003 compared to the same period in 2002. Q3 -2003 goods and services (rather than imported goods) remains also witnessed a small rebound, with a 3 percent growth unclear. But the fact that price inflation remains compared to Q3-2002. This supposed stagnation of subdued suggests that the output gap, - i.e., the investments is consistent with the observation that the difference between productive capacities and actual demand for domestic goods remains weak and that the demand for domestic products - is not significantly cost of investment (measured with lending rates) stays narrowing. high in the face of limited remunerative opportunities and substantial country risk. BALANCE OF PAYMENTS The evolution of cleared checks and the consumption of electricity complete this rough picture of private Steady growth of capital inflows in 2003. As already absorption. The value of cleared checks (mirroring the mentioned in previous issues of this Update, Lebanon evolution of transactions) grew 5 percent over the first critically depends on continuous foreign capital inflows nine months of 2003, compared to the same period in to finance its trade and public deficits. Over the first nine 2002. But, unlike the previous indicators of demand, months of 2003, the Balance of Payments (measured by Q3-2003 marked a slight decline compared to the first the variation of foreign currency reserves at the Central half of 2003, with a value of cleared checks only 4 Bank and in commercial banks) registered a net percent higher in Q3-2003 compared to Q3-2002. The cumulated surplus of US$3,275 million. During the consumption of electricity (measured in Kwh.) gr ew 4 same time, the trade deficit (imports of merchandise percent in 2003 (first nine months) compared to 2002. minus export of merchandise) amounted to US$4,019 The fact that this was, nevertheless, lower in Q3 -2003 million. Therefore, cumulated gross foreign capital than that of 2002 (-4 percent) might reflect the inflows culminated to US$7,294 million over the first Government's efforts to enforce the collection of nine months of 2003. This represents a strong electricity fees and/or the difficulties faced by the public improvement compared with the same period a year ago electricity company to supply electricity 24 hours a day (on the eve of Paris II), during which Lebanon during the summer of 2003. experienced an inflow of US$3,750 million, insufficient to finance a trade deficit of US$3,986 million. Demand for domestic goods sustained by public consumption and exports. The last two components of GDP, public expenditures and exports, are somewhat easier to track. The first one (Budget plus Treasury expenditures, excluding debt service) grew 9 percent over the first nine months of 2003. The Third Quarter 2 The evolution of construction permits, sometimes considered as a proxy for investment, is probably more a reflection of investment plans rather than actual investments. Besides (and this is also val id for cement deliveries), permits do not distinguish between residential and professional buildings. 12 Third Quarter 2003 Republic of Lebanon Update Figure 2. Cumulated Net Capital Inflows exports grew 37 percent and imports 7 percent over the (US$ million) first nine months of 2003, with a deceleration for exports 4,500 and an acceleration for imports during Q3-2003. As a of which Paris-2 result, the trade deficit after nine months, US$4,019 inflows 3,750 million, is similar to that of 2002, US$3,986 million. But the value of goods exchanged (imports plus exports of 3,000 merchandise) rose by 11 percent between the two periods. Several reasons are candidate to explain this 2,250 trend. First, Lebanon has been pursuing in 2003 its trade liberalization policy, with an average effective import 1,500 tax of 16.3 percent in 2003 (first nine months) against 17.5 percent in 2002 (Source: Directorate Gene ral of 750 Customs). Second, the de facto depreciation of the LBP vis-à-vis the Euro might have encouraged additional 0 exports to the Euro zone. Third, the depreciation of the LBP and other external shocks might have increased the value of some relatively price-inelastic imported goods, Source: World Bank s taff calculations based on BDL. like oil for instance. Foreign capital attracted by government papers. Figure 3. Quarterly Trade Deficits and Trade While the composition of these flows remains Volumes (US$ million) unfortunately unknown (transfers, foreign direct investments, portfolio investments, etc.), there is little 2500 Trade Deficit doubt that a significant part was private. Since January Trade volume 2003, the Treasury received US$2,040 million worth of 2000 Paris II contributions, the rest, US$5,254, almost entirely originated from private sources.3 Gross private capital 1500 inflows culminated to US$2,344 million during Q3- 2003, against US$1,278 million and US$1,632 million 1000 respectively in Q2 and Q1 of 2003. Two elements can probably explain this surge over the summer: the inflow 500 of tourism (495,000 passengers landed at Beirut International Airport during the Summer of 2003, 0 against 306,000 during the Spring); and the financial Q1- Q2- Q3- Q4- Q1- Q2- Q3- incentive procured by the possibility from April 2003 02 02 02 02 03 03 03 onwards to acquire Certificate of Deposits (CDs) yearly remunerated at 12.3 percent (for 3-year maturities) when Source: World Bank staff calculations based on Directorate General of Customs. purchased with foreign currencies. As a matter of fact, there is little doubt that the surge of capital inflows since Trade growth concentrated on two items. Based on Paris II was mainly triggered by greater financial information available for the first nine months of 2002 stability in Lebanon. While current transfers and foreign and 2003, the rise in exports of pearls and precious direct investments had no particular reason to increase stones (+US$161 million) contributed for 57 percent to sharply, it is likely that most of capital inflows were the total rise in exports of merchandise (+US$283 attracted by high and relatively secured (convertible) million). Prepared foodstuffs (+US$37 million), remuneration offered on Government and Central Bank machinery and mechanical appliances (+US$33 million) papers (see the Financial Sector Section below). and base metals and articles of base metal, (+US$29 million) are the other main product categories on the Growing trade transactions. The evolution of trade rise. As far as imports are concerned, mineral products transactions also warrants particular attention. As (+US$135 million) contributed for more than 43 percent already mentioned in previous paragraphs, merchandise of the total rise in imports (+US$315 million). Base metals and articles of base metals (+US$58 million) and 3 Regular public transfers (official development assistance) chemical products (+US$56 million) are the two other amounted to US$220 million in 2002 and could amount to main categories on the rise. During the same time, US$114 million in 2003. Net project loans financed by exports of paper and paperboard (-US$18 million) and foreign agencies were negative in 2002, -US$48 million, imports of