Speech at British-Lebanese Council, HSBC Beirut, March 23, 2016.

Ladies and Gentlemen, I am very glad to address your distinguished group, and I want to thank you for giving me the opportunity to do so. We meet tonight right after the 37th unsuccessful attempt to elect a president for the Lebanese Republic. When I last addressed your group in 2009, Lebanon was five days away from having its last general elections. Seven years ago. Although our country seems to struggle in maintaining its institutions afloat, the external world is starting to show us signs of support, as everybody recognizes the huge importance of the global public good provided by Lebanon as it has become by far the biggest host of displaced people per capita in the world, with 232 displaced per 1000 inhabitants in 2014. As we speak, 530 million European citizens host 1.5 million refugees. At the same time, 4.2 million Lebanese host 1.5 million refugees. 2 Tomorrow, we will have the visit of the UN Secretary General and the World Bank president, who announced his visit to Beirut right after my intervention on the refugees’ issue at the Annual Meetings in Lima. President Kim has on various occasions thanked and commended Lebanon for what it is doing to the world, and compared the situation in Lebanon to having all of Mexico’s population suddenly move into the United States. Tonight, I would like to summarize in front of you the diagnostic that I had the privilege to expose to the International Monetary Fund’s Managing Director Christine Lagarde in Abu Dhabi last month, as I believe it is still pretty much valid, and I will go into the details of one aspect, the exogenous shocks, and then focus on one of them, the impact of the Syrian war, and its consequences on Lebanon’s economy and financial sector. Finally, I will tell you what I am striving to do for Lebanon to come up with the proper set of actions, and how I 3 have been active in keeping the lines of communications open with the international community. Of course, the first point is about our fundamentals, which are clearly on a negative although still manageable trend. As you know, Lebanon’s 2015 GDP growth was estimated to be nil, the current account deficit is close to 20% of GDP and the fiscal deficit was above 9% of GDP at year end. Lebanon’s balance of payments has been in the red for more than three years, which had never happened before. In order to properly react to this situation, we need a good governance, a stable inflow of capital, and a reform agenda. My second point is precisely governance: No president, a cabinet working at minima, and an average of one parliamentary session per year. No appointments when needed, a rampant corruption, and headlines such as the waste problem, and now the telecom story, and others. 4 The third point is about exogenous shocks. As of today, I would like to highlight three of them: The relationship with Gulf countries, the international legislation (in particular the US one), and the impact of the Syrian crisis on Lebanon. The economic model that was developed since the end of the civil war presents a concentration of Lebanese jobs in the Gulf, and a concentration of financial resources from the Gulf, on top of which is the biggest share of remittances channeled through Lebanon’s banking sector. Therefore, it is critical to maintain a reasonable amount of communication with Gulf countries. This is why, among other reasons, I have been twice to the UAE and once to Saudi Arabia during the previous month, and I will also attend the Arab Funds’ meetings and the Finance ministers’ meeting in Bahrain on April 5 and 6. The issue with those partners is not about deposit withdrawal, it is about the Lebanese workforce in this region of the world. 5 Regarding international regulations, the critical issue there is not individuals who could be targeted, even if we need to make sure that everybody is treated on fair ground. Instead, it is the perception of the Lebanese financial sector’s risk that is of utmost importance, as correspondent banks deal with a relatively tiny volume coming from Lebanon, and may find it too cumbersome to scrutinize the business and reach high levels of confidence in the compliance rates that we achieve. What is currently being done is precisely to secure an acceptable level of trust so as to keep the channels with our correspondents safe and secure. Nevertheless, it is important to take into account the increased cost of doing business that results from those recent developments. As far as our third factor is concerned, allow me to take some time in talking about it. My team, together with the World Bank and UN agencies, has estimated the economic loss in 2015 alone to $5.6 6 billion due to the displaced crisis, which represent 11.3% of GDP. The cumulative overall economic loss from 2011 till 2015 amounts to more than $15 billion. On the labor market, unfair competition and sluggish growth due to the crisis have placed more than 190,000 Lebanese into poverty, in addition to the existing one million. The unemployment rate has doubled to more than 20%, one-third of the Lebanese youth are unemployed representing a 50 percent rise since 2011, in a labor force estimated to be 50 