FIRST QUARTER 2005 ·Lebanon's Challenge: From Malaise to Renaissance .................................................. 3 · Pension Reform in Lebanon ............................................................................................................................................................ 4 ·Recent Economic Developments ............................................................................................................................................. 8 ·Bank Group Operations ...................................................................................................................................................................................12 ·Health Sector Reform in Lebanon .............................................................................................................................................. 14 · News, Recent and Upcoming Activities ............................................................................................................................ 16 ·Recent World Bank Publications ........................................................................................................................................................... 20 Joseph Saba, Country Director Sabah Moussa, ExecutiveAssistant Tel. (202) 473-2992 - Fax (202) 477-1482 Tel. (202) 473-9019 - Fax (202) 477-1482 E-mail: jsaba@worldbank.org E-mail: smoussa@worldbank.org OsmanAhmed, Lead Country Officer Sereen Juma, Communications Officer Tel. (202) 473-7063 - Fax (202) 477-1482 Tel. (202) 473-7199 - Fax (202) 522-0003 E-mail: oahmed@worldbank.org E-mail: sjuma@worldbank.org Carlos Silva-Jauregui, Senior Economist Tel. (202) 473-1859 - Fax (202) 477-0432 World BankAddress: E-mail: csilvajauregui@worldbank.org 1818 H Street, NW Washington, DC 20433 Shaha Riza,Acting Manager External Relations and Outreach www.worldbank.org Tel. (202) 458 1592 - Fax (202) 522 0006 Email: Sriza@worldbank.org To Order World Bank Publications: http://publications.worldbank.org/ecommerce Sophie Warlop, OperationsAnalyst Tel. (202) 473-7255 - Fax. (202) 477-1482 For Information on World Bank Programs in Lebanon: E-mail:swarlop@worldbank.org www.worldbank.org/mna/lebanon Omar Razzaz, Country Manager Chadi Bou Habib, Economist E-mail: orazzaz@worldbank.org, Tel. Ext. 228 Email: cbouhabib@worldbank.org, Tel. Ext: 233 Haneen Sayed, Lead Operations Officer Mouna Couzi, Senior ProgramAssistant E-mail: hsayed@worldbank.org, Tel. Ext. 229 E-mail: mcouzi@worldbank.org, Tel. Ext:231 Radwan Shaban, Lead Country Economist May Ibrahim, ProgramAssistant E-mail: rshaban@worldbank.org, Tel. Ext. 246 Email: mibrahim@worldbank.org, Tel. Ext. 245 Robert Maurer, Lead Urban Sector Specialist Sophie Urnechlian, ProgramAssistant E-mail: rmaurer@worldbank.org, Tel. Ext. 224 Email: surnechlian@worldbank.org Sebastien Dessus, Senior Economist E-mail: sdessus@worldbank.org, Tel. Ext. 225 The World Bank Office in Beirut United Nations House, Sixth Floor Robert Bou Jaoude, Senior Financial Management Riad El Solh 1107-2270 Specialist P. O. Box: 11-8577 E-mail: rboujaoude@worldbank.org, Tel. Ext. 230 Beirut - Lebanon Hadia Samaha Karam, Operations Officer Tel. (961-1) 987-800 E-mail: hsamaha@worldbank.org, Tel. Ext. 241 Fax (961-1) 986-800 www.worldbank.org/lb Lina Fares, Procurement Specialist Email: lfares@worldbank.org, Tel. Ext. 244 Editorial Team: Mona Ziade, Communications Officer Chadi Bou Habib Email: mziade@worldbank.org, Tel. Ext. 239 Sebastien Dessus Hadia Karam Mona El-Chami, Financial Management Specialist Zeina El Khalil E-mail: melchami@worldbank.org, Tel. Ext. 223 Omar Razzaz DavidA. Robalino Diana Masri, Financial Management Specialist Joseph Saba E-mail: dmasri@worldbank.org, Tel. Ext. 238 Paolo Zacchia Zeina El Khalil, Public InformationAssociate Mona Ziade E-mail: zelkhalil@worldbank.org, Tel. Ext. 234 With special thanks to Mary Saba 2 First Quarter 2005 EDITORIAL Lebanon's Challenge: From Malaise to Renaissance In the past six months, Lebanon has witnessed events of Answers to the above questions have been articulated historic proportions. During this period, the tremendous in the past by public sector groups, local think tanks, strengths of Lebanese society and economy, as well as various political parties, regional and international some serious vulnerabilities were revealed. Lebanon's agencies and the World Bank (this issue, indeed, takes strengths included: the power of the population to make up a number of policy issues on which the Bank has a its voice heard in a peaceful manner; the resilience of view, such as pension reform and health reform). It is the financial sector; considerable investor loyalty; the important to stress, however, that there are not neces- high credibility of the Central Bank; and the capability sarily "right" answers to each question posed. But there of the Government, even though short-lived, to deliver is, however, a "right" package of answers: one which on reforms, if unobstructed. Finally, yet equally signifi- is internally consistent; reflects broad agreement among cant during this period, tremendous international good the Lebanese; and allows Lebanon to transcend its cur- will was manifested towards Lebanon. rent state of political, social and economic malaise onto a sustainable path of growth and development. Only Serious vulnerabilities have become evident: while the a broad-based consultative approach, with determined shock of the assassination of the late Prime Minister leadership, can lead to this package called the Beirut Rafic Hariri was successfully absorbed by the markets, Pact, which Prime Minister Mikati described as the Lebanon's economic and financial costs added to an "EconomicTaif" after the political accord that ended the already heavily burdened economy; the debt burden, Civil War 15 years ago. among the highest in the world, became even higher; Lebanon became even more dependent on the resump- Once the Beirut Pact is articulated, the next challenge tion of large external financial flows; and, on the elec- will be to make the Pact binding over several years of toral scene, short-term political rhetoric again took pri- implementation and not subject to manipulation for macy over long-term agendas for national reform. short-term political ends. Here, a time-bound action plan, endorsed by all branches of government and asso- Going forward, Lebanon faces the challenge of a trans- ciations of civil society and the private sector, would formation from a condition of malaise to a political, give greater credence to the Beirut Pact and the ability social and economic renaissance. The main challenge to implement the Pact. now is to move the country out of a post-war, debt spiraling reconstruction phase into a vibrant emerging The international community will play a crucial role economy. The former Prime Minister Najib Mikati and in Lebanon's transition. In the best scenario, the inter- his team have laid the foundation for such a transforma- national community could provide technical assistance tion by the launching of the Beirut Pact. and a financial package to help Lebanon bridge the gap between the status quo and a future of higher equilib- The Beirut Pact provides a vision for putting the State in rium. In the worst of scenarios, a financial package the service of the Lebanese citizen. In its first phase, the could actually be counterproductive, simply postponing Pact makes no attempt to provide a recipe for reform. the day of reckoning when hard decisions need to be Instead, the Beirut Pact identifies the challenges that lie made. Indeed, even the most generous financial pack- ahead and poses fundamental questions about develop- age of assistance would dissipate within a few years in ment priorities, policy choices and necessary tradeoffs. the absence of the transformation described above. These questions touch every aspect of political, eco- nomic and social development in Lebanon, including The success of Lebanon as a model for coexistence and the role of the public sector and administrative reform; prosperity in the Middle East is important not only to the fiscal adjustment; monetary policy; public debt sustain- international community and worthy of their support, ability; social policy and safety nets; human develop- but also, and most importantly, to the Lebanese people ment (health and education); sustainable use of natu- themselves. Lebanon's political elite have an opportu- ral resources; and private sector competitiveness and nity to show that the needs of the country itself can be growth. put above factional differences and thus, help transform Lebanon toward a new era of renaissance. First Quarter 2005 3 PensionReforminLebanon: Whyitisneededandwhyitshouldnotbepostponed The Lebanese public pension system is unique Important reforms to the civil service and the military not only in the MENA region, but probably, pension schemes have also been considered, but not yet the world. The pension system is a key source of developed into a concrete proposal. financial drain for the Government, provides inad- equate long-term security for a sizeable group of A revival of the policy dialogue on pension reform, pensioners and is marred by complex administrative however, is essential to overcome this major challenge procedures. to Lebanon's social and economic reform drive, and fur- ther delay could be costly. This pension system scheme classifies beneficiaries into three groups: (1) civil servants; (2) military and TheEnd-of-ServiceIndemnityProgram:risky,costly security personnel; and (3) private sector employ- and financially unsustainable. In its current form, the ees. The first two groups are covered by traditional End-of-Service Indemnity (EOSI) Program is a problem defined benefit schemes, which is the promise made for all parties involved: current plan members, employ- by the government to a worker as to pension income ers, the Government, and the Lebanese population at retirement. This is normally calculated as a percent- at-large. Thus, Lebanon is one of those rare cases where age of the last wage. But private sector employees a reform of the national pension system would produce have access only to end-of-service indemnity, where only winners. retirees are eligible only for a