machinery and mechanical appliances the result of higher amortization than disbursements, and (-US$54 million) were less traded in 2003 than in 2002. could be negative as well in 2003, -US$63 million (Source: As far as origin and destination of trade is concerned, the International Monetary Fund). Third Quarter 2003 13 Republic of Lebanon Update same pattern seems to emerge: Europe absorbed most of 2003), as transfers to EDL4 and expenditures on the increase in Lebanese exports (Switzerland in previous years' appropriations continued to be particular); and Arab Countries and Russia were the substantial. LBP280 billion was also paid to the two principal origin of the new Lebanese imports . mobile phone companies in settlement of the temporary acquisition of their assets. PUBLIC FINANCE AND PUBLIC DEBT Table 2. First Nine Months Public Finances (LBP billion) The fiscal situation improved during Q3-2003 compared 2003 to the two previous Quarters, but insufficiently to meet Budge the deficit targeted in the Budget Law, LBP2,524 billion 2002 2003 t Law* (Budget plus Treasury) by the end of the year. After Revenue 3,989 4,902 6,875 only nine months in 2003, the public deficit, at Tax Revenue 2,989 3,306 4,726 LBP2,908 billion, already exceeds the targeted deficit Of Which VAT 654 953 1,100 for the full year, with still three months to pass. Various Non-Tax Revenue 999 1,253 1,749 elements concur to explain the evolution of public Of Which Transfer from the finances since January 2003. In brief, while revenue Telecom Surplus 548 786 - has met - and sometimes even exceeded - expectations, the GOL has been unable to contain expenditures. Treasury Receipts 346 343 400 Expenditures 5,943 7,810 9,400 Revenue on track. On the revenue side, tax revenue as Non-Debt Expenditures 2,784 3,009 4,600 of end-September 2003 are in line with the budget law, Debt Service 3,160 3,402 4,000 with an 11 percent increase compared to the first nine LBP-Denominated Debt 2,302 2,203 - months of 2002. Thanks in particular to the Value Foreign Currency ­ Denominated Added Tax (VAT), whose collection exceeded initial Debt 858 1,199 - plans (+46 percent so far, against 11 percent budgeted Treasury Expenditures 1,251 1,399 800 for the full year) and somewhat compensated for more Deficit 2,859 2,908 2,525 disappointing results on other taxes (-1 percent on * Over twelve months. Source: Ministry of Finance. income tax, +1 percent on taxes on international trade, +2 percent on property tax). VAT collection is benefiting from one additional month in 2003 compared Public Debt grows. Due to ongoing deficits, net public to 2002, and its threshold was lowered. The fact that the debt grew by LBP1,772 billion over the first nine collection on other taxes did not improve as rapidly months of 2003. Yet, the reason why it increased reflects the stagnation of the economic activity in 2002 significantly less rapidly than the deficit, LBP2,908 (for direct taxes) and 2003 (for indirect taxes). Non tax billion, remains to be clarified5. Net Public Debt stood revenue will probably also exceed initial targets, thanks at US$30.6 billion by end-September 2003, up from in part to the unexpected transfer of the operational US$29.4 billion by end-December 2002. The Net Public surplus of telecom companies that were supposed to be Debt in LBP amounted for 49.4 percent of the total net privatized. debt by end-September 2003, down from 50.4 percent in December 2002, with contributions in foreign currencies Slippage in debt service and Treasury expenditures. from Donors, commercial banks and swaps to Public expenditures, on the other hand, were not Eurobonds from the Central Bank exceeding contained as much as initially budgeted. While non debt budget expenditures growth was so far below targets (+8 percent for the first nine months against 19 percent 4Formally though, advances to EDL on behalf of the planned), debt service (which grew by 8 percent in 2003, company's debt service should not be accounted for in the while planned to decrease 13 percent in the budget) was public deficit. 5 underestimated in 2003 for various reasons: first, For instance, in 2003 US$400 million worth of maturing because donors' actual contributions were lower than Treasury Bills detained by the National Social Security anticipated; second, because banks' contributions Fund (NSSF) - a liability of the GOL to the NSSF ­ were (mainly in cash) did not enable the GOL to restructure seemingly transferred to the public deposits ­ hence its debt towards lower rates as much as it expected; and becoming an asset of the GOL and reducing by the same third, because the lack of privatization proceeds did not amount the Net Public Debt. As another example, the subscription over the Third Quarter 2003 by the BDL of permit the government to reduce its stock of debt. LBP3,648 billion worth of T-bills at 4 percent (while Finally, Treasury expenditures far exceeded initial plans Certificate of Deposits were remunerated at much higher (a 48 percent decrease targeted for 2003, against an rates) also rendered more difficult the readability of public actual 12 percent increase over the first nine months of debt's evolution. 14 Third Quarter 2003 Republic of Lebanon Update acquisitions of LBP-denominated Treasury Bills (TBs) were mainly converted into Lebanese Pounds in order to from commercial banks and the BDL. benefit from the higher remuneration on LBP - denominated deposits. The dollarization rate of deposits Figure 4. Net Public Debt (LBP billion) dropped from 72.2 percent in September 2002 to 69.4 percent in December 2002, 67.4 percent in June 2003 45000 and 66.7 percent in September 2003. The relative stabilization of the dollarisation rate over Q3-2003 might 37500 be attributed to the fact that the incentive structure 30000 (given by the interest rates and risks structure) remained largely unchanged over the Summer of 2003, 22500 encouraging investors to maintain their positions. 15000 Figure 5. Dollarization Rate 7500 70% 0 Dec-02 Jan-03 Feb-03 Mar-03 Apr-03 May-03 Jun-03 Jul-03 Aug-03 Sep-03 69% Debt in FX Net debt in LBP Public Sector Deposits Source: Ministry of Finance 68% The debt in foreign currency increased by 26 percent from September 2002 and by 6 percent from the 67% beginning of the year. Out of the US$3.1 billion increase in foreign currency-denominated debt, US$2.4 billion were from Paris-II Donors' contributions. The debt stock 66% in foreign currency reached US$15.5 billion in September 2003, and amounts now for 47.5 percent of the total gross debt. The increase in foreign exchange Source: World Bank staff calculations based on BDL. reserves allowed the Government to repay US$500 million and US$450 million worth of maturing Strong increase of deposits over the Third Quarter Eurobonds and their interests in April and September 2003. The increase in all categories of commercial 2003. The gross debt in LBP increased by 2 percent banks' deposits witnessed in 2003 was particularly since December to US$17 billion. The structure of the pronounced during the Third Quarter. Over the first LBP-denominated debt changed with the Central Bank nine months of 2003, deposits rose