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Public Finance Quarterly Report, Q1- 2010.

Summary: Editor's note: The following are excerpts from the "Public Finance Quarterly Report - QI 2010," published last week by the Finance Ministry. The report highlights the main developments in public finance and debt in January-March of 2010, elaborating on the performance of revenues, expenditures and public debt.

Report

Editor's note: The following are excerpts from the "Public Finance Quarterly Report -- QI 2010," published last week by the Finance Ministry. The report highlights the main developments in public finance and debt in January-March of 2010, elaborating on the performance of revenues, expenditures and public debt.

Section I: Fiscal Overview

The first three months of 2010 registered a fiscal deficit of LL861 billion ($574 million), half the LL1,709 billion deficit recorded in the same period of 2009. This was led by additional receipts of LL256 billion (9 percent) coupled with a fall in payments of LL592 billion (13 percent) by end-March 2009.

The primary balance was in a surplus of LL582 billion at the end of March 2010, compared to a deficit of LL300 billion in the same period of 2009. This reversal to a surplus took place owing to an improvement in receipts and despite the increase in primary current expenditures by LL158 billion.

Section II: Revenue Outcome

Total revenues summed up to LL3,084 billion, registering an increase of 9 percent (or LL256 billion) during QI 2010 compared to the same period of 2009. The 17 percent and 19 percent growth in tax revenues and treasury receipts, respectively, more than offset the 18 percent drop in non-tax revenues.

Tax Revenues

Tax revenues totaled LL2,361 billion in the first quarter of 2010, up by LL347 billion from the same period in 2009. They accounted for 77 percent of total revenues, compared to 71 percent in 2009, due to a drop in non-tax receipts. All major components of tax revenues registered increases in collection during the first three months of 2010. But, the comparison with the growth rates recorded during the similar period of 2009 highlights a deceleration in the rise of some tax revenue items, namely, wages and salaries tax, excises on gasoline and taxes on cars (excises and registration fees). This deceleration can be explained by the normalization of collection following a substantial change in the tax base in 2009 for income tax on wages and salaries and excises on gasoline and a change in import trend of cars. On the other hand, other revenue items witnessed an acceleration in the collection pace, namely taxes on property which were propped up by the buoyant real estate activity and fiscal stamps. Additionally, the rise in both VAT receipts, driven by higher local consumption, and the proceeds from the tax on interest income, following the upsurge in deposits during the last two years, also contributed to the 17 percent growth in tax revenues.

The receipts of taxes on income profits and capital gains augmented by 16 percent year-on-year, up to LL431 billion in QI 2010, driven by the growth in the revenues of taxes on profits and on interest income. The former gained 20 percent to LL133 billion on higher declared profits due to the buoyancy of the economic activity in 2009. The latter -- the second-highest revenue generating component of taxes on income profits and capital gains -- increased by 28 percent, to LL163 billion, explained by the expansion of the deposit base following the 22 percent increase in both resident and non-resident private sectors deposits as of end-March 2010, compared to the deposit level as of end-March 2009. The upswing in the volume of deposits and the de-dollarization of deposits (to a lesser extent) more than counterbalanced the effect of the decline in interest rates on deposits. In fact, the weighted average interest rate on deposits denominated in Lebanese pound fell by 99 basis points (bps) to 6.11 percent as of end-March 2010, from the prevailing rate in March 2009; while the average interest rate on deposits in US dollar tumbled by 40 bps to 2.86 percent during the same period.

Non-Tax Revenues

Following a slight drop of 2 percent in QI 2009, non-tax revenues declined further in the first quarter of 2010, by 18 percent to LL552 billion. This drop is explained by 22 percent lower Income from Public Institutions and Government Properties at a time when Administrative Fees and Charges slid by 3 percent.

The decline in Income from Public Institutions and Government Properties is primarily the result of the absence of transfers from Port of Beirut (PoB) and Banque du Liban (BDL) in QI 2010. Transfers from these institutions are received once a year. For the year 2009, these transfers were collected in QI. In 2010, transfers from the telecom surplus remained stable at LL331 billion compared to Q1 2009, but only a single payment was made in February 2010, compared to two payments in January and February of 2009 amounting to LL331 billion.

Further, transfer from the Casino du Liban decreased by 17 percent (or LL7 billion) in QI 2010. The third installment payment of the dispute settlement between Casino management and the government, amounting to LL14 billion, was not made during QI 2010, whereas the second installment was received in QI 2009. On the other hand, transfers from the National Lottery were LL5 billion lower during the period under consideration.

