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Undertake critical reforms to improve Lebanon’s fiscal stability, create employment, provide adequate infrastructure, and support social inclusion

October 3, 2013

Synopsis

In public financial management, World Bank Group supported reforms have focused on improving the control, allocation and use of public financial resources through a series of inter-linked measures in budget, debt and aid management. Concrete measures included: (i) the creation of a macro fiscal unit at the Ministry of Finance and the formulation of a medium term fiscal framework that feeds into the budget; (ii) the restructuring of the Public Debt Department that led to the improvement of the debt recording functions and the adoption of a medium-term debt strategy for the first time in Lebanon; (iii) the creation of a Cash Management Unit and  efforts at consolidating public accounts and improving cash forecasting to introduce further fiscal discipline in line ministries' spending; (iv) adopting GFS2001 budget classification, reviewing accounting and reporting standards, and improving commitment controls as measures to enhance fiscal transparency.  In the Water sector, the Bank supported the Ministry of Energy and Water in developing a National Wastewater Sector Strategy, which was approved by Parliament in December 2012 and incorporates wastewater management for the Beka’a Valley. The Bank worked with the Ministry of Environment to finalize the Business Plan for Combating Pollution of Lake Qaraoun in the Beka’a Valley. In addition, the technical, financial and managerial capacities of the Beka’a and Beirut Mount Lebanon Water Establishments have been strengthened through the implementation of several important utility strengthening activities.  A Bank project in Urban Transport resulted in the development of a Public Transport Strategy, known as TransBeirut, to improve mobility within the Greater Beirut Area (GBA). A Traffic Management program has been successfully implemented and the operation of a traffic management system including the Traffic Management Center is ongoing.  Through Bank engagement in Human Development, the impact, efficiency and effectiveness of Lebanon’s social safety nets is being improved with the implementation of the ongoing National Poverty Targeting Program (NPTP), to target social assistance to the extreme poor.  The International Finance Corporation’s (IFC) program of investments and advisory projects is helping create jobs, improve access to finance for Micro Small and Medium Enterprises (MSME) and improve the investment climate.

Challenge

The regional turmoil and, more particularly, the Syrian crisis are having a strong impact on the security, political, and economic situation in Lebanon. The Syrian crisis has fueled a political divide along sectarian lines in Lebanon, leading to sporadic violence across the country. The Cabinet’s attention has shifted from the reform drive to the more urgent issues of political stability and volatile security amid deepening polarization within the government, parliament and the public at large. Beyond the impact of the Syrian crisis, the stalemate in the executive and legislative branches of government remains an impediment to reforms.  The financial sector, one of Lebanon’s pillars of economic growth, has been less affected by the global financial and economic turmoil, but is feeling the effects of the Syrian crisis and regional uncertainties. With its high fiscal and current account deficits, and the high public debt, Lebanon’s economy remains vulnerable. Careful fiscal management to preserve the confidence of domestic and foreign depositors and investors is crucial.  Continued prudent monetary policies are also important in managing risks and buffering Lebanon from the effects of future global shocks.

The major fiscal expansion that took place in 2012 is creating fiscal challenges for 2013, particularly in the context of a promised increase in public salaries. The fiscal expansion measured by the changes in the central government’s primary fiscal balance reached almost 4 percentage points of Gross Domestic Product (GDP) in 2012 (from a 3 percent of GDP primary surplus in 2011 to a deficit of 0.7 percent of GDP in 2012). The overall fiscal deficit reached 8.9 percent of GDP in 2012. The rising deficits were driven by a sharp rise in expenditures stemming from wages and salaries (following a large cost-of-living adjustment) and transfers to the electricity company. Low growth and rising deficits combined in 2012 to reverse the downward trend in the public debt-to-GDP ratio that started in 2006 (the ratio rose to 134 percent at the end of 2012).

Solution

The Bank will continue to monitor the macroeconomic environment closely, as part of the World Bank Group standard dialogue with the Lebanese authorities. The Bank will also continue to provide the Government of Lebanon with capacity building and implementation support for effective and prudent public finance management and fiscal consolidation.  Going forward, the Bank will continue to support the Government with lending for investments in key economic infrastructure to support basic services, as well as technical assistance and analytical work that will inform and build momentum around key reforms. The Bank will also continue to monitor the escalating Syrian crisis, and its socioeconomic, fiscal and developmental ramifications, while evaluating the impact of this risk on the Bank program.