by US$4.6 bil lion, holding 21 percent of the total in September 2003, the out of which US$2.0 billion during Q3 -2003. By banks 26 percent, and non-banks the remaining. In comparison, deposits rose by US$0.7 billion in the first December, ratios were respectively 2 percent, 68 percent nine months of 2002. In relative terms, deposits and 30 percent (see the Financial Sector section below). increased by 10.7 percent over the first nine months of 2003, against 1.7 percent for the same p eriod in 2002. Out of the US$4.6 billion increase, approximately one - FINANCIAL SECTOR third can be attributed to the mechanical growth of deposits stemming from their remuneration. The Money Supply (M3) grew steadily by 8.9 percent in remainder, US$2.9 billion, result from additional capital 2003, notably as a result of sustained capital inflows, inflows and the credit multiplier. though, most of the increase in deposits was sterilized at the Central Bank via the emission of CDs. This policy Additional banks' deposits sterilized at the BDL. The also enabled the Central Bank to replenish its stock of increase in deposits in 2003 did not have any impact on foreign currency reserves, hence maintaining confidence credits to the private sector. The total amount of in the parity in the face of high public deficit. outstanding loans (in LBP and US$) remained at US$15 billion between December 2002 and September 2003. Stabilization of the dollarization rate over the Third Meanwhile, the increase in deposits, together with Quarter 2003. Paris II cash flows, compounded with the banks' contributions at 0 percent, translated into a financial engineering initiated by the Central Bank substantial US$8.2 billion rise in commercial banks' entailed a large increase in banks' deposits. In an deposits at the BDL. Thus, the US$2.9 billion worth of environment marked by high and growing gross foreign new deposits in LBP were subscribed in CDs and, hence, currency reserves at the Central Bank, the new deposits completely sterilized. Another US$3.6 billion came from the 0 percent contribution of the banking sector, Third Quarter 2003 15 Republic of Lebanon Update and the major part of the remaining US$1.6 billion were conversion into CDs of the last two banks' installments new compulsory reserves linked to the increase in at 0 percent. commercial banks' deposits. As a result, commercial banks' exposure to the sovereign risk (GOL plus BDL) Figure 7. CDs Portfolio (LBP billion) continued to increase over Q3-2003, from 49 percent of 9000 banks' assets in December 2002, to 54.0 percent in June 8250 2003, and 54.5 percent in September 2003. The slig ht 7500 reversal witnessed in September 2003 was due to the 6750 reimbursement of US$450 million maturing Eurobonds 6000 by the GOL. 5250 4500 Figure 6. Commercial Bank's Exposure to 3750 Sovereign Risk 3000 2250 Commercial Banks' Exposure to 1500 Sovereign Risk 55% 750 0 54% 53% 52% Source: World Bank staff calculations based on BDL. 51% Increased gross foreign currency reserves. Currency 50% conversions, Paris II inflows, and commercial banks' 49% contribution at 0 percent in foreign currencies enabled the BDL to increase its gross foreign currency reserves 48% from US$5.1 billion at the end of December 2002 to US$10.2 billion at the end of September 2003. The stock of gross reserves slightly decreased in September 2003 Source: World Bank staff calculations based on BDL. with the reimbursement of maturing eurobonds, which were placed abroad in non-residents banks (+US$560 Continued increase in Certificate of Deposits over the million between August and September 2003). Still, Third Quarter 2003. The CDs portfolio reached the coverage rate of total Money Supply in LBP by US$5.8 billion at the end of September 2003, up from gross foreign currency reserves culminated at 49 US$4.0 billion in June 2003 and US$0.4 billion by end- percent by end-September 2003, up from 46 percent December 2002. The issuance of CDs fulfilled two in June 2003. major tasks during the last months. First, they allowed the BDL to sterilize huge amounts of Lebanese Pounds, Figure 8. Foreign Reserves Coverage of Money thus limiting the possibility of a sudden reversal (a Supply in LBP conversion of LBP to US$), which would immediately exert a downward pressure on foreign currency reserves. 52% Second, they allowed the banks to maintain an important 49% spread between rates offered on LBP-denominated 46% financial instruments and those offered on US$- 43% denominated ones, hence, reinforcing conversion to the 40% Lebanese Pound. It is believed that the issuance of CDs played a major role to attract foreign capital and increase 37% foreign reserves. A BDL circular even allowed the 34% commercial banks to invest fiduciary deposits (off- 31% balance sheets' items, not included in the definition of 28% money supply) in CDs at the demand of the depositors. Besides, special arrangements between BDL and 25% commercial banks resulted in a de facto increase in yields offered on CDs when purchased with foreign currencies. In June 2003, the weighted average rate on Source: World Bank staff calculations based on BDL. CDs reached 11.6 percent (against 7.9 percent in March, Source: Association of Banks in Lebanon, ABL), and Treasury Bills (TBs) transferred to the BDL. The then declined by end-September 2003, the result of the structure of the TBs portfolio continued to change during Q3-2003. The portfolio held by the Banks 16 Third Quarter 2003 Republic of Lebanon Update decreased by LBP2,718 billion between December 2002 Interest Rates on a slight decline. Interest Rates on and September 2003. This new liquidity in LBP was both private deposits and loans in the banking sector mainly invested in CDs. The non-banking system declined. The spread between private loans and deposits portfolio also decreased by LBP1,585 billion, a large in LBP declined substantially, while the spread between amount of which was formerly detained by the National loans and deposits in US$ decreased more slightly. Social Security Fund. Conversely, the holding of TBs Depositors' rates kept a substantial difference with by the Central Bank substantially increased during the international rates in order to stimulate capital inflows. same period, reaching LBP4,815 billion, an amount Moreover, the spread between the Lebanese Pound slightly lower than that of September 2002. deposits and the foreign currencies deposits remains high, which keeps the level of incentives of converting Figure 9. Holders of LBP Treasury Bills deposits into Lebanese Pound high. The average spread 27000 has indeed reached 4.5 percent between the LBP and the local US$ rate, and 6.8 percent between the LBP and the 24000 three months LIBOR. The spread between loc al US$ 21000 rate and LIBOR reached 2.32 percent in September 18000 2003. 