percent larger than pre-crisis according to the IMF in addition to an increase in informality which brought downward pressure on wages. Host communities’ desperation increases as they lose jobs and as they fail to compete with Syrian labor, while they witness the deterioration of basic services and utilities. If we keep in mind the local price inflation due to direct support to the displaced that excludes host communities, they have yet 7 another problem to deal with. Channeling money to displaced only triggers hostility. This is why, in Amman and Jeddah, I have been emphasizing a three-level response, 1- humanitarian for hosts and displaced (not less than $2.5 billion per year), 2- macro-financial assistance for the sustainability of the system (not less than $420 million per year), and 3- infrastructure and developmental needs, for the stabilization of the system, as we need to bring back the services and safety nets at least to precrisis level. This approach was broadly accepted by our partners, and at the London conference, it translated into Lebanon being one out of three countries to receive very sizeable pledges for its efforts related to the Syrian crisis. Lebanon’s debt to GDP has risen for the first time in 8 years to 138% in 2015 knowing that it is already one of the highest in the world. Without the direct impact of the Syrian crisis, it would have been at 8 122% at year end. This alone translates into an extra burden of $550 million every year. As oil prices are falling, and due to their strong correlation with remittances, we have higher financing needs to face and a much higher deficit than projected without Syria’s war impact. The bank deposits increased by only 3.72% between January 1st and November 30, 2015, compared to 12% in 2010, just before the beginning of the Syrian conflict. In the meantime, Lebanon will mobilize $16 billion for its existing financing needs in 2016 for the rollover and servicing of the debt. As already stated, fiscal deficit grew to more than 9% of GDP, with additional cumulative expenditure directly related to the Syrian displaced crisis amounting to $0.54 billion, and lost revenues of around $1 billion in 2015, a total of $2.4 billion since 2011 due to numerous factors related to the Syrian crisis. In fact, for the first time since the end of Lebanon’s civil war in 1990, the revenue 9 decreased in 2015 by 10%, bringing revenue to GDP to 19.3%. The crisis has negatively affected key growth drivers, such as construction, tourism and the service sector. Exports have decreased due to the deterioration of Lebanon’s only land export route which crosses Syria. The depletion of Lebanon’s environment on one hand, and of its infrastructure on the other, including public schools and hospitals, roads, and public utilities, is very quick and massive. Although the displaced benefit from various subsidized goods like electricity, bread, medication, and others, 59% of the Syrian children between 6 and 14 years old present in Lebanon remain out of school as I already mentioned, and 41 percent of the displaced population lives in substandard shelter conditions, and around US$20 million of due bills for the hospitalization of displaced Syrians are uncovered. 10 For the electricity only, and knowing that Lebanon has borne more than $2 billion losses yearly between 2011 and 2014, and more than $1.2 billion in 2015, the number of additional users has officially reached 1.17 million, and the cumulative cost related to Syrian displaced only has reached $434 million. On the other hand, the incremental degradation of the environment due to the presence of the displaced population can be translated by an increase of 20% in air emissions, between 8 and 12% increase in water demand, between 8 and 14% in wastewater generation and 33% in urban densification. The yearly cost on the environment is estimated at $3.7 billion. Water and telecommunications’ services have clearly declined, and some severe utilities problems are directly related to the massive presence of the displaced. Generally speaking, Lebanon spends an increased amount of money on infrastructure needs, including 11 water, electricity, and roads, to cater for development needs and for servicing the displaced. Another important burden to be considered is security. With 1.5 million displaced, small delinquency has risen. On the other hand, and as a direct consequence of Syria’s conflict, the Lebanese Armed Forces are fighting extremists from Daech and Jabhat Al Nosra on the northeastern border. Lebanon had to recruit 15 thousand persons in the armed forces during the past two years, which is a 20% increase in the numbers and an extra direct yearly burden of $147 million every year. We are also substantially increasing our ammunition and maintenance military expenditure. As the displaced may remain displaced for an average of seventeen years according to previous crises’ statistics, short-term answers only are obviously not helpful. While humanitarian needs continue to exist and need to be addressed through humanitarian funding channels, additional financing 12 needs should be leveraged to strengthen the capacities of Lebanon and its host communities to absorb the shocks on their