Administrative fees and charges collected a total of LL132 billion in the first quarter of 2010, representing a 3 percent drop over QI 2009 revenues due to an 18 percent fall in receipts from vehicle control fees.

Section III: Expenditure Outcome

Total Expenditures (budget and treasury), in the first quarter of 2010, reached LL3,945 billion, 13 percent lower than expenditures in the same period of 2009, as Table 11 below shows.

According to the economic classification, the LL592 billion decrease in total expenditures was mainly due to decrease in the line item "other treasury expenditures" by LL806 billion, largely explained by lower spending by LL580 billion to cover the deficit of the loss-making electricity company EDL, and LL200 billion less payments to the High Relief Committee.

On the other hand, both current and capital spending witnessed increases. In fact, current expenditures rose by LL192 billion, of which (i) LL91 billion was due to higher personnel costs, and (ii) LL74 billion due to larger various transfer bills. Capital expenditures were also larger by LL23 billion, driven by LL35 billion higher maintenance spending, among other things.

Total Primary Expenditures amounted to LL2,502 billion in January-March 2010 compared to LL3,128 billion registered in the same period of 2009, i.e. decreasing by 25 percent.

Current Expenditures

Current primary expenditures amounted to LL1,603 billion in January-March 2010, which is LL158 billion higher than the January-March 2009 level of LL1,445 billion. Details of the main components of current primary expenditures are recorded below:

Personnel cost amounted to LL1,233 billion, about 8 percent higher than the LL1,142 billion level of QI 2009, resulting from the rises in both "wages, salaries and related benefits" and "retirement and "end-of-service indemnities."

a. Wages, salaries and related benefits (Article 13) went up by LL86 billion, from LL770 billion in QI 2009 up to LL856 billion in QI 2010.

Of the LL86 billion increases in salaries, wages and related benefits:

l LL98 billion originated from an increase in allowances from LL65 billion in QI 2009 to LL163 billion QI 2010 in 2010, driven by i) a LL7 billion increase in hospitalization allowance from LL49 billion in QI 2009 to LL56 billion in QI 2010, which is mainly due to the adoption of harmonized hospitalization tariffs across public sector health schemes; and, ii) a LL97 billion increase in education allowance, reflecting merely a timing-effect as no education allowances were paid in the first quarter of 2009. Minor decreases in maternity and sickness allowances, death allowance and other social spending allowance partially absorbed this increase.

l LL11 billion is due to an increase in spending on other items classified under Article 13 and, in particular, a LL10 billion increase in transfers to the Civil Servants' Cooperative, which reached LL40 billion in QI 2010 compared to LL30 billion in QI 2009. This is due to a payment timing-effect as a LL9 billion payment from the 2009 budget allocation was effectively disbursed in QI 2010.

These increases are partially offset by a LL26 billion drop in payments of basic salaries, which reached LL587 billion in QI 2010 compared to LL613 billion in QI 2009. This decrease is due to the payment in January-March 2009 of retroactive amounts that accrued following Cabinet's original decision in May 2008 to increase monthly salaries and wages in the public sector by LL200,000 starting May 1, 2008 and its actual implementation in Fall 2008.

b. Retirement and end-of-service indemnities rose by LL6 billion, from LL303 billion in QI 2009 to LL309 billion in QI 2010, induced by the LL15 billion increase in end-of-service indemnities, which offset the LL9 billion decrease in retirement payments.

On the other hand, within personnel cost, transfers to public institutions to cover salaries remained nearly stable at LL67 billion in QI 2010 compared to LL69 billion in QI 2009.

Materials and supplies decreased from LL59 billion in QI 2009 to LL53 billion in QI 2010, representing a 10 percent drop, and mainly resulting from a LL7 billion decrease in medication expenditures and a LL5 billion decrease in food expenses. This fall was partially absorbed by an increase in (i) the consumption of clothing, lab material and engine oil for vehicles by the Lebanese Army (+LL1.5 billion), (ii) the consumption of specialized materials and supplies by the Public Health Ministry (+LL1.5 billion,) and (iii) other administrative supplies by the Foreign Ministry, representing the utility bills of the Lebanese missions overseas (+ LL3 billion).

External Services, which include payments of rents, postal services, insurance, advertisement, public relations, printing costs, consultancy fees, and cleaning and maintenance service fees amounted to LL34 billion, up by LL9 billion from the QI 2009. This is explained -- among other things -- by the adoption of Law 63 dated December 31, 2008, which stipulated a 33 percent rise in rent contracts. Moreover, the LL200,000 increase in the salary and wages paid in the private sector led to an upward revision of cleaning and maintenance contracts.