lump sum payment cal- culated according to the length of employment (on One of the main problems of the current system is average a one-month salary per year of service) and that it does not provide adequate and secure income contributions and interests accumulated from previ- for retirement. Under the EOSI system, employers are ous employment. not required to provision for their liabilities toward employees. This implies that in difficult times, com- The three schemes cover about 26 percent of the labor mitments might not be able to be fulfilled. On the force at a cost of 3.5 percent of the Gross Domestic other hand, retirees are not mandated to transform the Product (GDP), among the highest levels of spending lump sum they receive into an annuity (i.e., a pension on pensions in the MENA region, where the average is for life). As such, the retirees' flow of income dur- close to 2 percent of GDP. Moreover, all three schemes ing old age depends on their ability to invest wisely, are fraught with serious problems in terms of financial which leaves them vulnerable to the vagaries of the sustainability, efficiency and equity which compromise financial market. Even under ideal conditions, the the credibility of the fiscal framework, the recovery average lump sum that individuals receive might be of the economy and the welfare of young and future insufficient to replace an adequate share of pre-retire- generations. ment income. Indeed, while the EOSI is supposed to operate as a defined contribution system, the implicit Mindful of these complications, past governments rates of return on contributions tend to be below have conducted assessments of alternative reform market levels. In other words, plan members could options, which ultimately culminated in a draft law be receiving benefits that are 50 to 80 percent below which would transform the end-of-service indemnity what they could obtain from depositing savings in a program for the private sector into a "defined con- bank account. tribution," fully funded scheme. Under this option, a worker would put aside a percentage of each pay- For employers the EOSI is not a good deal, either. Any check into a pension plan, which is usually mandated mandatory insurance scheme imposes, at least in part, by the Government. These contributions are then a tax on labor. The tax, however, is known in advance. placed into an account that accrues interest until the In the case of the EOSI, on top of the statutory contri- worker retires. The draft law was sent to Parliament bution rates, employers are subject to additional pay- in early 20005, but has not yet been endorsed. ments ­ of unknown amounts ­ to cover the difference betweenthecapitalaccumulatedbyindividualaccounts 4 First Quarter 2005 (usually involving an ad-hoc rate of return on contribu- ad-hoc benefits including lump sums and extra credits tions), and the benefits promised to the employee. In for each year of contribution (in the case of the military 2003, these "extraordinary" contributions represented scheme). At the same time, the process used to index 33 percent of regular contributions. Because the size of pensions is discretionary. This exposes retirees to the this implicit liability increases with the length of ser- risk of inflation while making the system vulnerable to vice of the employee, this system offers employers an adjustments that are too high. incentive to hire short-term employees, and/or refrain from declaring the workers. This also discourages The two schemes are already displaying an aggregate employees from switching jobs, restricting the mobil- deficit of 2.6 percent of GDP that is expected to con- ity of the labor force and impairing an efficient alloca- tinue to grow (see Figure 1). This deficit is being tion of resources. financed from general revenues. The implicit contri- bution rates paid by the Government to the military There are also problems with current investment poli- and civil servants' pension schemes represent respec- cies. Current arrangements do not provide incentives tively 110 and 28 percent of the covered wage bill to mange savings in the best interest of plan mem- (the legal contribution rate is only 6 percent). The bers. Indeed, because employers are ultimately liable current subsidy imposes a large burden on the bud- for the differences between accumulated savings and get and one that only benefits 6 percent of the labor promised benefits, EOSI managers could engage in force! The same resources could be allocated towards risky and/or low return activities. A review of current investments with a larger social impact, for instance information systems reveals poor record-keeping prac- in education and health. tices. Consequently, upon retirement, benefits tend to be calculated on a prospective basis, which involves a To date, the accrued pension liabilities of the two discretionary mechanism to credit interests to the indi- systems are estimated at 66 percent of GDP. This is vidual accounts. the value of the pension promises to current retirees and the rights accrued by current plan members. These While in appearance the EOSI is not facing financial liabilities compromise the credibility of the fiscal frame- difficulties, a closer look gives reasons for concern. work. In the absence of reforms they would continue to The system is still running a surplus of 1.8 percent grow, threatening the well-being of future generations of GDP. However, as indicated above, this balance (including low-income individuals who are outside the reflects "extraordinary" contributions from employers system) who have to finance the inherited debt through a and an implicit tax on employees' savings. Although combination of higher taxes, lower benefits and a lower the EOSI reports to have reserves worth 15 percent of non-pension budget. GDP, the World Bank estimates that liabilities could be as high, if not higher. In other words, to cover its A final issue relates to the fragmentation of the current current obligations the EOSI would need to receive system. The separate schemes for civil service, the mil- fiscal support which would entail using general rev- itary and private sector are problematic for a number enues to finance promises made to 20 percent of the of reasons. The most obvious reason is that this frag- labor force. mentation unnecessarily increases administration costs. Instead of one information system, three are necessary. The schemes for civil servants and the military Also, different provisions and the lack of bridges to and security personnel are a major liability for the transfer acquired pension rights between schemes limits budget and young and future generations. Both the mobility of the labor force. Finally, fragmentation is schemes offer to the average full-career worker a pen- a source of inequity because the system is treating work- sion equivalent to 85 per cent of pre-retirement income ers differently. ­ among the most generous in the world. This high level of income replacement is not only unaffordable, but also reduces incentives to diversify sources of sav- ings for retirement outside the public system ­ particu- larly among middle- and high-income workers. This is unfortunate, as it is known that the development of contractual savings outside the public system could contribute to financial sector development and eco- nomic growth. In addition, the system offers a series of First Quarter 2005 5 Figure 1: Projected Balances of the Civil Servants and Military and security personnel's Pension Systems. The left and right panels correspond respectively to the schemes for civil servants and the military and security services personnel. Source: World Bank. 2005. "Towards an Integrated Pension System in Lebanon: Reforming the End-of-Service Indemnity and the Schemes for Civil Servants and the Military". Towards an integrated reform program. Any Clearly, one should not underestimate the complexi- reform of the Lebanese pension system should aim ties involved in the implementation of this type of for the following objectives: (i) providing adequate pension system. In Lebanon, the existence of a core and secure benefits during old age; (ii) ensuring finan- of sound banks and insurance companies and a com- cial self-sustainability; (iii) minimizing economic mitment for financial sector development facilitate distortions; (iv) ensuring that when redistribution the task. While the fiscal situation remains frail, the takes place it is transparent and progressive (from fact that unfunded liabilities of the EOSI are rela- high to low income workers); (v) ensuring that the tively small would reduce transition costs at least system is administratively efficient; (vi) allowing for during the short term. However, the main challenge an efficient diversification of savings for retirement; is to ensure that the new institution has the necessary and (vi) supporting economic growth. capacity to mange the scheme and that an appropriate regulatory and supervisory framework is in place. It The current draft law to reform the EOSI is a right is desirable that some administrative functions (such step in this direction. The law proposes the conver- as record keeping, the collection of contributions, as sion of the EOSI into a fully funded defined contribu- well as the management of part of the reserves) are tion pension system. The contributions of employees outsourced. would be deposited in individual accounts which earn a market interest rate. Upon retirement, the capital As for the scheme for civil servants, two critical inter- accumulated in the accounts would be transformed ventions are recommended. The first is to close the two into a pension for life. The system would also provide schemes to new entrants, who would then be chan- a minimum pension guarantee, as well as survivor- neled to the reformed pension system for private sector ship and disability pensions. Financing mechanisms workers. Military and security personnel and civil ser- would be transparent and would not generate uncer- vants would have access to voluntary complementary tainties that discourage investment and job creation. private pension plans, which could be offered through By strengthening the link between contributions and the employer. The second intervention would require a benefits, the new system would also reduce distor- reviewofthebenefitformulasandeligibilityconditions tions in labor markets. The scheme would provide of those who remain in the "old" system - for example, incentives to diversify savings outside eliminating the lump sum payments and the credits on years of contributions. These two interventions would the public system. This would help to develop con- not eliminate the current implicit pension debt of the tractual savings, which would contribute to financial system, but would bring it to more sustainable levels. sector development and, through this channel, eco- The Government would continue to finance the defi- nomic growth. cit of the closed schemes, but the necessary budgetary outlays would be considerably reduced. 