15000 12000 Table 3. Commercial Banks' Interest Rates for the 9000 Private Sector 6000 Average Interest December September 3000 Rates 2002 2003 0 Currency LBP US$ LBP US$ Loans to the Private 16.10 9.62 12.04 8.63 Sector Commercial Banks Non banks Central Bank Private Sector Deposits 9.83 4.00 7.93 3.48 Source: World Bank staff calculation s based on BDL. Spread 6.27 5.62 4.11 5.15 Source: World Bank staff calculations based on BDL. Third Quarter 2003 17 Republic of Lebanon Update FUNDAMENTAL TRANSITIONS FOR THE REGION'S GREATEST CHALLENGE The Middle East and North Africa Region of the even more important are the domestic policy and World Bank produced four major regional reports on institutional reform agendas, the focus of this work. the occasion of the World Bank-International The regional conflict and security concerns may Monetary Fund Annual Meetings in Dubai in partly explain the slow pace or absence of reforms, September 2003. These reports - on trade and investment, governance, gender, and employment - but they also make the reforms even more necessary are intended to enrich the debate on the major and urgent. development challenges of the region in the beginning of the 21st century.1 The following note Employment Problems in a attempts to provide a general overview without going Changing Environment into the details of the four reports. Over the next two decades the region faces an Between eighty and one hundred million new jobs to unprecedented challenge. With the labor forces of be created by 2020. Economic growth to be lifted the region totaling some 104 million workers in from a sluggish 3.4 percent over the late 1990s to at 2000 and expected to reach 146 million by 2010 least 6-7 percent a year. Governance to move from traditional autocracies to more inclusive and 185 million by 2020, some 80 million new governments, accountable to the people. Women to jobs will be needed in the first two decades of the be more equitably included in economic activity and 21st century just to absorb new labor force to harness the significant potential economic benefits entrants. from an increasingly educated and healthy female population. Public sectors to open the door to more These new entrants are increasingly educated, private initiatives. Economies dependent on oil and young, and female. Labor force growth rates workers' remittances to diversify into manufacturing averaged more than 3 percent a year between 1970 and services. Closed trading regimes to integrate with and 2000. The labor force growth rate is forecast at new trading partners in the region and the world. 3.5 percent a year between 2000 and 2010, and not Impossible? No. Imperative? Yes. For these are until 2020 will pressure on labor markets fall to the precisely the changes needed to improve living standards throughout the Middle East and North more moderate rates last witnessed in the 1960s. Africa (MENA) over the next two decades. The The projected growth of the female labor force at political imperatives for such change and the stability about 5 percent per year during the same period is of the old order are two opposing forces. The balance even more challenging. No other developing is shifting toward the need for reform as joblessness region has experienced this magnitude and and slow growth make the old order increasingly persistence of labor market pressures. With costly and unsustainable. unemployment above 15 percent, the more ambitious goal of absorbing unemployed workers MENA's prosperity depends heavily on establishing in addition to the new entrants implies the need to regional security and stability. Regional and civil create close to 100 million jobs by the end of the conflicts, wars, and embargoes have all reduced the next decade, more than doubling the number of development performance of the region, diverting jobs in the region. resources to military and security expenditures, degrading the investment climate and diminishing the Past modes of employment creation are no attractiveness of the region through neighborhood longer sustainable. Many of the region's effects, and sustaining economic and political traditional systems for employment creation are structures that are not conducive to good governance fast coming to an end. The public sector and development. Resolving these conflicts and represented a primary engine for job creation restoring security and stability are important. But during the 1970s and 1980s and was still a major employer into the 1990s. Today, it accounts for a 1 The interested reader is referred to the individual third of employment in the region, and as much as volumes listed at the end of this article. 18 Third Quarter 2003 Republic of Lebanon Update 80 percent in several Gulf Cooperation Council countries' demand for labor from the rest of the countries. region. But the public sector can no longer be the Outside the region labor migration has become employment outlet it has been in the past. Across more complex. The demographics of MENA's MENA, evidence suggests that most branches of young population structure and rising working- the public sector are overstaffed, by as much as a age cohorts and Europe's lower labor force third or more in some countries, steadily eroding growth and aging population provide an oppor- productivity. But efficiency losses aside, the tunity for mutually beneficial migration flows. strategy of providing refuge to vast numbers of But the barriers remain high, even to moderate unemployed and new labor force entrants is simply and temporary migration. no longer sustainable with the marked change in fiscal circumstances throughout the region. Unless In all, the region's traditional sources of wealth employment growth in the formal private sec tor accelerates, the rising numbers of new entrants will and job creation are fast disappearing. MENA's be pushed into the informal economy. world has changed, and it must change with it. Oil and aid flows are declining. MENA's Three Fundamental Realignments development has relied heavily on three financial Are Needed sources: oil, aid inflows, and workers' remittances. If the traditional engines of job creation will not These three sources provided an essential supply meet the employment challenge in the 21st of public revenues and private earnings, century, what will? The reports on tr ade and supporting large-scale public employment and investment, governance, employment, and gender sustaining a state-led development strategy based argue that to accelerate job creation and growth in on central planning and economic and social the future, MENA must address a set of long - policies for income redistribution and equit y. standing policy and institutional challenges to complete three fundamental and interrelated But all three sources are under great pressure. Oil realignment in their economies: prices are projected to decline steadily over the next decade to levels that prevailed in the 1970s. § From public sector-dominated to private sector Known oil resources will be depleted in about dominated, by reducing the barriers to private four decades in some countries (such as Algeria activity while creating regulatory frameworks that and Iran), and much sooner in others (such as make private and social interests mutually Egypt and Yemen). Aid flows are expected to reinforcing. The private sector's contribution t o similarly decline, except in temporary periods of value added is low compared to that in other strategic importance and conflict