Various transfers witnessed a rise of LL74 billion, from LL98 billion in QI 2009 to LL172 billion in QI 2010. This increase resulted from:

a. Higher transfers to pay the Lebanese government's contribution to the Special Tribunal for Lebanon, which totaled LL41 billion in QI 2010, compared to LL12 billion in QI 2010, and,

b. Transfers to subsidize diesel oil subsidy amounted to LL48 billion in QI 2010, compared to its absence in the same period of 2009. Of this:

l LL46.4 billion was paid to cover the diesel oil subsidy in QIV 2009-QI 2010. The subsidy can be divided into two distinct components: (a) the direct subsidy of LL2,720 per tank, amounting to LL46.4 Billion and (b) the indirect subsidy of the foregone VAT on the amount subsidize by the treasury, amounting to LL4.6 billion.

l LL1.3 billion is on account of QIV 2008 and QI 2009 -- but was effectively paid in QI 2010. The amount of the subsidy was low because the subsidy was effective for 10 days only starting December 15, 2008, as prices of diesel oil remained below LL15,000 per tank throughout the period, and there was no real need to subsidize it.

Capital Expenditures

Capital expenditures for QI 2010 totaled LL173 billion, increasing from LL150 billion in QI 2009. This increase of LL23 billion is mainly the outcome of the following factors:

a. A LL10 billion increase in transfers to the Council of the South, from LL10 billion in QI 2009 to LL20 billion in QI 2010,

b. A LL10 billion increase in transfers to the Displaced Fund from LL20 billion in QI 2009 to LL30 billion in QI 2010,

c. A LL7 billion increase in payments to the Public Works and Transport Ministry from LL13 billion in QI 2009 to LL19 billion in QI 2010 due to a (i) LL1 billion increase in construction of buildings, (ii) LL5 billion increase in construction of roads, (iii) less than LL1 billion increase for the road works program law, (iv) LL1 billion for the Palais de Justice in Tripoli and (v) LL1 billion for the Saida Port and Corniche project.

d. A LL35 billion, or 149 percent, increase in maintenance expenditures from LL23 billion in QI 2009 to LL58 billion in QI 2010. Most of this increase is due to higher spending by the Ministry of Public Works and Transport on roads maintenance and, to a much lesser extent, on buildings. Additionally, maintenance spending by the Defense Ministry also witnessed a slight increase.

The magnitude of the increases above offset the impact of the decrease in the following items:

a. A LL24 billion decrease in transfers to the Council for Development and Reconstruction for the construction in progress component of capital expenditures. In fact, this item decreased by 53 percent, reaching LL22 billion in QI 2010 compared to LL45 billion in QI 2010. This is due to:

(i) absence of transfers to cover the counterpart funding for foreign financed projects in QI 2010, which amounted to LL25.5 billion in QI 2009,

(ii) LL3 billion decrease in allocations to cover the maintenance of the Rafik Hariri International Airport dropped from LL4.7 billion in QI 2009 to LL1.6 billion in QI 2010,

(iii) absence of transfers to CDR in QI 2010 for the building and equipping the Lebanese University campus in Hadath-which amounted to LL3 billion in QI 2009,

(iv) LL2 billion decrease in allocations for the construction of international roads which dropped from LL6 billion in QI 2009 to LL4 billion in QI 2010,

(v) absence of transfers for the equipment of the Central Building of the Education and Higher Education Ministry in QI 2010-which amounted to LL1.5 billion in QI 2009 and,

(vi) absence of transfers of LL2 billion in QI 2010 to fund the construction of secondary roads -- which amounted to LL1.5 billion in QI 2009

Meanwhile, the allocations for the restoration and equipment of the Grand Serail slightly went up from LL2 billion in QI 2009 to LL2.5 billion in QI 2010, and a payment of LL13 billion was made for the settlement of an arbitration dispute of the Rafik Hariri International Airport in QI 2010.

It should be also noted that a LL0.5 billion payment was made in QI 2010, from the allocation of the Directorate General for State Security, as a contribution to the execution of the Directorate General of State Security building versus none in QI 2009.

b. A LL12 billion decrease in other expenditures related to fixed capital assets, from LL21 billion to LL9 billion resulting from the two payments, of LL10 billion each, made to IDAL for the Export Plus program in QI 2009, in comparison with two payments of LL1.5 billion and LL7 billion in QI 2010.