6 First Quarter 2005 As such, the reform proposal would not only address move toward the design and execution of a multi-year the financial problem, but also contribute to a reduc- reform program. This requires: (i) setting up a high tion in administrative costs, improve equity and level Steering Committee to oversee the design and facilitate the mobility of the labor force between the implementation of the reform program; (ii) approv- private and the public sector. ing the draft law for the EOSI; (iii) preparing and submitting to Parliament a law to reform the scheme In a nutshell, Lebanon is in a unique position to initi- for the civil service and the military; (iv) preparing ate reforms. These reforms would contribute to fis- various studies (financial and fiscal impacts of the cal stability and could facilitate the economic recov- reform, assessment of the financial sector, legisla- ery by reducing distortions in labor markets, elimi- tive stock taking, analysis of institutional capacity) nating uncertainties which diminish incentives for to guide the design of fiscal policies to finance the investment, while contributing to financial sector cost of the reform; (v) preparing the regulations; and development. With a new Parliament and a new Gov- (vi) being kept informed about the necessary invest- ernment in place, policy makers are in a position to ments in human and physical capital to strengthen resume the policy dialogue on pension reforms and institutional capacity. First Quarter 2005 7 EconomicDevelopmentsInTheFirstQuarterOf2005 Overview tunity to address its macro-economic, social and developmental shortcomings. The multiple friends Lebanon's economy and financial sector weathered of Lebanon are perhaps more eager today than ever the shock of former PM Hariri's assassination and before to assist in the country's social and economic subsequent political developments. In the weeks fol- transformation. But, this transformation can only be lowing the assassination (February 14, 2005), tourism, activated, led and sustained from within Lebanon. commerce and construction activities dropped sharply, It will first and foremost require a deep reflection and the financial sector experienced massive conver- and agreement among Lebanon's constituencies sions from Lebanese Pound-denominated deposits into on what would constitute the right action plan in foreign currency. Nonetheless, the economic activity the face of current political, economic and social started to rebound in March and confidence in the finan- conditions in Lebanon today. Two dimensions war- cial sector's resilience prevented large capital outflows. rant here particular attention: the first one relates Tight coordination between the Central Bank [Banque to the design of an "optimal" policy package, and du Liban, (BdL)] and the banking sector also contrib- concerns primarily fiscal, monetary and structural uted to the rapid stabilization of the financial situation. economic policies (public administration reform, By mid-March, the sector began to register net capital investment climate, etc.). The second is more politi- inflows and re-conversions of deposits into the Leba- cal in nature and relates to how the cost of transfor- nese Pound (LBP). mation would be shared among the population, with a particular view on its most vulnerable segments. Figure 1. Dollarization Rate of Deposits (%) A sustainable recovery is at this price: credibility and broad-support are the necessary conditions of its success. Using the most recent data available, the following briefly summarizes economic development during the period January-March 2005: real sector and external accounts indicators; public finance and the financial sector. Real Sector and External Accounts Developments Source: Banque du Liban (BdL) The regrettable absence of updated economic sta- tistics impedes rigorous monitoring of economic However, the successful prevention of a severe finan- activity. National and external accounts are missing. cial crisis will bear a high cost in the medium run. Also, there is no up-to-date information on house- The drop in the money supply and consequent increase holds' living conditions, consumer prices, wages or in interest rates, the financial engineering undertaken by unemployment. The World Bank is encouraged by the Central Bank to limit outflows, and the drop in tax recent efforts exerted by the Government of Lebanon collection and in public investment will all entail costs to develop quantitative information, notably regard- in terms of foregone growth and higher fiscal deficit. ing national, fiscal and quasi-fiscal accounts, as well This, in turn, adds to the already daunting task that faces as households' living conditions. The Government's Lebanon of inspiring growth, improving living condi- efforts should be sustained to make permanent the tions and regaining fiscal sustainability. production and dissemination of reliable statis- tics in these fields, as a critical element for good In the face of its new domestic and external politi- governance. cal environment, Lebanon has a historical oppor- 8 First Quarter 2005 There is no doubt, however, that the economic compared to Q1-04, while the increase for the single activity suffered from the political events of month of January reached 2 percent. Between Q1-03 Q1-05. The coincident indicator of the Central Bank and Q1-04, airport activity rose by 21 percent. decreased by 1 percent between Q1-04 and Q1-05, against an increase of 12 percent between Q1-03 and Lebanon's balance of payments witnessed a deep- Q1-04. The value of compensated checks increased ening of its merchandise trade deficit combined by only 1 percent in Q1-05 compared with Q1-04 with a contraction of its capital account surplus against 5 percent between Q1-03 and Q1-04. Accord- during the Q1-05. In spite of a depressed domestic ing to Bank Audi, the real GDP growth in Q1-05 demand, imports increased heavily in Q1-05 due to might have been close to zero during Q1-05. The the rise in oil prices and the appreciation of the Euro deceleration in consumer price inflation in February against the United States Dollar (and hence, the and March 2005 also illustrated a drop in domestic Lebanese Pound). Besides, political events resulted demand. According to the Consultation and Research in net capital outflows, which reduced the capital Institute, year-on-year price inflation was lower than account's surplus of the balance of payments, and 1 percent in February and March, against 3 percent made it insufficient to cover its growing merchan- in January. dise trade deficit. As a result, net foreign assets of commercial banks and the Central Bank declined in Figure 2. Compensated Checks (LBP billion) Q1-05. Between December 2004 and March 2005, gross foreign currency reserves at the Central Bank declined by US$2 billion. This decline reflects only partially the extent of the conversions from LBP- denominated deposits to the United States Dollar. The coordination between Lebanon's Central and commercial banks, indeed, helped mitigate the drop in gross reserves. Banks agreed on diverse forms of refunding gross reserves against substantial remuner- ations, such as subscribing to long-term Euro-CDs. Fiscal Accounts and Public Debt Source: BdL; seasonally adjusted series. In spite of a depressed economic situation, the Construction, industrial and tourism activities fiscal situation improved in the first quarter of seemingly contracted over Q1-05. The construc- the year. The Government's total deficit decreased tion sector suffered significantly from the political by 20 percent in Q1-05 compared to Q1-04 (on a disturbance - probably the result of depressed antici- cash basis) and primary balance (the difference pations and withdrawal of foreign workers dur- between revenue and spending, excluding debt ing the weeks that followed Hariri's assassination. service) improved by 4 percent. Nevertheless, this Construction permits dropped by 27 percent, and improvement was only achieved because the drop cement deliveries by 15 percent in Q1-05 com- in public expenditures was higher than the drop in pared with Q1-04. Industrial exports decreased by revenue. Besides, the recent consolidation of pub- 18 percent compared to Q1-04. The main decreases lic accounts by the Ministry of Finance, notably occurred in the pearls and precious metals indus- through the computation of arrears, worsens the try with a 68 percent drop, in addition to a 35 overall fiscal picture. percent drop in the machinery and electrical instru- ments industry. The decrease in exports, especially Revenues decreased by 4 percent in Q1-05 com- machinery exports, could be linked to the decrease pared to Q1-04. The revenue decrease (LBP70 bil- in exports to Iraq, which plunged by 64 percent. lion) is attributed to the drop in petroleum excises Imports of industrial equipment also dropped, by 3 by 31 percent (LBP58 billion, the result of gasoline percent compared with Q1-04, pointing to a decline price capping and new subsidies for diesel), in non in productive investments. The total activity of tax revenues by 4 percent (LBP18 billion) and in theBeirutairportincreasedbyonly2percentinQ1-05 taxes on property by 16 percent (LBP16 billion). This First Quarter 2005 9 decrease was partially compensated by a 10 percent Table 1. First Three Months Public Finances rise in the income, profits and capital gain tax (LBP20 (LBP billion) billion), and by an 8 percent increase in VAT collec- tion (LBP30 billion). 