resolution. Finally, labor remittances are not projected to regions, and it increased only marginally during increase significantly, a result of deteriorating the 1990s. The increase in the share of private prospects for labor migration. investment in total investment was not enough to compensate for the decline in public investment. Labor migration prospects have diminished. While The scope for private sector expansion is very regional migration provided an important large in MENA, but it requires a conducive employment outlet for workers in many of the economic and social environment. non-oil-producing economies during the oil boom § From closed to more open, by facilitating in the 1970s and 1980s, net outflows of MENA workers to other countries in the region integration into global goods and services and decelerated rapidly in the 1990s. Migration to the factor markets while installing safeguards for Gulf countries has slowed. Lower oil prices, financial stability and social protection. The rapidly rising supplies of national labor, and region's potential for trade is large. Exports other competition from lower cost labor elsewhere in than oil are a third of what they could be. Manu- the world have together dampened the Gulf factured imports are half of what would be Third Quarter 2003 19 Republic of Lebanon Update expected, and foreign direct investment flows Transitioning from the old to a new model of could be five to six times higher than they are. development, through these three realign ments, represents a considerable challenge. At the same § From oil dominated and volatile to more stable time, accomplishing the transitions provides the and diversified, by making fundamental changes greatest hope for accelerating growth and delivering in institutions managing oil resources and their the jobs needed to respond to the growing labor intermediation to economic agents. force pressures. The success of these transitions Diversification is a growing priority because per hinges on progress in enhancing gender equality and capita exports of hydrocarbons have been de- education quality. Progress on bridging the gender clining during the last two decades, a result of gap in education and health has been impressive. But falling real prices, rising domestic demand, and this has not translated into a commensurate increase in rapid population growth. Diversification is women's participation in the labor force. Women's low especially urgent for countries such as Syria and participation in the labor force carries large costs to Yemen, whose known oil reserves may soon be families and society at large, and limits the flexibility of depleted. Better management of the volatility of families to adapt to the changing economic conditions. hydrocarbon resources and planning for their decline and eventual depletion are important for The transition to more market-driven and globally insulating the real economy as well as ensuring oriented economies requires continuing progress in widening and deepening the stock of human capital the sustainability and efficiency of public and, more critically, changes in the qualitative expenditures. outputs of the region's education systems. Water resources and their management, which is a major Many countries in the region have already initiated challenge in the region is not addressed in this note, reforms to achieve these transitions, but the reforms but is critical for most countries of the region. have generally been cautious and incomplete. Water, Growth, and Socioeconomic Development in MENA Because MENA is in the driest part of the world, water is critical for growth, development, and poverty reduction in countries of the region. Average per capita water availability in the region is about 1,200 cubic meters a year -the world average is 7,000 cubic meters. By 2025, average regional water availability is projected to be just over 500 cubic meters/person/ year. Current water use practices are unsustainable. The natural problem of water scarcity has been ag gravated by inadequate use of economic instruments for managing demand, increases in household incomes, and such supply side factors as, inefficient public sector service delivery and signifi cant expansion in irrigation. Most MENA countries are extracting groundwa ter well beyond the renewal rate, mainly because energy subsidies make it cheaper for many users to do so. But because water supplies are not effi ciently distributed, many other users, particularly in urban areas, are forced to rely on vended water, often at 10 -20 times official tariffs. Apart from efficiency concerns, therefore, there are serious equity problems with current water practices. Significant amounts of water supplied for municipal use remain unaccounted for. Water used for irrigation is also wasted because incentives for farmers to adopt modern, water-conserving technologies are still inadequate. Untreated wastewater from municipal sources and agricultural runoff have been polluting shallow aquifers, rivers, streams, and lakes. The increased water contamination is affecting public health and thus generating significant opportunity costs as well. Studies of environmental degradation due to water pollution esti mate the costs at about 1 percent of GDP. Sustainable water management requires reforms on the demand (economic instru ments) and supply (service delivery) sides. Water subsidies, which are both inefficient and inequitable, should be replaced by water pricing based on what users want and are willing to pay for. Most public sector organizations (serving both irri gation and urban water supply needs) have been unable to serve their customers efficiently. The challenge is to develop alternative institutional arrangements in volving the public sector, the private sector, and communities, so that management of water resources is undertaken at the lowest appropriate level. 20 Third Quarter 2003 Republic of Lebanon Update Foundations for the Transitions: tribal affinity, patronage, or money, determining Governance who gets public services and who does not-and who gets access to lucrative business opportunities The three realignments-key for managing the and who does not. While every national region's employment challenge-and associated constitution in the MENA region enshrines the progress on gender equality and education quality value of equality for all, the inclusiveness gap cannot be accomplished by policy change alone. between the MENA countries and their main Fundamental to each transition is improved competitors in the global economy is wide and per- governance, across the board. Each transition im- sistent. plies deep changes in the role of government and strong improvements in its effectiveness. The ...And in public accountability. Weaknesses in governance agenda is not a separate challenge, to accountability are reflected in failings in be worked on at its own pace. It is a transparency in governance mechanisms and in complementary and reinforcing agenda to reform contestability. While there are some glimmers of efforts in private investment, trade, and economic greater transparency, countries across the region