economic and social fabric. If the picture looks very gloomy, let us also look at the bright side, and that is the ability of this country to do wonders: Before the beginning of the Syrian conflict, the long war of 1975-1990 had already claimed two hundred thousand killed and more than a hundred thousand handicapped, in addition to the missing people and the enormous damages at all levels. We later faced two very aggressive Israeli wars in 1996 and 2006 that claimed thousands of victims and witnessed systematic demolition of Lebanon’s infrastructure. This situation contributed to a very high public deficit and worrying debt dynamics, but the Lebanese people continued to finance their needs and those of refugees in Lebanon without relying on significant external assistance. We managed to keep 13 the country going, and never defaulted, whether toward creditors or toward humanitarian responsibilities, as Palestinian refugees have been present in big numbers (more than 450,000) in Lebanon for a long time. Already then, the international community could have avoided lots of 0supported the displaced and the host communities, and had it accepted to fairly share the burden of the Palestinian tragedy. Despite the understandable trauma, when Syria’s bloody conflict began, Lebanon became a case study for the whole world: It deliberately wideopened its borders to an immense flow of displaced, and has willingly provided relief and services to all of them, despite the very difficult circumstances. Those who feared another displaced-related conflict, or those who suspected some of the displaced to be fighters, possibly smuggling weapons into Lebanon, or those who simply wanted to avoid a very large disequilibrium 14 between religious communities, especially at a time when the whole region is divided along sectarian lines, all of them called for closing our borders, but the displaced were not denied access into Lebanon. In our public schools, we have introduced a twoshift system to make sure that the displaced are not denied schooling, and today, we have more Syrian students in public schools than Lebanese students. Syrian workers have been very quickly absorbed into various sectors of the economy despite the brutal slowdown that Lebanon is facing. Host communities have done everything they could to provide relief, and it is remarkable to note that no clash has occurred at any point in time between the displaced and their host communities, knowing that the displaced are very vulnerable and could easily be manipulated. While hoping that Syria’s war will end soon and that the displaced will be able to go back home in the 15 near future, we can all be proud of what we achieved with regards to this terrible conflict. Ladies and gentlemen, A country that is able to sustain a shock of this magnitude and teach the world how things can be done ought to be able to deal with its long-standing intrinsic problems. I am personally convinced that the very urgently needed reforms will never become implementable if they are part of permanent bargains. The required changes are in the structure, and in the culture, and in the policies. Due to the issues I have just mentioned, we are getting closer to a very risky zone, and postponing change should not be an option anymore. The system is stretched and is near its limits at the political, economic and social levels. Lebanon, dear friends, should ideally expect the following from its elites: 16 0-Accept the necessity of change. The system in place is unsustainable, despite all the complacent statements issued internally and externally, and even though the international community has already proven ready to bail us out, which has comforted the elite in its unwillingness and/or inability to implement reforms. It is important for the parties that benefit from the existing system to understand that the trade-off against the wealth transfer in their favor might be social instability that would jeopardize their gains on the longer term. The consequences are already massive brain drain and growing unemployment. The purchasing power of the Lebanese had its brutal corrections. The first at the beginning of the nineties through massive depreciation and inflationary pressure. The second through soaring interest rates in the mid-nineties, and a third one through higher taxes at the beginning of the 2000’s, with a tax burden increasing by 17 about 7% of GDP within three years. Then we had a correction through higher unemployment, and now through an enormous exogenous shock. It is time to wake up and reverse the deterioration trend. 1- Re-discovering Constitution, laws and regulations: Law has become meaningless. Corruption and inefficiency are seen as unavoidable in the system. Nobody is responsible for anything, and the decision making process is never clear. The dedemocratization of Lebanon continues, with officials being no more responsible for most of their duties, and no possibility for the citizens to determine responsibilities. This situation leads to misusing power at all levels. Nearly nothing that lies in the Constitution is respected: No president is elected in due time, no general elections are held and MPs give themselves the right to stay beyond their term, 18 no appointments, recruitment… properly done, no policies defined to face crises, no budget voted for 11 years, no financial accounts… This is why I have continued to produce draft budgets within the constitutional deadlines every year, and kept my ministry working according to the laws even without a voted budget. This is also why I have reconstituted 23 years of financial accounts with my team (millions of operations, thousands of abnormalities), which is an extremely important milestone for accountability, institutional work and memory, and credibility toward taxpayers, donors, and external agencies. 