2004 2005 Total receipts 1,720 1,649 The decrease in revenues was offset by a higher Budget receipts 1,634 1,584 decrease in expenditures. Expenditures dropped by Tax revenues 1,162 1,131 8 percent (LBP185 billion), mainly the result of a VAT 380 410 13 percent decrease in debt service (LBP105 billion). Customs 389 333 Other tax revenues 393 389 This was largely due to debt restructuring efforts Other 472 454 undertaken in 2003 following the Paris II confer- Treasury receipts 86 65 ence. The other major category of spending which Total payments 2,299 2,114 witnessed a strong contraction was public investment Excluding debt service 751 731 expenditure, which declined by 32 percent (LBP64 Debt service 799 695 billion) compared with Q1-04. Indeed, the absence in LBP 467 318 of a voted budget for 2005 forced the administration in FC 333 377 to refrain from undertaking new investment projects Treasury payments 748 687 and to keep current primary expenditures at their Surplus / Deficit -579 -464 2004 level. But this decline in public investment Primary Surplus 222 231 spending was not necessarily good news. In fact, a continued contraction in public investment spending, Source: Ministry of Finance. Please Note: Figures are on a cash basis. already low by international standards with respect to the GDP, could dent the current stock of public infrastructure through insufficient maintenance, at Table 2. Estimated Government Arrears the expense of private sector activity and growth. As of Year-End 2004 (LBP billion) NSSF and IGD 1062 The recent computation of arrears by the Min- Hospitals 139 istry of Finance, although tentative and yet un- Expropriations 800 audited, reveals sizeable contingent liabilities, esti- Wages 1304 mated at LBP3425 billion by year-end 2004. Such Others 119 arrears (delays of payment) have been accumulated over recent years, mainly from extra budgetary funds Source: Ministry of Finance. [National Social Security Fund (NSSF) and the Insti- tute of the Guarantee of Deposits (IGD)], private Figure 3. Public Debt Holders operators (hospitals, contractors), households (through (LBP billion) the expropriation of their land) and public employees (for which a wage increase decision was adopted by Parliament on November 5, 1998 but never applied, as confirmed by various tribunal decisions). The build- up of arrears has various consequences: poorer fis- cal transparency, higher tariffs for private services, weaker social safety nets and greater difficulties in implementing investment projects1. As a result of continuous financing needs from the Government, the public debt continued to increase in Q1-05. Gross public debt rose by 5.7 percent between Q1-04 and Q1-05, to reach US$35.5 billion by end- March 2005 (out of which 52 percent is labelled in for- eign currencies). 1 As a large number of public investment projects (including Source: BdL. Please Note: Other holders include private donor-financed projects) are stalled before cases (payments of agents, international and bilateral donors and public agencies arrears) are legally settled. (NSSF, IGD, etc). 10 First Quarter 2005 Debt structure by holders changed. With massive The Central Bank increased the remuneration of conversions of deposits to the United States Dollar in banks' deposits and reserves. The weighted average Q1-05, banks had no alternative but to discount at the rate on LBP-denominated CDs rose by 49 basis points Central Bank some of their Treasury Bills with liquidi- between December 2004 and March 2005, from 9.5 ties in turn converted into United States Dollars and to 10.0 percent. The weighted average interest rate on placed at the Central Bank (in the form of Euro CDs United States Dollar deposits rose by 101 basis points and other placements). As a result, the Central Bank between December 2004 and March 2005, from 3.0 to was holding 29 percent of the Government's debt by 4.0 percent. end-March 2005, against 24 percent in December 2004. Commercial banks' overall exposure to the consoli- datedpublicriskstagnatedinQ1-05,butincreasedin Financial Developments foreign currency. Measured as the sum of claims on the Government and the Central Bank, commercial banks' The money supply (M3) decreased by 2.7 percent exposure to the sovereign risk remained unchanged between December 2004 and March 2005. Non- between December 2004 and March 2005, in proportion resident deposits, which are not included in the of commercial banks' assets (52.7 percent). This stag- definition of the money supply, shrank by 12 per- nation, though, masks important shifts in the nature of cent during the same period. The drop in net foreign the banks'exposure, from LBP to United States Dollar- assets at commercial banks and the Central Banks denominated instruments, mirroring the increased dol- (-7 percent between December 2004 and March 2005) larization of deposits and the concerted efforts exerted contributed largely to this overall decline. Reflecting by commercial banks and the Central Bank to limit out- massive conversions to the United States Dollar, the flows. money supply in LBP dropped by 31 percent between December 2004 and March 2005. Table 3. Commercial Banks Balance Sheets (LBP billion) Reflecting the strong decline in the money supply Mar- in LBP, average interest rates on LBP-denominated 2002 2003 2004 05 deposits increased by 96 basis points between Assets December 2004 and March 2005, from 7.0 percent to Vault Cash 0.1 0.1 0.1 0.1 8.0 percent. The average interest rate on United States Claims on Central Bank, LBP 2.5 11.6 10.3 9.5 Dollar-denominated deposits rose by 21 basis points Claims on Central Bank, FC 5.3 7 9.4 11.3 (from 3.3 percent to 3.5 percent) over the same period Claims on private sector, LBP 2.7 2.6 2.8 2.8 [Source: Association des Banques du Liban, (ABL)]. Claims on private sector, FC 12.5 12.6 13.1 13.3 Between March 2004 and March 2005 the spread Claims on public sector, LBP 10.8 7.6 7.2 5.5 between the average interest rate on United States Dol- Claims on public sector, FC 6.8 6.4 8.8 8.9 lar deposits in Lebanon and the Libor decreased from Claims on non-resident 8.2 8.1 11.1 11.3 221 to 44 basis points. banks, FC Other foreign assets, FC 1.3 1.9 2.5 1.6 Figure 4. Counterparts of Money Supply FixedAssets, LBP 1.9 1.9 2.1 2.2 (LBP billion) OtherAssets, LBP 0.4 0.4 0.4 0.4 Liabilities Bonds 0.1 0.0 0.1 0.1 Public sector deposits, LBP 0.4 0.9 1.0 1.1 Private sector deposits, LBP 12.7 15.7 15.5 10.3 Private sector deposits, FC 24.1 25.3 29.8 33.8 Non resident deposits, LBP 0.5 0.8 1.0 0.6 Non resident deposits, FC 5.6 6.9 8.6 7.8 Foreign Banks deposits 1.2 1.6 2.5 2.1 Capital Base, LBP 3.3 3.6 3.9 3.6 Unclassified liabilities, LBP 4.6 5.2 5.5 7.4 TotalAssets = Liabilities 52.6 60.1 67.8 66.8 Source: World Bank Staff Calculations based on BdL and ABL. Source: BdL. Please Note: FC: Foreign Currency. First Quarter 2005 11 BankGroupOperations IBRD Ongoing Projects Ba'albeck Water and Wastewater Project. (US$43.5 million). The major development objectives of the The current World Bank portfolio in Lebanon consists Project include: (a) improving the access of satisfactory of seven Projects for a total commitment amount of water supply and wastewater services to the region's US$321.85 million, of which US$87.71 million has residents; (b) introducing appropriate sector reforms­ been disbursed through May 15, 2005. particularly the development and strengthening of the capacity of the existing Ba'albeck Hermel Water and Revenue Enhancement and Fiscal Management IrrigationAuthorityand,onceitisestablished,theBekaa Technical Assistance Project (REFMTAP). (US$25.25 Regional Water Authority; and (c) involving the private million). The Project seeks to support Government sector in the operation and maintenance of water and efforts to enhance revenue and strengthen fiscal man- wastewater facilities by preparing for a Management agement. Contractor (MC) through a lease or concession contract that would secure the long-term financial needs for sec- Education Development Project (EDP). (US$56.6 mil- tor investments. The World Bank Board of Directors lion). This Project is designed to support the Govern- approved the Project in June 2002. ment's efforts to enhance the capacity of the Ministry of Education to function as an effective manager of the Urban Transport Development Project (UTDP). education sector and to restore the credibility of the (US$65.0million). The Project's objectives are to pro- Public Education System. vide the city of Beirut and the Greater Beirut Area with the basic institutional framework that is currently lack- First Municipal Infrastructure Project (FMIP-I). ing, and to support critical investments needed to maxi- (US$80.0 million). This Project aims at addressing mize the efficiency of existing urban transport infra- urgent municipal works while setting the stage for the structure. TheWorld Bank Board of Directors approved gradual assumption of responsibility for municipal ser- the Project in June 2002. vices at the local level. Cultural Heritage and Urban Development Project Community Development Project (CDP). (US$20.0 (CHUD). (US$31.5 million). The Project will finance million). This Project is designed to raise living stan- site conservation, enhancement investments, and associ- dards in targeted poorer communities, and to raise eco- ated urban infrastructure improvements in selected sites, nomic activity levels in such communities by investing and provide technicalassistance to strengthen the capac- in grass-roots social and small infrastructure activities, ity of the Directorate General ofAntiquities, Ministry of and in employment creation. Tourism, and targeted municipalities in cultural heritage preservation and tourism development. A signing for implementation of the Project was held in July 2003. Commitments and Disbursements as of May 15, 2005 Approval Loan Amount Project Name Year Amount Disbursed US$ Million Revenue Enhancement and Fiscal Management TechnicalAssistance 1994 25.25 24.33 Education Development 2000 56.57 7.19 First Municipal Infrastructure 2000 80.00 49.45 Community Development 2001 20.00 1.51 Ba'albeck Water and Wastewater 2002 43.50 1.83 Urban Transport Development 2002 