Abstract
This report reviews the Emergency Post-Conflict Assistance (EPCA) given to Lebanon after the conflict with Israel in 2006. The five-week conflict with Israel in 2006 and the month-long blockade that followed inflicted a heavy human and economic toll on Lebanon. EPCA would provide an appropriate transition to 2008, when fiscal adjustment is envisaged to commence. The authorities intend to seek IMF support through a Stand-By Arrangement (SBA), following satisfactory implementation of the EPCA program and after the immediate impact of the conflict has been addressed and the current political stalemate resolved.
Attachment IV. Lebanon: Technical Memorandum of Understanding
I. Introduction
1. This memorandum sets out the commitments of the Lebanese authorities for the period March 31-December 31, 2007 relating to the Emergency Post-Conflict Assistance (EPCA) requested in the Letter of Intent (LOI), and described in the authorities’ program. Section II defines the indicative quantitative targets and relative adjustors, reported in Attachment I, and Section III establishes the content and frequency of the data to be provided to IMF staff for monitoring the program.
II. Quantitative Indicative Targets
A. Definitions and Concepts
2. Test dates. Quantitative indicative targets are set quarterly through end-2007, and are to be met at the end of each quarter unless otherwise specified.
3. Government. For the purposes of the program, “government” includes the central government, the Council for Development and Reconstruction (CDR), and the grant-financed operations of the Higher Relief Commission (HRC). It excludes all other agencies not specifically listed, including, but not limited to, the following: Electricitê du Liban (EDL), municipalities, the Régie, and NSSF. The government balance is defined on a modified cash basis to include foreign-financed expenditure of the CDR, all operations of the HRC, any treasury advance, and arrears (as defined below). Unless otherwise specified, fiscal data are compiled according to the Government Finance Statistics (GFS) manual 1986.
4. Project grants are defined as those grants to the government linked to specific project financing, and do not include grants received for general budgetary support. Budgetary grants are grants received for general budgetary support, including grants in support of specific budget lines and grants to be applied to debt reduction.
5. Arrears. Domestic arrears are defined as government expenditures that have not been paid within 90 days of a payment order being issued. External arrears are defined as overdue payments (principal or interest) on external debt contracted or guaranteed by the government or the Banque du Liban (BdL).
6. Valuation changes. All data are expressed in Lebanese pounds (LL), unless otherwise indicated. To exclude foreign exchange valuation effects: (i) gold will be valued at the December 31, 2006 price of US$ 629.70 per fine troy ounce; (ii) the U.S. dollar value of foreign assets and liabilities will be converted into LL at the exchange rate of US$1 = LL 1507.5; and (iii) all foreign assets and liabilities denominated in currencies other than the U.S. dollar will be converted into U.S. dollars and/or LL at their respective exchange rates prevailing as of December 31, 2006, as published in the IFS.
B. Indicative Targets
7. Target 1. For the purpose of the program, the Gross Reserves (GR) of the BdL (floor, U.S. dollars) are defined as BdL’s callable foreign exchange deposits abroad, foreign exchange holdings (including SDR), gold, Eurobonds issued by the Republic of Lebanon (henceforth “Eurobonds”), and holdings of investment grade liquid foreign currency-denominated securities. Encumbered assets will be excluded from GR. The floor for GR will be adjusted (i) downward (upward) for the full amount of any shortfall (excess) in disbursements of official grants and loans to the public sector (government and non-financial public sector) relative to those projected in the program; and (ii) downward (upward) for the full amount of sale (purchase) by the BdL of Eurobonds relative to the December 31, 2006 level of BdL holdings.
8. Target 2. The total net debt of the government (ceiling) is defined as the sum of the domestic currency value of (i) net BdL claims on central government and EdL; (ii) net claims on the government by the rest of the banking system; (iii) net claims on the government by public sector institutions; (iv) net claims on the government by other creditors, including leasing; minus (v) the balances in the CDR and HRC transit accounts at BdL. For the purpose of the program, any transfers from the BdL other than those related to gold revaluation and realized profits will be treated as net government borrowing from the BdL and added to net BdL claims on central government. The ceiling for net debt will be adjusted (i) upward (downward) for lower (higher) disbursements of budgetary grants relative to the amounts projected under the program; (ii) upward (downward) for lower (higher) receipts from privatization or securitization operations relative to the amounts projected under the program; and (iii) upward (downward) for lower (higher) transfers from BdL’s gold revaluation relative to the amounts projected under the program.
9. Target 3. The primary balance of the government, before grants (floor) is defined as the overall fiscal balance on a modified cash basis minus interest payments and grants received. Securitization proceeds will not be counted as above-the-line revenue. For the purpose of the program, transfers from BdL’s gold revaluation and transfers not related to realized profits will be considered to be capital (below the line) transfers and therefore excluded from the primary balance.