2-Better redistribution: The whole world, starting with the USA, is suffering from increased concentration of wealth, and Lebanon’s redistribution system is an extreme case. The wiping off of the middle class has had a very negative impact on our economy, and on our 19 ability to introduce change and reforms. This is why my team and I are working on a fair adjustment of salaries in the public sector, and proposing the trimming of unreasonable expenses that distort the fair redistribution of public money. This is also why we have been gradually introducing tax measures that make the system a fairer one, and this is also why I insist on targeting the loopholes in the tax system before relying on increasing the burden on taxpayers across the board. You can easily imagine the amount of resistance. Major changes are needed in the tax system, which relies mainly on consumption, very little on labor and revenue, and not at all on wealth. My team and I are technically ready for revisiting the tariffs of public services, budget allocations and policies, poverty targeting, and redirecting investment toward performing and promising fields. We just need institutions that work. 20 3-Define the role and shape of the State: The public intervention is massive in some cases, and nonexistent in others. Citizens and businesses are insecure. In my field, I work on clarifying the rules of the game. Defining responsibilities is important. Yesterday, we had an issue with carcinogenic wheat, and the responsibilities were diluted among three ministries. With utilities, it is the same. No adequate pricing, and poor services. EDL is an extreme case. But the government fixes the subsidized sales price of EDL, buys the oil, and decides on all investments and recruitments. Is EDL responsible, or the government? Or both, or nobody? 4-Controlling the deficit: The government should define clear priorities. Government spending consists of a long list assigned to satisfy everybody at all time. Therefore, important expenditure do not necessarily come first. We waste the value of time, thus we have a soaring 21 debt. Current expenditure come before capital expenditure, and are sometimes borne forever before related projects take place. Accommodating everybody means that no clear work program is ever defined, and therefore, no performance assessment is possible. We start twenty projects at a time, and we finish none, so we spend plenty of money with no return on public investment. This is why my team and I have developed a medium term expenditure and budget framework, which provides a clear prioritized agenda. From a long list of inefficient subsidies pushing competitiveness down, our budget could become an effective one if adequate political support is secured. In order to achieve prioritization, I keep trying to introduce a yearly expenditure ceiling. 5-Growth agenda: Our economy needs diversification. We want growth that creates employment for the skilled labor force to 22 increase the local added-value. Construction creates jobs for foreign workers, and tourism creates short-term employment. We have niches in which investment can be very profitable, and this is why, from the Treasury which provides the money, and from the central bank’s board where I sit, I have been promoting and supporting various initiatives that boost new sectors with high potential. This would create much more wealth than getting remittances from emigrants. The induced competitiveness will allow Lebanon to open up the market and consumers to enjoy better terms and quality. The state will have to secure honest competition, protection of rights, efficient courts of justice, and a fair treatment to all. 6-Education: It has traditionally been a very big investment for households (more than 12% of GDP, compared to 5% in France). This means 23 that it requires high returns, with no adequacy with the labor market needs and no sizeable demand for highly skilled labor. Conclusion: the skilled labor goes abroad and seeks higher returns. One reason among many others is the inability of the government to pursue a coherent policy, as it spends big amounts on the public system on one hand and it subsidizes civil servants’ children that attend private schools on the other hand. With the Syrian displaced now, the system needs to be stabilized very quickly. With the help of the UK and other donors, our teams at the ministry of finance and the ministry of Education have developed a convincing set of argument to receive adequate support. 