Treasury Expenditures

Treasury expenditures decreased significantly by LL806 billion in QI 2010, when compared to the same period of 2009 due to:

a. Decrease in Treasury transfers to, or on behalf of, Electricite du Liban by LL580 billion, to a level of LL505 billion by end-March 2010. This drop is the result of the LL565 billion decrease in payments to Kuwait Petroleum Corporation and Algeria's Sonatrach for fuel and gas oil purchases, coupled with the decrease in debt service by LL15 billion. The registered 54 percent downward change is rooted mainly in a price-effect, where the average oil price according to which the QI 2010 payments were made is lower than that pertaining to 2009.

b. Transfers to municipalities decreased by LL31 billion, from LL107 billion in QI 2009 to LL76 billion in QI 2010. The registered decrease is due to a lower transfers to solid-waste companies in QI 2010 compared to QI 2009 for reasons related to the timing of these payments.

c. Other expenditures decreased by LL188 billion, from LL293 billion in QI 2009 to LL105 billion in QI 2010, as a result of the following main fluctuations:

(i) Decrease in payments of VAT refund by LL12 billion, which is mainly due to a timing issue.

(ii) Treasury advances to the High Relief Committee decreased by LL200 billion, from LL200 billion in QI 2009 to nil in QI 2010.

(iii) Other tax refunds increased by LL2.5 billion, from LL6 billion in QI 2009 to LL8.5 billion in QI 2010.

Social Spending

Spending on social services covers the basic social services of: health, education, pension and end-of-service indemnity, transfers to the National Social Security Fund and other areas of intervention classified under social assistance.

Social spending reached LL906 billion in the first quarter of 2010, constituting about 23 percent of total spending. Spending on health represented 17 percent of total social spending and included mainly hospitalization in the private sector and purchase of medication. Spending on education represented 41 percent of social spending and covered mainly the Education and Higher Education Ministry salary and wage bill, the contribution to salaries' payment of the Lebanese University's personnel, education allowance for public sector employees and contributions to non-profit organizations also known as subsidies to private schools. Pension and end-of-service payments and transfers to civil servants cooperatives constituted 34 percent and 4 percent of total social spending, respectively.

The first quarter of 2010 witnessed a higher level of spending on social services relative to 2009, by LL124 billion or equivalent to an increase of 16 percent. This increase was mainly a result of:

a) Higher spending on education by LL141 billion (or 60 percent), primarily as a result of a LL97 billion increase in education allowance payment in the private sector, reflecting merely a timing-effect as no education allowances were paid in the first quarter of 2009, and LL26 billion higher wages and salaries of the General Directorate of Education.

b) Higher transfers to civil servants' cooperative by LL10 billion

c) Lower spending on health, by LL26 billion, due to lower private hospitalization bills for citizens taken in charge by the Public Health Ministry by LL20 billion and lower costs medication purchases by LL8 billion. In reverse, hospitalization of public sector employees in the private sector rose by LL7 billion, to LL56 billion in QI 2010.

Interest payments

Interest payments amounted to LL1,396 billion in the first quarter of 2010, up by LL26 billion from their QI 2009 level, primarily resulting from a 3 percent growth in interest payments on local currency debt, while interest payments on debt denominated in foreign currencies remained relatively unchanged.

Interest payments on local currency debt, discount interest for short term Treasury bills added up LL48 billion, offsetting the LL22 billion drop in coupon payments of long-term Treasury bills.

Interest payments on foreign currency debt declined slightly by LL1 billion in QI 2010, compared to QI 2009, as Eurobond coupon payments retreated by LL4 billion, while interest payments on concessional loans inched up by LL3 billion. This resulted from a reduction in foreign currency debt by LL111 billion, mainly as a result of the redemption of Eurobonds issued in the context of the Paris II and Paris III Conferences that have an amortized payment structure.

Concessional Loans Principal Payments amounted to LL47 billion for the period January-March 2010.

Section IV: Public Debt

Developments

Financing Requirements

Total net financing requirements for the first quarter of 2010 reached LL918 billion, compared to LL1,769 billion for the first quarter of 2010.

In the first quarter of 2010, LL Treasury-bill issuances represented the main funding source, with a net issuance of LL651 billion albeit dropping by 36 percent compared to LL1,016 billion in 2009. This decrease reflects the halt in the auction that took place during March 2010, following a decision from the Finance Ministry. On the other hand, Eurobond issuance increased by LL128 billion reflecting the Eurobond March 2010 transaction. Given the high liquidity level in the Treasury deposits at the end of 2009 coupled with the halt in the auction during the month of March 2010, the government further reduced its cash balances by LL226 billion to finance remaining needs.