65.00 2.06 Cultural Heritage and Urban Development 2003 31.50 1.34 TOTAL 321.85 87.71 12 First Quarter 2005 IFC Projects in Lebanon LebanonLeasingCompany(LLC).TheProjectinvolves the establishment of Lebanon's first leasing company, Uniceramic. The Project supports the modernization providing leasing finance to local small- and medium- of the company's existing production line and the size enterprises. It also includes two credit lines from expansion of the plant's capacity of glazed ceramic IFC to fund LLC's leasing activities. floor tiles. Middle East Capital Group (MECG). The Project Bank of Beirut and theArab Countries (BBAC) Credit consists of the establishment of the first regional Line. The Project offers innovative residential mort- investment bank in the Middle East, and is headquar- gages to middle income customers. tered in Beirut. Banque Saradar SAL. The Project involves an equity Banque Libano-Française. The Project offers innovative investment in common shares of the company. residentialmortgagestomiddleincomecustomers. ByblosBankSyndicatedCredit.TheProjectaimsatpro- BankofBeirutLebanonCreditLine.TheProjectconsists viding long-term project finance to small- and medium- of credit lines to four Lebanese private sector commercial sized enterprises in Lebanon for infrastructure project banksforon-lendingtolocalsmall-andmedium-sizedpri- finance, and to increase its housing loan portfolio. vate sector enterprises, and to middle income families to finance either the purchase of their first residence, or the Société Générale Libano-Européenne de Banque. IFC expansionoftheirexistinghome. extended a Line of Credit to Société Générale Libano- Européene de Banque to be utilized in support of its Idarat, SAL. The Project funds the company's invest- housing finance program. ment program in hotels and restaurants, and is designed to help revive the tourism industry, which is a key sector Fransabank. IFC extended a credit line to Fransabank in Lebanon. to support its housing finance program. Idarat SHV (Société Hôtelière "de Vinci" SAL). The Agricultural Development Company (ADC). The Proj- Project supports the Company's investment in a Green- ect is designed to rehabilitate and expand the existing field5-plusstar«boutique»allsuiteshotelinanup-scale facilities ofADC, which is involved in the poultry busi- residential district of Beirut. ness, into an integrated broiler meat production facility. MIGA in Lebanon Lebanon has been a member of the Multilateral Invest- infrastructure, and manufacturing sectors for invest- ment Guarantee Agency (MIGA) since 1994. Over the ments in Cote d'Ivoire, Ghana, Sierra Leone, Gambia, past decade, MIGA has received more than 20 prelimi- Guinea, and Syria. Eligible investors include those nary applications from investors in Austria, Canada, from MIGA-member countries investing in Lebanon, France, Luxembourg, Saudi Arabia, and Spain for Lebanese nationals repatriating funds for investments investments in Lebanon in the finance, infrastructure, in Lebanon, as well as Lebanese investors investing in telecommunications, and tourism sectors. developing countries, including the Middle East region. In addition, the Lebanese investor community has The Investment Development Authority of Lebanon become increasinglyinterestedin MIGA's abilityto pro- (IDAL), Lebanon's Investment Promotion Agency, has videnon-commercialriskcoveragefortheirinvestments submitted to MIGA a needs assessment request. MIGA into other developing countries. In fiscal year 2002, will perform the Needs Assessment by Fall 2005. The MIGA issued US$8.1million in guarantees to Invest- Needs Assessment will benchmark IDAL's invest- com, a Lebanese-owned company, for a telecommuni- ment promotion capacity relative to international best cations project in Benin involving the installation of a practices and recommend steps to improve IDAL's abil- new GSM mobile telephone network in Lebanon, which ity to attract FDI into Lebanon. has one of the lowest teledensities in the world. In fiscal year 2003, MIGA issued US$56 million in guarantees MIGA's online investment promotion services to Investcom's investment in Spacetel, Syria's second (www.fdixchange.com and www.ipanet.net) feature 90 mobile telephone network. Also, Lebanese investors documents on investment opportunities and the related have submitted preliminary applications in the finance, legal and regulatory environment in Lebanon. First Quarter 2005 13 HealthSectorReforminLebanon: BuildingonthePartnership withtheMinistryofPublicHealth Background These development objectives focus on the principles of equity, efficiency, cost-containment and quality. Despite impressive achievements in the overall public health status and life expectancy over the past decades, The project design at this stage would include four Lebanon still faces a number of significant healthcare main components which would build on earlier work challenges. Over half of the population lacks formal achieved under the previous World Bank Health Sec- health insurance coverage, and more than 60 percent tor Rehabilitation Project which closed on December of overall health spending comes from out-of-pocket 31, 2003. These components also include health man- expenditures. Total health expenditure, as a percentage agement information activities and overlap in ways to of Gross Domestic Product (GDP), is about 12.4 percent achieve the four objectives mentioned above. ­ higher than any other country in the Middle East and NorthAfrica region. Service delivery is largely curative The four components are: and dominated by an unregulated private sector, which manages up to 90 percent of all hospitals and 83 percent · Public Health and Primary Health Care (PHC): of health centers. The average hospital occupancy rate This component will focus on increasing the overall is low (around 56 percent) compared to the average rate quality and capacity (managing a larger volume and of Organization for Economic Co-operation and Devel- range of basic health services) of primary health- opment (OECD) countries. Quality standards in health care services in the public and private sectors. It care are still quite modest (notwithstanding the estab- will also seek to strengthen the referral system to lishment of a national hospital accreditation program), more specialized care services (i.e., to reinforce the given the absence of a national approach toward con- "gate-keeping" mechanism). Five types of broad tinuous quality improvement in healthcare. interventions are currently envisaged: (i) improv- ing the MOH's capacity to fulfill several critical In addition, there is growing concern over the long- public health functions (i.e., disease surveillance); term financial sustainability of the Lebanese healthcare (ii) improving the service delivery capacity of PHC structure, particularly in view of the demographic and facilities serving poorer sub-populations by demon- epidemiological transitions expected to occur over the strating the positive impact of new managerial and next 20 years. The combination of population growth, provider payment reforms; (iii) assisting the MOH the increasing longevity of citizens and growing con- in expanding, monitoring and regulating its network tribution of non-communicable diseases to the overall of contracted private PHC providers; (iv) develop- illness burden will have serious implications for health- ing quality improvement guidelines and processes care financing and service delivery arrangements in the for PHC providers; and (v) enhancing the academic country. training,continuousmedicaleducation,professional status and financial rewards of primary healthcare The World Bank is currently working closely with the practitioners in the country. Ministry of Public Health (MOH) on the preparation of anewproject(TechnicalAssistanceLoan)whichaimsat · Pharmaceutical Reform: This component will addressing someoftheaforementionedissues.Themain concentrate on policy measures designed to pro- objectives of the new project would be to: (i) strengthen mote the rationalization of drug registration, pricing the capacity of the primary healthcare system to service and utilization practices by all concerned stakehold- the poor; (ii) support the rationalization of drug registra- ers (i.e., Government, importers, pharmacists, phy- tion, pricing and utilization practices; (iii) improve the sicians and patients). These measures may include overall quality of health services, particularly primary critical human resource training in pharmaceutical healthcare services; and (iv) promote the development regulations; the introduction of new drug registra- of critical tools to implement important health finance tion procedures promoting consumer and stake- reforms. holder acceptance of generic substitution through 14 First Quarter 2005 continuous provider and patient education; promot- tratively, the survey work necessary for the prepa- ing better prescription and dispensing practices in rationofhealthcareaccreditationauditreports; and line with standardized treatment guidelines. (vi) improving the current Geographic Information System-based (GIS) health mapping system (Carte · Quality Improvement and Accreditation Pro- Sanitaire) to better monitor the quality of health grams: This component will built on the achieve- care technology acquisition and critical clinical mentsmadebytheGovernmentduringtheprevious outcomes across the country. project and will work to develop an overall quality improvement approach for Lebanon involving a · Health Financing Reforms:This component will number of concrete "applications" within the areas focus on various activities designed to improve of primary, secondary, and tertiary healthcare and various aspects of the current health financing pharmaceutical reform. This approach may include arrangements in Lebanon. These activities could the following activities: (i) developing standard- include (i) identifying and helping to implement ized clinical practice guidelines (and methods to specific options to harmonize information, opera- continually update them) for critical healthcare tional processes across the various public health services; (ii) introducing quality improvement top- insurance funds; (ii) assisting in the design, ics