10. Monitoring of the primary balance before grants, for the purpose of the program, will be carried out from the financing side. The overall balance on a modified cash basis is calculated as the sum of the following: (i) the change in net BdL claims on the central government and EdL; (ii) the change in net claims on the central government by the rest of the banking system; (iii) the change in net claims on the central government by public sector institutions; (iv) the change in net claims on the central government by other creditors; (v) the net change in government arrears; (vi) proceeds from exceptional financing (items such as Paris III grants, privatization revenues, gold or foreign exchange revaluation proceeds, and securitization proceeds); minus (vii) the net change in the CDR and HRC accounts at the BdL. Budgetary and project grants to the government will also be measured through BdL. All changes will be calculated as the difference between end-period stocks, net of any valuation changes resulting from currency movements and changes in accrued interest reflected in the gross debt stock that are reported separately by instrument. For the purpose of the program, interest payments will be measured on a cash basis.
11. The floor on the primary balance before grants will be adjusted (i) downward (upward) for higher (lower) than projected project grant disbursements; (ii) downward for the net amount of the revenues lost due to privatization; and (iii) downward for the full amount of the revenues to be securitized through the associated Special Purpose Vehicle (or other legal instrument).
12. Target 4. New gross domestic arrears of the government (continuous ceiling) are defined as the change in gross domestic arrears arising after February 28, 2007. “Gross” arrears indicates that the taxes and contributions owed to the government are not netted out of the arrears.
13. Target 5. New external arrears of the government and the BdL (continuous ceiling) are defined as the change in external arrears after December 31, 2006.
14. Target 6. Net government borrowing from the BdL (ceiling) is defined as the difference between the BdL claims on the government, in domestic and foreign currency, including all holdings of government securities; and the deposits in domestic and foreign currency of the government at the BdL. For the purpose of the program, any transfers from the BdL other than those related to gold revaluation and realized profits (e.g., from securitization of future profits) will be treated as net government borrowing from the BdL. The ceiling for net government borrowing from the BdL will be adjusted: (i) downward (upward) for the full amount of any excess (shortfall) in transfers from the BdL’s gold revaluation relative to those projected under the program; and (ii) downward (upward) for higher (lower) than projected budgetary grant disbursements.
III. Reporting Requirements
15. To permit the monitoring of developments under the program, and as part of and in addition to the regularly reported data, the government will provide to Division B of the Middle East and Central Asia Department of the IMF the information specified below and summarized in the reporting templates:
Gross Reserves and components (monthly).
Monetary aggregates, including currency in circulation, M3 and non-resident deposits (weekly).
BdL balance sheet, including a break down of all assets and liabilities by instrument, by currency and remaining time to maturity (monthly).
Data on outstanding BdL instruments by type (coupon or discount), currency, amounts, remaining maturity, and yield (monthly). Data on auctions or sale of CDs by the BdL, including amount, maturity, yield, and any premium paid (monthly).
BdL income statement on an accrual basis (quarterly).
Commercial banks’ balance sheet (monthly).
On a checks-issued basis, summary budget operations, revenues, expenditures (including net advances), net domestic financing, balances in the government accounts with the BdL and commercial banks (including privatization accounts), the receipt and use of privatization proceeds (monthly), monthly cash data on foreign-financed capital expenditures, and relief and reconstruction expenditures.
Government debt and financing: Government debt statistics as per the usual reporting format provided by the BdL, including BdL lending to EdL. Government interest expenditure on a cash basis by debt instrument and currency. Grants received, of which project-related grants. Privatization proceeds. Valuation changes to the outstanding stock of debt due to currency fluctuations. Changes in the outstanding stock of accrued interest that is reflected in the debt stock. The new stock of domestic and external arrears. Any put or call options, collateral guarantees, warrants or similar derivative arrangements entered into by the government or the BdL. On-lending operations of the government. Securitization of future payment flows to the government or resulting in future payment flows to or from the government. Letters of credit entered into by EdL (monthly). Amortization payments by debt instrument.
The annual accounts of the NSSF, including the disaggregated accounts of each of the three NSSF funds and any contractual arrears (as defined above) from the central government on NSSF contributions.
Foreign assistance received (separating grants from loans and budget support from project financing), and full terms of the newly-contracted but not disbursed loans (monthly).
Balance of payments (current, capital, and financial accounts) (monthly);
List of short, medium, and long-term public or publicly guaranteed external loans contracted during each quarter; identifying, for each loan: the creditor, the borrower, the amount and currency, the maturity and grace period, and interest rate arrangements (quarterly).
16. Weekly data and data on the central bank CD auctions should be sent to the Division B of the Middle East and Central Asia Department (MCDDB) with a lag of no more than one week. Monthly and quarterly data should be sent within a period of no more than four weeks, except for balance of payments data, which should be sent within a period of no more than eleven weeks. Any revisions to previously reported data should be communicated to the MCDDB in the context of the regular updates.
17. The authorities will prepare and send to MCDDB reports, with appropriate documentation, indicating progress achieved, explaining any deviations relative to the initial targets, and specifying expected revised completion dates of the monitorable actions specified in Section III.
18. Details on major economic and social measures taken by the government that are expected to have an impact on program sequencing (such as new legislation on decrees) will be sent in a timely manner to MCDDB.