diversification by changing governance exhibit a pattern of limited and reluctant trans - mechanisms, thereby improving capacity and parency-reflected in the fact that MENA has the incentives within government while fostering a least empirical data on the quality of governance larger role for civil society in governance. While of all regions. No MENA country assures citizens better governance cannot guarantee optimal the right to government information; some economic policies, it is indispensable to guard countries actively repress that right. Free dom of against persistently poor policies and to ensure that the press is carefully monitored and the good policies needed to meet MENA's growth circumscribed in most countries and periodically potential enjoy legitimacy and are implemented assaulted in some by the harassment or arrest of faithfully and with celerity. journalists, dampening public debate. The primary governance challenges derive from As much as in transparency, there are weaknesses weaknesses in inclusiveness and public in contestability throughout the region. accountability. Inclusiveness reflects the notion Contestability can come from within the that everyone who has a stake in governance government structure itself, such as from processes and wants to participate in them can do parliaments that can question national policies, or so on an equal basis with all others. Accountability from the people being governed, such as from fa ir draws on the principle of proper representation- competitive processes for electing public that those selected to act in the name of the people officials, broader and more binding consultations are answerable to the people for their failures and with civil society, and a vibrant, independent, credited for their successes. Accountability and responsible public debate on government be- depends on both transparency (knowledge and havior. While internal accountability mechanisms information about governance processes) and in executive branch administration are generally contestability (the ability to debate, question comparable to those in other countries with choice, and have competition among alternative similar incomes, internal checks and balances representatives and policies). across the branches of government are uniformly weak, the result of excessive concentration of Current governance systems show weakness in power in the executive even in notionally inclusiveness... Weakness in inclusiveness is pluralistic governments such as Algeria, Egypt, reflected in rural dwellers having few public and Tunisia. External accountability, through services, leaving in its wake some of the highest contestability for public officials, has been rare in levels of illiteracy among middle-income the region, leaving its governments the most countries. It is reflected in gender inequalities in centralized of all developing countries. voice and participation in society, and differing treatment under the law. It is reflected in nepotism, Third Quarter 2003 21 Republic of Lebanon Update Countries Will Meet the Challenges manufacturing and services. For instance, bridging of Reform in Different Ways only half the gap between the current 6 percent share of nonoil merchandise exports in total exports While the need to complete the three fundamental and its potential of 20 percent, with associated transitions and underlying governance increases in domestic and foreign private improvements is common across the region, the investment, would create more than 4 million new priorities and sequencing of changes in policies jobs over the next five years. That is equivalent to and institutional improvements needed to achieve cutting the unemployment rate by 4 percentage higher growth and complete the transitions will points of the labor force. The broader reform agenda vary-depending on relative resource endowments would bring even larger benefits. of natural wealth and labor, and on past success in undertaking policy and institutional improvements, in particular the strength of gov- ernance. Political economy factors are also fundamental to external accountability, and national checks and balances and administrative MENA Development Reports: measures for better internal accountabil ity are indispensable. § "Trade, Investment, and Development in the Middle East and North Africa: Engaging the The Impact on Income Growth and World". Employment Would Be Large § "Better Governance for Development in the Middle East and North Africa: Enhancing The impact of an integrated package of policy Inclusiveness and Accountability". realignments that improves the business and investment climate for the private sector and fosters § "Gender and Development in the Middle East integration with the world economy is potentially and North Africa: Women in the Public Sphere". very large. The trade report estimates, based on the § "Unlocking the Employment Potential in the experience of comparable countries, that out put per Middle East and North Africa: Toward a New worker could increase by some 2-3 percent a year. Social Contract". The governance report, using similar international evidence of good performing countries, suggests that improving the institutions for accountability The reports can be ordered on-line at: and public administration could boost output growth http://publications.worldbank.org/ecommerce/ per capita by 0.8 and 1.3 percent a year. Increasing the participation of women in the labor force to Overviews of the four reports are available in levels comparable to the highest performers in the English, French and Arabic at: region may add 0.4 percent or more to GDP growth. www.worldbank.org/mna/ While these effects are not additive and reflect changes in policies and institutions that are not exclusive, a conservative estimate of the sum of these projected effects, taking into ac count overlap in the channels through which the policy changes operate, would be output growth per worker of 2.5- 3.5 percent a year, or roughly triple the 1 percent growth of today. The suggested economic transformation and deep reforms would generate millions of new jobs and more productive jobs in traded sectors across 22 Third Quarter 2003 Republic of Lebanon Update NEWS, RECENT AND UPCOMING ACTIVITIES World Bank Launches Arabic Website (www.albankaldawli.org) The World Bank has launched an Arabic website that project stories. The site also features press releases includes dozens of detailed web pages about the and country, sector, and issue briefs on various institution's work and new translations of Bank topics. Summaries for key reports will be available publications and issues briefs. The site is currently a in Arabic soon. This new Arabic site will be mirror of the Bank's main homepage translated into invaluable in promoting the World Bank's dialogue Arabic. It also includes a regional site focusing on the with the Middle East and North Africa at this critical Bank's work in the Middle East and North Africa period for the region. The World Bank's overarching (MENA). Over 100 web pages will be available in objectives in the MENA region are to strengthen the Arabic for the new site. These will