into continuous medical, nursing and technical implementation, monitoring and evaluation of a education programs; (iii) introducing rational drug new Diagnosis Related Groupings (DRGs) sys- utilization (RDU) practices among physicians and tem within the Ministry of Public Health (pos- pharmacists with linkages to quality improvement sibly transferring the system to the other pub- processes; (iv) enhancing the existing accredita- lic funds); (iii) updating and institutionalizing tion system by moving from basic and "process" national health accounts (NHA) to better track oriented accreditation standards to ones based on health expenditure flows from source of financing clinical outcome information and beginning a new to end users of financing; and (iv) assisting in the accreditation system for primary healthcare facili- development of means-testing methods for indi- ties; (v) institutionalizing, financially and adminis- gent healthcare coverage provided by the MOH. First Quarter 2005 15 News,RecentAndUpcomingActivities Environmental Carnival Climaxes Lebanon Development Marketplace 2005 In a marked departure from the political tensions that nal plants, organic crops, and indigenous bird species. have gripped the country since mid-February, the World Seven projects were selected by a small jury to share a Bank celebrated the conclusion of its Lebanon Develop- total prize of US$130,000. The World Bank provided ment Marketplace 2005 at a full-blown festival which prize money in the amount of US$100,000 and UNDP featured marching bands, colorful banners, children's contributed US$30,000 in prize money. theater, folk dances and awards. In addition to the finalists, 43 non-governmental orga- OrganizedinpartnershipwiththeUnitedNationsDevel- nizations, active in environment-related fields such as opment Program, Innovation Day, which had as its slo- eco-tourism, organic farming, health food and nature gan "United for a Better Environment," was timed to reserves, set up colorful displays further enlivening the coincide with Lebanon's National Unity Day on April event at BIEL. Hundreds of environmental activists, 13, 2005. exhibitors,schoolsandscoutsgroupscrowdedtheRoyal The festivities attracted representatives from civil soci- PavilionatBIELforlivelyentertainmentwhichfeatured, ety, the private sector, the Government and the interna- among other activities, presentations and documentaries tional community to the Beirut International Exhibition about the landscape, air and water pollution and endan- and Leisure Center (BIEL) to affirm their partnership to gered species, such as sea turtles. Schoolchildren aged seek a better future for Lebanon. 10-11 years, performed in a play entitled "Ozone," and a quiz of some 20 questions raised the awareness of the Innovation Day had been put on hold in the aftermath young and old about some of the less familiar offenses of Ex-Prime Minister Rafic Hariri's assassination on to the environment. February 14, 2005. But, on short notice, the World Bank and UNDP teams, with the help of local partners, orga- "Protecting the environment is not a luxury, but an nized a carnival to spotlight Lebanon's long-forgotten urgent necessity," Omar Razzaz, the World Bank Leba- environmental woes and promote Lebanon's natural non Country Office Manager, said in opening remarks, beauty and rich resources. highlighting World Bank studies that estimate the cost of environmental degradation in Lebanon at more than Innovation Day climaxed a five-month contest, entitled US$500 million a year, or 3.5 percent of the Gross "Harvesting Youth and Community Ideas for a Bet- Domestic Product. ter Environment", that attracted exhibitors and visitors from all ages and walks of life. Separately, Mona Hammam, UNDPResident Represen- tative and UN Resident Coordinator, stressed that the Since the launch of the contest in November 2004, 87 environment was an important component for sustain- proposals were submitted by NGOs and youth groups, able social development and economic growth. She said ranging in subjects from recycling household and that harvesting viable innovative ideas could also offer industrial waste, to the creation of reserves for medici- new job opportunities. The Winners of the Lebanon development Marketplace 2005 Competition Organization Project 1 Regional Cooperative Union in South Lebanon Transformation of Olive Residue into Firewood 2 TheAssociation of Chouf Cedars Sustainable Use of Medicinal Plants in the Protected Area of Arz al-Chouf 3 Association of Rural Development inAarsal Creating a Recycling Plant for Processing Quarry Waste 4 Animal Encounter Conserving Lebanese Biodiversity by Outreach Programs to Rural Areas 5 BaldatiAssociation Baldati.com Eco-Center 6 Friends of Nature Nesting Sites for Birds in Urban Schools 7 Scouts of Lebanon ­ St. Joseph Group Traditional Food Processing Festival 16 First Quarter 2005 Closing Round of the 2005 Small Grants Program in Lebanon The final round of the World Bank's 2005 Small Grants moting the integration of three different social struc- Program (SmGP) in Lebanon has ended and grants have tures (tribes, families and Bedouins) that often tend been awarded to the following projects: to compete rather than cooperate, into a single struc- ture working on developing a comprehensive and har- 1­ Communities Building for Better Resource monious development vision for their region. Work Management, by MADA. will be conducted through the definition of roles and 2­ Library for the Blind, by the South Lebanese responsibilities of various subcommittees, through Society for the Blind (SLSB). negotiations, creation of conflict management and arbitration bodies, and the set up of further transparent 3­ PublicSafetyAwarenessProject,bytheLebanese representative mechanisms for local committee mem- Association for Public Safety. bers. A parallel negotiation process will take place between Mada and the private sector represented by The 2005 round of the 2005 SmGP was initiated by a AlJord s.a.l. to clarify the role and engagement of the "Call for Proposals" on January 17, 2005 to a long list private sector for the development of the area and of NGOs, in addition to newspaper and website post- to agree on the institutional relationship and mecha- ings. In total, 11 project proposals were submitted to nisms. By the end of the Project, a CooperationAgree- compete for total funding in the amount of US$34,000. ment will be reached and signed with clear policies, The SmGP Committee screened and reviewed applica- monitoring mechanisms, representation mechanisms, tions along a pre-determined set of evaluation criteria arbitration processes and shared vision. and the final 3 proposals selected were awarded grants to implement their projects over a maximum duration of 2­"Library for the Blind" by the South Lebanese 12 months. Society for the Blind (SLSB) in the amount of US$12,500. The Project calls for the establishment of The Small Grants Program was created in 1983 to com- a small library (talking and Braille books) equipped plement and facilitate the social development agenda of with special talking computers and internet access the World Bank. The SmGP provides, through Country within the SLSB's Center in Nabbatiye, South Leba- Offices, grants to civil society organizations (CSOs) to non. The Project will also undertake training courses support the empowerment of citizens for greater own- for 20 blind and visually-impaired persons on the use ership of development processes, thereby making these of library resources and in receiving, hearing and/or processes more inclusive and equitable. reading material and information from Lebanese, as well as international resources on civic education and The Lebanon Country Office has been part of the SmGP development and its dissemination to the rest of the for five consecutive years. Previous grantees of the visually impaired. The Project's aim is to facilitate SmGP in Lebanon were: Save the Children, Center for the engagement of the blind and visually-impaired, Research and Training on Development, Imam Sadr currently marginalized due to the lack of appropriate Foundation,AmelAssociation, NationalAssociation for means and tools, in various civic society and develop- the Rights of the Disabled, Sesobel, Soins Infirmiers et ment activities. Developpement Communautaire, Association for Vol- unteer Services, Lebanese Development Forum, Mou- 3­"Public Safety Awareness Project" by the vement Social and the Lebanese Association of Educa- Lebanese Association for Public Safety in the tional Studies. amount of US$13,000. The Project aims at raising awareness concerning the importance of public safety Below is a brief description of the 3 selected projects: information and promoting the effective exchange of relevant information and training of specialized indi- 1­"Communities Building for Better Resource viduals.The Project will develop a Public SafetyTrain- Management" by MADA in the amount of ing Manual and CD in English and Arabic covering US$7,750. This proposal builds on an integrated basic knowledge of safety measures and instructions. development project initiated in 2001 in the moun- It will also train 50 professionals in various fields on tains of Hermel, Akkar and Donniyeh, some of the safety practices leading to the creation of a network poorest areas in Lebanon. The Project aims at pro- of Public Safety Individuals. A series of workshops on First Quarter 2005 17 the issue of safety practices will be conducted and a mass awareness campaign targeting mainly the youth, For more information about the Small Grants to disseminate knowledge and change perceptions and Program in Lebanon, visit: attitudes vis a vis public safety issues, in coordination www.worldbank.org/lb or contact with concerned ministries, municipalities, schools, Zeina El Khalil, zelkhalil@worldbank.org universities... and through various mass media. An IDF Grant in Support of the National AIDS Program (NAP) According to available data, Lebanon has a low HIV/ Evaluation System with participatory approaches; AIDS prevalence rate, but there is also evidence (2) evaluation and strengthening of the current HIV/ that a number of risks exist for further transmission AIDS epidemiological surveillance