7-Labor market: The rigidity of the Lebanese labor market was obvious to all players before the extraordinary concentration of workforce that we are witnessing now. We are currently 24 putting in place a mechanism that allows Lebanon to benefit from this workforce in its traditional areas, such as heavy infrastructure works and agriculture, with incentives for them to go back home whenever the situation permits. 8-Social safety nets: Any correction in our economy, be it through reforms or through a crisis, will be very tough on the less privileged, which calls for effective social safety nets. Access to education, health services and retirement pensions are the minimum a state can provide for that part of the population. It is a fact that we would save money by having proper safety nets compared to the current situation, as most of those who benefit from State subsidies do not really need it, whereas the poorest are often not on the screen. I am still pushing for passing the law on social security prepared by the ministry of Finance in 25 January 2005, one example of a win-win-win (employer-state-worker), and strongly endorsed by the World Bank. 9-Attract FDI: We are too short-term oriented, with quick profit in mind, probably due to the permanently unstable environment. Investors are eager to find long term opportunities, stability, and institutions. At the General Directorate of Finance, we are increasing trust and reliability with the public, whether through procedures and services or through technical improvement and automation, not only for transparency purposes, but also for reinstating the image of an institution that is solid and reliable. I was very glad to note that donors unanimously reflected this image during our public discussions lately. 26 10- Credibility toward donors and financial institutions: It is a fact that Lebanon needs the support of the international community for some time. This is why credibility is of utmost importance. Having worked with International Financial Institutions such as the IMF and the World Bank before, and for private international banks, in addition to rating agencies, I am relentlessly using my network to increase Lebanon’s creditworthiness. Internally, the measures taken by the government based on my recommendations for aid management have been very well received by the international community, and helped overcome the previous negative image of our country. 11- Environment: It overlaps with many other items. Just bear in mind the cost of deterioration I mentioned earlier. It is very costly on tourism, public health, living standards, etc. And the cost of reversing the 27 trend is far too high. For an elite that keeps postponing problem solving, this is an area where that kind of behavior is simply unacceptable. 12- Asset management: I have been trying, through the new units in my General Directorate, to establish a proper asset-liability management for Lebanon. Although we succeeded in some areas, we still need to develop a complete database of the state properties with adequate valuation, and we are facing a wall, for reasons you can easily imagine. Under the same topic lies the issue of petroleum. My team has finalized the draft tax law and all decrees that are necessary for petroleum operations, but until this day, they have not been discussed nor approved. Another critical issue is the way we intend to use those resources. If we treat them as income and spend them on debt servicing and reduction, or 28 on various other inefficient expenditures, we would be generating high inflation, with a Dutch disease phenomenon, in addition to deteriorating productivity and accelerating brain drain. We would also be stealing the assets of our future generations, as we already did by piling up the debt. But if we treat them as assets, and wisely use the income they generate, this could be a positive game changer. I need your support and everybody’s support to win this extremely important fight. 13- Due to the Syrian crisis, Lebanon’s response should include trade facilitation and direct investment incentives. This is of utmost importance to be able to deal with the displaced issue. Clearly, our European partners have a big role to play in this regard, and we are discussing several ideas along those lines. 29 14- Consolidating the financial sector: If we do not manage to come up with the proper answers for the displaced issue, Lebanon will be in trouble on the long run. And if we do, our already strained financial sector will come under extra pressure due to increased consumption and financing demand. This is why we have put in place an ongoing assessment for the sector, and a medium term debt strategy that takes into consideration the banking sector’s needs, in order to secure the smoothest cooperation among all players. The markets have greeted our work with very low rates compared to our peers, and the ability to issue dollar-denominated Eurobonds over a 20- year maturity, in addition to a peak in demand in 1H2015. As I said, those are the headlines. Today, given the dramatic developments, quick and well-coordinated action is needed. The world is 30 incredibly impressed with our resilience given the Syrian earthquake. It is high time to show that we are not resilient to positive change. Thank you.