highlight the World momentum for building a climate for investment, Bank's partnerships in the region, learning initiatives, job creation, and sustainable growth, and to publications and research reports in Arabic, as well as empower poor people in the development process. Parliamentary Network On The World Bank In 2000, with a view to engaging management to relay the concerns and opinions of the Parliamentarians more deeply in Network on development policy issues. development, and to inform them about the World Bank's role in Website: The Network has created a website to poverty reduction and its knowledge facilitate the exchange of information on international resources, the World Bank development issues among members and to serve as a encouraged the creation of the Parliamentary Network clearinghouse for the latest parliamentary and World on the World Bank (PNoWB). This independent Bank news. international network aims to encourage policy dialogue and the exchange of views between legislators Field Visits: With support from the Government of and the World Bank. It is also a platform for Finland, the Network has initiated a program to parliamentary coordination and advocacy on organize field trips for parliamentarians from donor international development and poverty eradication. countries to visit World Bank projects in developing countries. The PNoWB currently has over 200 members from over 60 countries, and a Steering Committee with the Handbook: Plans are underway to create a mandate to initiate, guide and oversee the activities of "Handbook on the World Bank for Parliamentarians" the network and organize meetings and consultations on to serve as a comprehensive guide for a regular basis. The PNoWB's main activities, parliamentarians on the functioning of the World initiatives and projects include: Bank. Annual Conference: The Network organizes an annual conference in partnership with a national parliament For more information and to access the website, and the World Bank. please visit: www.pnowb.org/ Steering Committee Meeting with World Bank Management: The Committee meets once a year with the President of the World Bank and senior Third Quarter 2003 23 Republic of Lebanon Update The Information For Development Program The Information for Under the core program, infoDev provides grants to Development Program support demonstration projects in health, education, (infoDev) was started in e-commerce, e-government, environmental September 1995 to address protection, telecommunication sector reform, and the obstacles facing Internet access by local communities. The infoDev developing countries in an information-driven world Conference Scholarship Facility (iCSF) provides economy. It is a global grant program funded by 23 bloc grants to conference organizers sponsoring the donors and managed by the World Bank. Through participation of individuals from developing pilot projects and other activities, infoDev promotes countries in major ICT conferences. With the innovation in the use of information and International Institute for Communication and communications technologies (ICT) for economic Development in the Netherlands, infoDev has and social development, with a special emphasis on developed a web-based environment for poverty reduction. It operates as a "venture fund" for disseminating lessons and case study materials from ideas and its main method of intervention is through information and communication technology projects: grants to field test specific activities. the ICT Stories Project. infoDev provides the mechanism for forming smart The infoDev Flagship Initiatives are strategic partnerships to mobilize intellectual and financial projects complementing the core program; Country resources for economic and social development in Gateways, e-readiness, e-government and regulatory the information age. To date, infoDev has created colloquium are examples of the most current formal partnerships with eighteen governments and flagships. InfoDev is presently launching an international organizations and four private Incubator Initiative dedicated, over an initial three- corporations. year period, to the establishment of a network of incubators to facilitate the emergence and infoDev is cooperating with public and private development of small and medium size Information donors, development organizations, international and Communication Technologies enterprises in organizations, and developing countries. infoDev developing countries. collaborates with institutions such as the International Telecommunication Union, UNDP, UNESCO, the European Union, OECD and many For more information and to access the website, others in the promotion and development of ICT please visit: www.infodev.org strategies and infrastructure. World Bank's Engagement with Civil Society The growth of civil society has been one of the most evolving relationship with civil society throughout recent significant trends in international development. the world. CSOs will find information on ongoing Partnerships amongst governments, businesses and policy consultations, funding sources, operational civil society organizations (CSOs) are increasingly partnerships, and publications. seen as one of the most effective ways to reduce poverty and achieve sustainable development. For more information and to access the The purpose of the website is to provide CSOs with website, please visit: information and materials on the World Bank's www.worldbank.org/civilsociety 24 Third Quarter 2003 Republic of Lebanon Update RECENT WORLD BANK PUBLICATIONS Trade, Investment, and Development in the Middle region's legacy of limited public disclosure and East and North Africa: Engaging with the World transparency has, moreover, hampered the debate on (ISBN: 0-8213-5574-0 SKU: 15574). Engaging with governance. the World describes why expanding trade and investment is vital for this region. The greatest Gender and Development in the Middle East and economic challenge is to create enough jobs for its North Africa. Gender inequality--the differential rapidly growing labor force, which is increasingly access to opportunity and security for women and young and educated, to ward off threats to social and girls--has become an important and visible issue for political stability inherent in high unemployment rates. the economies of the Middle East and North Africa. This effort requires higher, and more sustainable, economic growth than has been achieved in the past Gender equality issues in MENA are usually two decades. Expanding trade and private investment approached from a social, anthropological, or political offers the best hope. The potential is enormous given angle. But the costs of inequality are often borne at the the region's human resources, skills, location, history, economic level. This report seeks to advance the gender and opportunities. equality discussion in the region by framing the issues in terms of economic necessity. It analyzes the potential The book analyzes why the region has yet to tap fully of women's greater economic contribution to the into the rich stream of global commerce and region's new development model, further