system; and (3) of the infection. Recent studies in the region have developing guidelines for integrated prevention and argued that the cost of inaction would be incalculable care for vulnerable groups. if efforts are not immediately exerted to prevent fur- ther transmission. This Grant is the first World Bank IDF grant for the Middle East and North Africa Region that specifi- The Lebanese Government initiated efforts to address cally addresses HIV/AIDS, an area that is still very HIV/AIDS in the early 1990s when it established the much a taboo in the region. However, given Leba- National AIDS Program (NAP). Since then the Gov- non's ongoing activities in this area and readiness to ernment of Lebanon has provided the NAP with the tackle these issues, this Grant will contribute to the full political and financial support needed to carry strengthening of the capacity of the Ministry of Pub- out education and awareness activities, as well as lic Health to sustain its efforts. Furthermore, the out- care, including providing antiretroviral therapy to puts of this Grant (e.g., manuals on HIV/AIDS Moni- eligible patients. toring and Evaluation, evaluation of an HIV/AIDS surveillance system and guidelines on vulnerable Based on UNAIDS and the World Health Organiza- groups' programs) can assist other countries in the tion (WHO) data, it is estimated that the number of region in implementing their HIV/AIDS programs. people living with HIV/AIDS in Lebanon in 2003 are This IDF Grant will be implemented by the MOH/ 2,763. However, the many problems of data collec- NAP with technical assistance from the World Health tion have led to uncertainties about the true extent of Organization (WHO) and in collaboration with other the epidemic in the country. UN agencies of the Country's UN Theme Group on HIV/AIDS. In 2003, with technical assistance from the World Bank, the National AIDS Program developed a National Strategic Plan (NSP) for 2004 to 2009 with For more information about this IDF Grant, four main priority areas including advocacy, moni- contact Ms. Hadia Samaha Karam, toring, surveillance and evaluation. In May 2005, hsamaha@worldbank.org the World Bank and the Government of Lebanon signed an Institution Development Fund (IDF) grant to support the implementation of some of the NSP activities. The purpose of this Grant is to assist the Government of Lebanon in developing a Monitoring and Evalua- tion (epidemiologic and programmatic) system. This Grant will enhance the capacity of the Government of Lebanon to plan, manage and implement HIV/ AIDS prevention, care and treatment activities in the country. The Grant covers three major components: (1) developing a National HIV/AIDS Monitoring and 18 First Quarter 2005 Structural Reforms Keys To Future Job Creation In The Middle East And North Africa The Middle East and North Africa (MENA) region is has been the weakest in the world. On average, MENA experiencing an economic boom driven largely by soar- countries rank in the bottom-third of the world in terms ing oil revenues, but this growth remains insufficient of advancing a range of business regulatory and finan- for addressing the region's daunting development chal- cial sector reforms.The pace of reform in politically dif- lenge of creating jobs. The first in a series of Annual ficult areas, such as judiciary, to improve enforcement Reports that monitor major economic developments in of contracts has been particularly weak. the region, Middle East and North Africa Economic Developemnts and Prospects 2005 says that close to The Report also points to a lack of progress in improv- 100 million new jobs will be needed over the next 20 ing governance, based on the twin criteria of quality of years to absorb new entrants into the labor force and public administration and public sector accountability. today's unemployed workers. Iraq's Reconstruction Brings Over the last two years, economic growth averaged 5.6 percent in MENA, up from the 3.6 percent growth Economic Dividend to Region over the 1990s. This exceptional growth was steered by external factors--escalation in oil prices and a subse- The Report states that apart from the oil price shock, quent rise in oil production, which significantly boosted the war in Iraq and its reconstruction and reintegration government consumption and investment. Moreover, represent the largest economic shock to the region in the this growth was concentrated in oil-producing countries past three to four years. From a regional standpoint, the that account for most of the regional growth accelera- initial economic impact of the war was limited, largely tion. The Report points out, however, that in per capita because Iraq was in many ways economically isolated terms, the growth upturn in MENA continues to lag from the rest of the region. In terms of Iraq's reconstruc- behind most other regions of the world. tion, however, many countries in the MENA region are poised to reap numerous potential economic dividends, Structural Reforms Essential for as a result of trade and business-related activities related to the reconstruction. Clearly, an improved security sit- Long Term Growth uation will need to occur to pave the way for greater progress on the reconstruction front. The Report argues that, in order to meet the challenge of jobcreation,theregion'seconomiesneedtoberealigned Looking forward, the Report predicts that shifts in along three fronts: (1) from closed to more open econo- external factors will continue to shape the profile of the mies; (2) from a public sector-dominated to private sec- region's growth in the short run. Moderately easing oil tor-ledeconomy;and(3)fromanoil-dominatedtoamore prices, partially counterbalanced with European growth diversified economy. However, the Report reveals that conditions, suggest growth will continue, particularly in the MENA region has, by and large, not kept pace with the labor abundant diverse economies. Overall, regional worldwide progress in embracing structural reforms, as growth is expected to average 4.9 percent in 2005, mod- shown by its measurement of progress in reforms in the erating to 4.3 percent in 2006. areas of trade, business environment and governance. According to the Report, the MENA region has made The Report can be downloaded from: great strides in trade reforms, motivated in part by www.worldbank.org/mna regional and bilateral trade agreements. Two-thirds of MENAcountries ranked above half of all countries in the world in terms of reducing tariff and dismantling non-tariff barriers to trade. Progress was particularly strong in a few countries, including: Egypt, Jordan, Lebanon and SaudiArabia. MENA's progress in improving the business environment, on the other hand, First Quarter 2005 19 RecentWorldBankPublications Pensions in the Middle East and North Africa: Time can be accelerated. The MDGs set clear goals for reduc- for Change (ISBN: 0-8213-6185-6 SKU: 16185). This ing poverty and human deprivation, and for promoting is the first comprehensive assessment of pension sys- sustainable development. What progress has been made tems in the Middle East and North Africa. While other toward these goals, and what should be done to acceler- regions--Central Asia, Eastern Europe, and Latin ate it? What are the responsibilities of developing coun- America, in particular--have been actively introducing tries, developed countries, and international financial reforms to their pension systems, Middle East and North institutions? Global Monitoring Report 2005 addresses African countries have lagged behind.This is explained, these questions. in part, by the common belief that, because demograph- ics remain favorable--the countries are young and the Global Development Finance 2005 (Complete Print labor force is expanding rapidly--financial problems Edition): Mobilizing Finance and Managing Vulner- are far in the future; as a result, pension reform does not ability (ISBN: 0-8213-5985-1 SKU: 15985). Global have to be a priority in the broader policy agenda. Development Finance 2005 I: Analysis and Statistical Appendix addresses two key challenges in develop- However, aging is not the only factor behind a finan- ment finance: first, how to raise resources flowing to cial crisis; the problem is the generosity of the current low-income countries, which are heavily constrained in schemes. Moreover, badly designed benefit formulas theiraccesstomarket-basedfinance;andsecond, how to and eligibility conditions introduce unnecessary eco- manage the vulnerability inherent in developing coun- nomic distortions and make the systems vulnerable to tries' access to finance--vulnerability stemming from adverse distributional transfers. changes in the global macro environment, as well as from shifting donor priorities (affecting aid and conces- Leveraging WTO Accession to Design Strategy of sional finance) and changing debt dynamics in develop- Economic Reform for New Iraq (Working Paper ing countries. Series 31217). Despite significant progress towards establishing institutional foundations of a market-based Global Development Finance 2005 II: Summary and economy made over the last year in Iraq, the transition Country Tables includes a comprehensive set of Tables is far from complete. The challenge remains huge: what of data for 136 countries which report under the World choice of institutional structures would offer incentives BankDebtorReportingSystem,aswellassummarydata to maximize microeconomic efficiency, assure the allo- for regions and income groups. It also contains data on cation of resources to their best use and prevent easy total external debt stocks and flows, aggregates, and key policy reversals. Ultimately, the main challenge will be debt ratios, and provides a detailed, country-by-country the choice of policies which will assure maximization of picture of debt. Global Development Finance 2005 debt national economic welfare, rather than that of rents for data are also available on CD-ROM and online, with the privileged few. The Paper proposes leveraging the more than 200 historical time series from 1970 to 2003, WTO strategy to design a strategy of structural reforms and country group estimates for 2004. and to draw on the experience of recent entrants to the European Union to