A review of progress in the implementation of the World Bank Group’s Country Partnership Strategy (CPS) for the Financial Years 2011- 2014 has confirmed the validity of the World Bank Group’s focus on assistance in light of challenges at the regional and country levels. The four strategic goals of the CPS are: (i) strengthened fiscal and public financial management; (ii) improved competitiveness; (iii) improved economic infrastructure; and (iv) enhanced human capital development and social protection.

Results

Public Financial Management: Under the Emergency Fiscal Management Reform Implementation Project, (Lebanon Trust Fund – Bank Approval: March 12, 2009; Closing: June 30, 2013) public financial management has been strengthened with the establishment in 2012 of a macro-fiscal department within the Budget Directorate at the Ministry of Finance (MoF), and the development of the conceptual framework for a multi-year budget planning process (MTEF).  In addition, reforms in the debt management area have moved forward with the development of a national debt management strategy and the establishment of a new Public Debt Directorate in MoF that assumed both analytical and operational functions. In addition, the latest version of the United Nations’ Debt Management and Financial Analysis System, DEMFAS 6 has been installed to gradually assume the recording and operational functions of debt issuances.

Water and Wastewater Sector: Under the Ba’albeck Water and Wastewater Project (Bank Approval: June 4, 2002; Closed: June 15, 2012), over 134 kilometers of water distribution and wastewater collection networks have been installed.  The Iaat Wastewater Treatment Plant is now fully operational and all pumping stations deliver water that meets World Health Organization quality standards.  Under the West Beka’a Emergency Water Supply Project (Lebanon Trust Fund – Bank Approval: March 20, 2007; Closed: May 20, 2012), 194 kilometer of water supply network were rehabilitated (over 85 kilometers more than planned at project appraisal), and all pumping stations now deliver water that meets World Health Organization quality standards.

Urban Transport Sector: Under the Urban Transport Development Project (Bank Approval: June 13, 2002; Closing: December 31, 2013), the on-street Paid Parking of 730 pay-and-display parking meters has been implemented. Traffic control lights have been installed at 200 intersections along with CCTV cameras connected to the equipped and operational Traffic Management Center.  Within the framework of a new Public Transport Strategy, the government of Lebanon is now launching the procurement for the design of infrastructure, operational planning and contract preparation for the priority lines of a Bus Rapid Transit system in the Greater Beirut Area, and is preparing the restructuring plan for the Railway and Public Transport Authority.

Cultural Heritage and Urban Development Sector: Under the Cultural Heritage and Urban Development Project (Bank Approval: April 17, 2003; Closing: December 31, 2015), improved conditions for local economic development and enhanced quality of life in 5 historic city centers was achieved through: 595 new rehabilitation activities in historic urban cores in compliance with approved regulations; rehabilitation of 150,000 square meters of pedestrian public squares and spaces; rehabilitation of 182,000 square meters of facades of historic buildings.  These activities led to a 10 percent increase in private sector investments in the tourism and heritage sector.

Municipal Sector: Under the First Municipal Infrastructure Project (Bank Approval: June 22, 2000; Closed: December 31, 2008), and the Municipal Infrastructure Project (Lebanon Trust Fund – Bank Approval: November 3, 2006; Closed: April 30, 2012), improved access to basic services at the local level has been achieved through building and/or upgrading of essential infrastructure; construction of about 3,350 km of roads; 305.7 km of retaining walls; installation of 19,767 streetlight poles; improvement of 290 km of storm drainage networks; improvement of 28 km of potable water networks; and rehabilitation of 36 km of sewerage networks. 17 municipal building were reconstructed, in addition to the construction of 15 public facilities in 15 municipalities.

Education Sector: Achievements under the Education Development Project (Bank Approval: March 30, 2000; Closed: December 31, 2009) include: (1) Building and equipping training centers for teachers and training more than 450 school principals in leadership and management skills; (2) Constructing and making operational 11 new schools; (3) Establishing computer classrooms in a majority of secondary schools and in all vocational schools; (4) Designing and implementing exams and test standards; and (5) For the first time in Lebanon, developing and adopting an education reform strategy, currently under implementation, with the support of the World Bank and other donors. The strategy focuses on: (i) making education available on the basis of equal opportunity; (ii) achieving quality education that contributes to building a knowledge society, social integration and economic development; and (iii) improving the governance of education.

