Donors may insist on Lebanese economic reforms

Upcoming donor meetings to raise funds for rebuilding war-damaged Lebanon could be an opening for Western lenders to look for fresh commitments from Beirut to resume politically difficult economic reforms.

Lebanese officials say the 34-day Israeli war against Hizbollah guerillas will erase growth this year and increase the country's already massive public debt load, which has been rolled over thanks to economic support from the Arab world.

An August 31 donor meeting in Sweden will seek to raise immediate reconstruction funds for the estimated $3.6 billion in war damages and will likely be followed by a later meeting in Beirut for wider economic support.

The country was growing at a healthy six per cent before the war broke out on July 12 but Lebanese politicians have bickered for months over draft reform plans, especially the privatisation of the power and telecommunications sectors, higher taxes and lower spending.

Western lenders are signaling they are willing to help with overall economic support if Lebanon agrees to adopt reforms, possibly seeking an International Monetary Fund programme as a signal of its commitment to reform and to frame how donor money could be best used.

Some analysts question, however, why Lebanon would bow to Western pressures when the Arab world is willing to provide help without conditions attached.

Saudi Arabia already has pledged $1 billion for the war reconstruction effort, and Kuwait says it will donate $300 million. The United States on Monday announced $230 million in humanitarian, reconstruction and security assistance.

Still, some factions in Lebanon believe that linking to the West means more economic confidence and private investment.

Mohsin Khan, director of the IMF's Middle East and Central Asia Department, told Reuters the fund was in constant contact with the Lebanese government and central bank.

He did not say whether Beirut had expressed interest in IMF assistance, but said he expects his organisation to play "an active role" in the donor process.

"We are waiting for an assessment of the needs and then will work out how we can help," Khan said.

US officials said some donors may look for Lebanese reform commitments, possibly under an IMF-backed programme, before they are prepared to give economic support down the road, especially when it comes to addressing Lebanon's debt load.

The officials said Washington could support an IMF-backed program that would underpin the country's efforts to demonstrate serious, comprehensive and robust reform.

Lebanon has a long history of weathering and bouncing back from financial crises, but investors say it will not be easy to lure back investors this time unless a lasting cease-fire is reached. Beirut has never sought an IMF program but the government has long tapped the fund's technical expertise.

An IMF programme would radically alter the economic landscape in Lebanon, which has a sophisticated - and highly liquid - banking and financial sector, home to large regional deposits.

Before the recent fighting that killed 1,181 people and destroyed vital infrastructure, the IMF had warned of a potential Lebanon debt crisis. Its annual review of the Lebanese economy, issued in May, said it needed more than the expanding Middle Eastern funding and investments and without policy changes the debt ratio could rise steadily to over 210 per cent of gross domestic product by 2011.

"It is difficult to predict where the breaking point lies," the IMF document said. "But it is clear that such growing financing needs cannot be filled indefinitely by ever increasing capital flows."

"Lebanon has been held together by Middle East money and I'm not sure they need the IMF," said Tim Ash, a London-based economist at Bear Stearns who visited Beirut shortly before the Israeli bombing began. "What benefits will it bring?"

In an August 18 research paper, Ash said talk that Lebanon could draw on IMF credits through the fund's emergency assistance facility could provide Beirut with an additional source of funding.

He questioned whether the IMF would be able to enforce conditions on Lebanon given that the bulk of official financing is from friendly Middle Eastern governments through so-called "soft loans".

Samir Makdisi, a former Lebanese economy and trade minister and director of the Institute of Financial Economics at the American University of Beirut, noted that irrespective of who assists Lebanon, the government requires domestic consensus for any of its plans.

"Remember, Hizbollah is represented in the cabinet and in Parliament, and in Lebanon mutual agreements among the main players are normally sought on main issues," he said.