design an institutional setting for the Measuring Empowerment: Cross-Disciplinary Per- development and implementation of the strategy. spectives (ISBN: 0-8213-6057-4 SKU: 16057). Poverty reduction on a large scale depends on empowering those Global Monitoring Report 2005: Millennium Devel- who are most motivated to move out of poverty--poor opmentGoals:FromConsensustoMomentum(ISBN: people themselves. But if empowerment cannot be mea- 0-8213-6077-9 SKU: 16077). The year 2005 marks an sured, it will not be taken seriously in development pol- important juncture for development as the international icy-making and programming. community takes stock of implementationof the Millen- nium Declaration--signed by 189 countries in the year Building on the award-winning Empowerment and Pov- 2000--and discusses how progress towards the Millen- erty Reduction sourcebook, this volume outlines a con- nium Development Goals (MDGs) ceptual framework that can be used to monitor and eval- 20 First Quarter 2005 uate programs centered on empowerment approaches. It ability between different actors in the delivery chain. presentstheperspectivesof27distinguishedresearchers Moving from a model of central provision to that of and practitioners in economics, political science, soci- decentralization to local governments introduces a ology, psychology, anthropology, and demography, all new relationship of accountability between national of whom are grappling in different ways with the chal- and local policymakers, while altering existing rela- lenge of measuring empowerment. The authors draw tionships, such as that between citizens and elected from their research and experiences at different levels, politicians. Only by examining how these relationships from households to communities to nations, in various change can we understand why decentralization can, regions of the world. and sometimes cannot, lead to better service delivery. In particular, the various instruments of decentraliza- World Development Report 2005 (Arabic): A Better tion, (fiscal, administrative, regulatory, market, and Investment Climate for Everyone (ISBN: na SKU: financial), can affect the incentives facing service 31892). Firms and entrepreneurs of all types--from providers, even though they relate only to local poli- micro enterprises to multinationals--play a central cymakers. Likewise, and perhaps more significantly, role in growth and poverty reduction. Their investment the incentives facing local and national politicians can decisions drive job creation, the availability and afford- have a profound effect on the provision of local ser- ability of goods and services for consumers, and the tax vices. Finally, the process of implementing decentral- revenues governments can draw on to fund health, edu- ization can be as important as the design of the system cation, and other services. in influencing service delivery outcomes. The World Development Report 2005 argues that The Role of Factoring for Financing Small and improving the investment climates of their societies Medium Enterprises (Working Paper Series 3593). should be a top priority for governments. Drawing on Around the world, factoring is a growing source of surveys of nearly 30,000 firms in 53 developing coun- external financing for corporations and small and tries, country case studies, and other new research, the medium-size enterprises (SMEs). What is unique Report explores questions such as: about factoring is that the credit provided by a lender is explicitly linked to the value of a supplier's accounts · What are the key features of a good investment receivable and not the supplier's overall creditworthi- climate, and how do they influence growth and ness. Therefore, factoring allows high-risk suppliers poverty? to transfer their credit risk to their high-quality buy- · What can governments do to improve their ers. Factoring may be particularly useful in countries investment climates, and how can they go about with weak judicial enforcement and imperfect records tackling such a broad agenda? of upholding seniority claims because receivables are sold, rather than collateralized, and factored receiv- · Whathasbeenlearnedaboutgoodpracticeineach ables are not part of the estate of a bankrupt SME. of the main areas of the investment climate? Empirical tests find that factoring is larger in coun- · What role might selective interventions and tries with greater economic development and growth international arrangements play in improving the and developed credit information bureaus. In addition, investment climate? the author finds that creditors'rights are not related to factoring. · What can the international community do to help developing countries improve the investment TradeCAN 2005 (ISBN: 0-8213-5940-1 SKU: climates of their societies? 15940). TradeCAN 2005 is a comprehensive database and versatile toolbox for the analysis of the competi- Decentralization and Service Delivery (Work- tiveness of nations. It is based on the official United ing Paper Series 3603). Dissatisfied with centralized Nations international trade statistics, using the four- approaches to delivering local public services, a large digit standard international trade classification. It number of countries are decentralizing responsibility covers the period 1985-2002 for all exporter countries for these services to lower-level, locally elected gov- and incorporates 90 percent of world trade. Around ernments. The results have been mixed. The Paper pro- the central concept of "market share," TradeCAN vides a framework for evaluating the benefits and costs, offers novel indicators of the quality, structure, and in terms of service delivery, of different approaches to performance of international trade specialization of decentralization, based on relationships of account- nations. First Quarter 2005 21 TradeCAN 2005 also contains a user-friendly interface ditionality? How has conditionality changed with the that allows rapid data retrieval and easy report prepara- streamlining efforts of the World Bank and the Interna- tion. The "Exercises Guide" provides essential informa- tional Monetary Fund? How has the content and focus tion regarding origin and coverage of the dataset, for- of conditionality evolved? What has been the experi- mulas, and more.The set of exercises is designed so that ence with different types of conditionality, and do they the reader becomes familiar with the system by using matter--be it ex-ante, programmatic, process-oriented, it and guides users, step by step, through the query and or outcome-based conditionality? How can we make report options. partnerships in conditionality more effective? This Annual World Bank Conference on Development volume of contributions by authors from a wide vari- Economics 2005: Lessons of Experience (ISBN 0- ety of backgrounds aims to make a contribution to the 8213-6021-3). The Annual Bank Conference on Devel- ongoing debate on development effectiveness and the opment Economics (ABCDE) is one of the world's best future shape of conditionality. known series of conferences for the presentation and Also available: discussion of new knowledge about development. First held atWorld Bank headquarters inWashington, D.C. in Gender and Development in the Middle East 1988, the ABCDE has become broader in scope as the and North Africa: Women in the Public Sphere world's economies have become more interconnected (ISBN: 0-8213-5676-3 SKU: 15676). and challenges have become more complex. Unlocking the Employment Potential in the This year's volume,Annual World Bank Conference on Middle East and North Africa: Toward a New Development Economics 2005, presents selected papers Social Contract (ISBN: 0-8213-5678-X SKU: from the 16th ABCDE meetings, held in May 2004. It 15678). reviews the lessons of 60 years of development expe- Better Governance for Development in the rience, addressing key topics such as infrastructure, Middle East and North Africa (ISBN: 0-8213- behavioral economics, trade, poverty, and globalization. 5635-6 SKU: 15635). The volume is a critical reference guide for develop- ment research and will be of interest to practitioners and Trade, Investment, and Development in the those studying international development and poverty Middle East and North Africa: Engaging with reduction. the World (ISBN: 0-8213-5574-0 SKU: 15574). Conditionality Revisited: Concepts, Experiences, Ordering World Bank Publications and Lessons. (ISBN 0-8213-6013-2). Why revisit con- ditionality? The tension between country ownership and Phone: (001) 1-800-645-7247 conditionality emerged as a central issue in the debates or (001) 703-661-1580 about policy-based lending. Over the past quarter cen- Fax: (001) 703-661-1501 tury, the development community has learned from the On-Line: http://publications.worldbank.org/ecommerce experience with policy-based lending around the world. Among the most important lessons are that conditional- E-Mail: books@worldbank.org ity cannot substitute ownership. Research and working papers are also available in elec- tronic format free of charge at: The approach to conditionality has shifted away from http://econ.worldbank.org/ the old model of the 1980s, but has not yet settled on a new one. While there is now generally more recogni- tion of the importance of ownership, a stronger focus Data and Statistics on development results and greater selectivity based on country performance, there are still different views and The World Bank offers multiple databases online, approaches among the international financial institu- some free of charge, and some on an annual subscrip- tions, bilateral development partners, recipient govern- tion basis. Almost all the data reported in the site men- ments, and critical observers. tioned below are derived, either directly or indirectly, from official statistical systems organized and financed Conditionality Revisited takes stock of recent experi- by national governments. ence with these new approaches to conditionality over the last few years, and discusses a number of key ques- tions. Is there still a useful role for conditionality? To access the on-line databases, visit: What is the right balance between ownership and con- http://www.worldbank.org/data/ 22 First Quarter 2005