discussed in investment--and the measures needed to do so, three parallel reports on trade, employment, and including improvements in the domestic investment governance. It identifies key economic and climate and reforms in the policies of the region's sociopolitical impediments to women's increased labor trading partners. Its findings will appeal to force participation and empowerment, and suggests a policymakers in the region, the private sector and civil way forward in developing an agenda for change. society, trade specialists, donors and partners, and anyone with an interest in the history and prospects of Unlocking the Employment Potential in the Middle the Middle East and North Africa. East and North Africa: Toward A New Social Contract. As the region's increasingly educated and Better Governance for Development in the Middle young populations complete their schooling, its already East and North Africa: Enhancing Inclusiveness and strained labor markets, with unemployment rates Accountability (ISBN0-8213-5635-6). Good averaging 15 percent and a labor force growing at more governance-in which public institutions function than 3 percent annually, are facing a daunting test. In responsively, transparently, and accountably-is 2000, the labor force in the Middle East and North essential to reducing poverty and stimulating growth. Africa totaled some 104 million workers, a figure As numerous studies have shown, weak governance expected to reach 146 million in 2010 and 185 million translates into slower growth, less-than-effective public by 2020. Creating work for today's unemployed services, and missed opportunities for human workers and future, first-time job-seekers will require development because of the limited participation of nearly 100 million new jobs over the next two decades. citizens in shaping their future. This is much more than the number of jobs created in the region during the past 50 years. This book seeks to enhance the dialogue on good governance in the Middle East and North Africa The report says that to meet this employment (MENA) region. To accomplish this goal, it marshals challenge--not seen anywhere in the world in the past evidence showing that good governance matters, both 50 years--the region's countries must reinvigorate the regionally and globally, and draws on the universal private sector, integrate into the global economy, and values of inclusiveness and accountability to propose an better manage oil resources. To fuel these economic analytical framework for discussing and measuring reforms, a new "social contract" between the governance. While the MENA region's quality of governments and their citizens is needed. This new administration is relatively strong, it lags behind in social contract must couple political and economic other key measures, notably public accountability. The reforms, linking reform to the principles of poverty reduction, income equality, and security that have Third Quarter 2003 25 Republic of Lebanon Update guided MENA's political economies for almost 50 international trade and employment in manufacturing in years. developing countries. HIV/AIDS in the Middle East and North Africa: Regulation by Contract: A New Way to Privatize The Costs of Inaction (ISBN 0-8213-5578-3). Recent Electricity Distribution? (ISBN 0-8213-5592-9). In evidence suggests that the prevalence of HIV/AIDS is many developing countries, both governments and increasing in the Middle East, North Africa, and investors have expressed disappointment with the Eastern Mediterranean (MENA/EM) region, and that performance of recently privatized electricity the total number of AIDS-related deaths has risen distribution companies. Some investors claim that the almost six-fold since the early 1990s. Although this design of the new regulatory system is fundamentally figure is low compared with those for Africa, South flawed and recommend that independent regulatory Asia, and the Caribbean, low prevalence does not equal commissions be replaced or supplemented by more low risk. The situation can change rapidly, and even explicit "regulation by contract" that would reduce the conservative estimates indicate that AIDS poses a real discretion of new commissions. threat to the region's long-term growth. This paper examines whether regulation by contract or This book reviews the current knowledge available on a combination of regulation by contract and regulatory the prevalence of HIV/AIDS in the MENA/EM region independence would provide a better regulatory system with the goal of stimulating discussion among policy- for developing and transition economy countries that and decision makers. In other regions, early wish to privatize distribution systems. It pulls together a investments in good surveillance and effective vast amount of country cases to identify key issues and prevention programs have proved to be relative approaches for addressing political tension and bargains, compared with the costs of a full-blown economic trade-offs. epidemic. As the authors argue, the time to act is now, while prevalence levels are still low. To that end, they make specific recommendations and offer best practices and case studies from around the world. Ordering World Bank Publications Phone: (001) 1-800-645-7247 or (001) 703-661-1580 This volume is the product of the Joint United Nations Fax: (001) 703-661-1501 Programme on HIV/AIDS (UNAIDS), the World On-Line: http://publications.worldbank.org/ecommerce Health Organization (Eastern Mediterranean Regional E-Mail: books@worldbank.org Office), and the World Bank. It will be of particular Research and working papers are also available in interest to those in the fields of public health, social electronic format free of charge at: policy, and economic development, as well as to http://econ.worldbank.org/ students and scholars of the region. Opening Up Telecommunications to Competition Data and Statistics and MENA Integration in the World Economy (Working Paper Series No. 33). The paper investigates The World Bank offers multiple databases online, some the potential impact of opening up telecommunications free of charge, and some on an annual subscription to competition in MENA on the sector's performance basis. Almost all the data reported in the site mentioned and on the participation of the region in the World below are derived, either directly or indirectly, from economy. official statistical systems organized and financed by national governments. The World Bank, in Making Trade Work for Jobs ­ International collaboration with many other agencies, is actively Evidence and Lessons for MENA (Working Paper involved in improving both the coverage of and Series No. 32). Can trade expansion help MENA effectiveness of these systems. countries step up the pace of job creation? Despite the short-run costs of adjustment to trade liberalization, in a To access the on-line databases, please visit: number of countries that successfully integrated into http://www.worldbank.org/data/ global markets, export-led growth has eventually brought large employment dividends. The paper examines the medium-term relationship between 26 Third Quarter 2003