Social Protection: Under the Emergency Social Protection Implementation Support Project (Lebanon Trust Fund – Bank Approval: September 5, 2008; Closing: August 31, 2014), the National Poverty Targeting Program promotes gender equality with a goal of ensuring that 50 percent of all beneficiaries are women. In the first round, out of 84,322 total beneficiaries, 40,173 beneficiaries were female, or approximately 48 percent. In addition, the New Entrants to Work Program (NEW) aims to have women make up 50 percent of those enrolled in the program for soft skills training and on-the-job training. By the end of 2013, it is expected that half of those who enrolled and successfully completed the soft skills training will be young women; by August 2014, it is expected that half of those who successfully complete the on-the-job training will be young women.

Under the Social Promotion and Protection Project (Bank approval:  May 17, 2013; Closing: December 31, 2018), grants for income-generating activities will be provided to vulnerable groups in Lebanon, especially those with female heads of households.  Women will also be a part of the target groups for social services provided through the project. Women would be particularly encouraged to participate in the “Local Consultative Platforms” (LCP), informal community structures where representatives of civil society, local Non-Governmental Organizations (NGOs) and municipal services could exchange ideas and formulate suggestions for the Ministry of Social Affairs for community-driven projects. Out of the total number of direct beneficiaries, the project will aim to have 50 percent be women.

IFC Investment Projects: Helped to catalyze around 1,500 jobs (almost 540 of which were for women) and supported clients who have generated more than 115,000 MSME loans worth US$2.2 billion. In addition, IFC activities reached 913 students, approximately half of whom were women.

IFC’s trade program has committed around US$1.3 billion to date since the inception of the Global Trade Finance Program in the country in the Financial Year 2006.

Bank Group Contribution

Portfolio Overview: As of March 30, 2013 the portfolio consists of 14 active projects, (financed by the World Bank  for US$463.2 million, Lebanon Trust Fund (LTF) for US$10 million, State and Peace Building Fund (SPBF), Institutional Development Fund (IDF), and Program on Forests (PROFOR) resources for a total amount of US$4.5 million), focusing on education, social protection, urban development, transport, water, environment, private sector, social services, telecommunications, and fiscal management reform, for a total commitment of US$477.7 million, of which a total of US$147.2 million has been disbursed. Trust Funds are integrated in the Bank’s portfolio and support key institutional development. Bank-administered trust funds, including the Lebanon Trust Fund (LTF), provide support to Government priorities by financing activities to: (i) improve Lebanon’s social services; (ii) support the Telecommunications Regulatory Authority; (iii) improve water resources and agricultural management and planning; (iv) increase youth civic engagement to improve youth employability and strengthen social cohesion; and (v) provide assistance to the government of Lebanon and the public electric utility in managing inventories of Polychlorinated Biphenyl (PCB)  and disposal options.  In addition, the Bank’s ongoing Analytical and Advisory Activities (AAA) cuts across the four CPS pillars and continues to inform the policy dialogue around reform, as well as the design of the World Bank Group’s program in Lebanon. The AAA includes support for sound macroeconomic management, public financial management, capacity building activities to the Central Administration for Statistics, business environment reform, support for structural reforms in electricity and water, public transport development, environmental management, education, employment and labor markets, and social safety nets.

Since 2007 the IFC has significantly scaled-up its activities in Lebanon. IFC exceeded its Paris III/Reconstruction pledge of US$275 million, having committed over US$1 billion since the end of the 2006 conflict.  IFC’s commitments in 2012 and first half of 2013 totaled US$370 million and US$220 million, respectively while spending on Advisory Services during these same periods totaled approximately US1.3 million and US$0.5 million.  Funding for IFC’s Alternative Dispute Resolution project was provided by the State Secretariat for Economic Affairs (SECO).  IFC’s program emphasizes increasing access to financial services for small and medium enterprises; trade finance activities; extending services to the under-served; promoting improved corporate governance; improving competitiveness; and facilitating greater private investments.  IFC is broadening its engagements in Lebanon with its first investment and advisory projects in Tripoli, and projects to promote greater access to finance for women-owned small and medium enterprises s and sustainable energy finance. 

Partners

The World Bank Group operates as part of a broader international effort in Lebanon working in cooperation with the following partners in five sectors: 

  • Water Sector: Kuwaiti Fund for Arab Economic Development and the Islamic Development Bank
  • Energy, Cultural Heritage and Urban Development SectorsAgence Française de Développement
  • Urban Transport Sector: Arab Fund for Economic and Social Development, Abu Dhabi Fund for Development
  • Social Protection Sector: Canadian International Development Agency  and the Italian Cooperation

Moving Forward

Moving forward, close policy dialogue, analytical and advisory services, and targeted investments can help inform and build momentum around the reform agenda. Therefore, a Bank engagement that focuses on support through the existing portfolio (in fiscal and financial management, water, transport, and urban development, support to small and medium enterprises s, social protection, and education), to be complemented by further, selected operations targeting transformational sectors, which show potential for progress under the present circumstances, e.g. electricity (showing promise of reform) and water (per the priorities identified in the National Water Sector Strategy).

The TA and AAA support for sound macroeconomic management, public financial management, business environment reform, support for structural reforms in electricity and water, education, employment and labor markets, and Social Safety Nets remain a priority. In moving forward, the Bank Group will also strive to adapt its analytical work to the requirements of the government of Lebanon in terms of addressing the ongoing or new external shocks and crises, and will increase its responsiveness to provide just-in-time technical assistance for specific policy issues.

IFC’s investment program will continue to support the financial sector as a conduit to reach MSMEs, as well as seeking potential investments in the retail and manufacturing sectors to assist companies seeking to expand regionally and beyond.  Investments in the energy and infrastructure sectors will also be explored.  IFC’s Advisory Services will continue focusing on activities that create jobs, improve the investment climate, mitigate the effects of climate change and promote greater economic inclusion.

Beneficiaries

“As the Director General of the Beka'a Water Establishment since June 2010, I faced several challenges in optimizing the operations of my water utility. One of the principal obstacles to sustained growth and delivery of water services in the Beka'a region (one of Lebanon's most important agricultural and municipal hubs), is the consistent collection of revenue. Unfortunately, in the Beka'a region, collections averaged only 18.5% in 2009 and many households were not registered with the utility and thus received their water from informal sources or from more expensive, private water vendors. Through the World Bank funded Ba'albeck Water and Wastewater Project and West Beka'a Emergency Water Project, however, I received the funding for infrastructure and technical assistance needed to make a step-change in the way that my utility operates. By developing awareness-raising campaigns, targeted at local communities, and implementing a household survey on a number factors, such as the willingness to pay for example, the rate of households registered with the utility increased significantly, and the collection rate has increased to more than 33 percent. I further participated in a regional capacity building program on utility reform at the Marseilles Center for Mediterranean Integration (CMI), where I was able to meet with the directors of other regional utilities who face similar challenges and with whom I was able to establish a network of support and knowledge exchange. I look forward to continued engagement with the World Bank."

In an effort to understand the low subscription rates persistent in the Ba’albeck-Nabi Chit region, the World Bank in collaboration with the Beka’a Regional Water Authority (BRWA) and a local survey firm conducted a household survey to evaluate the community’s perception of the quality, quantity and cost of water. As part of the survey, the team incorporated questions to gather data on the gendered impact, if any, of BRWA’s service delivery. This would allow for a broad assessment of female-male differences or similarities in their experience of access to and usage of potable water at the household level. According to the results, one-third of all households surveyed were headed by females – the majority of them responsible for the supply of water in their homes. While a detailed and disaggregated analysis of responses has not yet been carried out, a few lessons can be drawn from the existing study and more can be done with further investigation in the dataset provide by the local survey firm:

  • Women constitute a sizeable proportion of the total number of household decision-makers. This makes them an important audience for BRWA to target in awareness-raising campaigns about the benefits of an improved water network and promotional discounts to connect/subscribe.
  • Women have higher satisfaction levels with the network service than their male counterparts. As a result, women can be an under-tapped constituency for the BRWA to rely on for support and community outreach when improvements take place or in public consultations during community feedback sessions. Additionally, the goal should not only be to get higher satisfaction levels but to maintain the levels of satisfaction that already exist.
  • Women allocate a larger share of water supply for growing plants, tending their garden and raising cattle. 80 percent of women carrying out such chores use the water from the BRWA network. Women play a major role in the allocation of water resources in the household to benefit the family and the community. Efforts to increase subscriptions should take into consideration the entire ecosystem of domestic water use – typically led by women.