Public Debt

By the end of Q1 2010, gross public debt registered LL77,644 billion, 0.74 percent higher than the debt stock at the end of 2009. This near stabilization was solely a result of higher domestic currency debt as foreign currency debt decreased by 0.35 percent over the same period.

Net public debt stood at LL66,989 billion, registering an increase of LL436 billion over the end-December 2009 level.

By the end of March 2010, local currency debt registered LL45,653 billion, 1.51 percent higher than the domestic currency debt stock end-2009, stemming from a higher stock of Treasury bills and notes even though no auctions were held for value dates in March 2010, partly to decrease the pre-funding levels prevalent as of end-February 2010.

By holder, commercial banks had the highest increase in stock of domestic currency debt in Q1 2010, with holdings LL472 billion higher than at end-2009. This was mainly led by commercial banks' purchase of treasury bills resulting in a higher stock of treasury bill portfolio by LL459 billion over the same period.

The stock of domestic currency debt held by the Central Bank also rose by LL74 billion by end-March 2010 led by a higher Treasury bills portfolio of LL85 billion (loans extended by BDL to public entities decreased by LL11 billion). However, the stock of Treasury bills held by public entities decreased by LL112 billion over the quarter even though "other" holders of TBs increased their stock by LL134 billion.

Results from the weekly auctions in Q1 2010 reflect that commercial banks ranked first in terms of share of subscriptions, with 65 percent of total subscriptions, followed by public at banks with 13 percent of subscriptions, and public institutions and the Central Bank with 10 percent of subscriptions each.

By instrument, the stock of long term bonds rose by 3.18 percent to LL42,140 billion by the end of Q1 2010 compared to end-2009 in contrast to the decreased stock of short-term bills by 16.60 percent to LL3,115 billion in the same period.

The pattern of subscriptions in Q1 2010 indicates that short-term instruments (3MN, 6MN, 12MN) captured 28 percent of subscriptions compared to 72 percent of subscriptions in long-term instruments (24MN, 36MN, 60MN). The 60-month Treasury Note acquired the highest share of subscriptions at 37 percent of total subscriptions, followed by 36-month Notes with 24 percent of subscriptions and 24 percent and 6-month Treasury Bills with 15 percent of subscriptions.

The highest increase in stock was witnessed on 60-month Treasury Notes which went up by 18.25 percent followed by a 7.59 percent increase in 24-month Treasury Notes, and a 0.53 percent increase in 36-month Treasury Notes. All three auctioned short-term bills saw a reduction in their stock by end-March 2010 compared to end-2009.

In Q1 2010, maturing t-bills were mainly short-term instruments with six-month TBs accounting for 32 percent of maturing bills and notes, followed by 12-month TBs with 26 percent of maturities. Thirty-six month Treasury Notes were the third-largest maturing instrument with 24 percent of maturities during that quarter.

Foreign currency debt stood at LL31,991 billion by the end of March 2010, a reduction of 0.35 percent compared to the end-2009 stock of foreign currency debt, in contrast to the higher domestic currency debt. The stock of foreign currency debt decreased by LL179.5 billion due to exchange rate valuations including due to the depreciation of the Euro from a rate of 1.433 EUR/$ at the end of 2009, to 1.3475 EUR/$ at the end of March 2010.

The decrease in foreign currency debt between December 2009 and March 2010 mainly resulted from a lower stock of loans by LL197 billion. This was led by the Paris II loan reduction of LL99 billion, reflecting the principal repayment of e1/430 million in February 2010 of the Agence FranE*aise de Developpement Paris II loan. The LL30 billion lower Paris III loan debt is purely due to exchange rate valuation changes.

With respect to the LL86 billion rise in the Eurobond portfolio, this stemmed from a new cash Eurobond transaction in March 2010 for an amount of $1.2 billion which outweighed the reductions of Eurobonds issued in the relation to the Paris II and Paris III international donor conferences for Lebanon. The new Eurobond has a 10-year maturity and was issued at a coupon rate of 6.375 percent. The LL53 billion reduction in the Paris II preferential rate stock of Eurobonds reflects the $35 million principal repayment on the $700 million May 2018 Eurobond. This is one of four Eurobonds issued in relation to the Paris II conference, all of which have an amortized payment structure redeemable in 20 equal semi-annual payments starting from 2008. The LL23 billion reduction in the Paris III related Eurobonds also reflects the first $15 million principal repayment (in January 2010) of the $300 million Eurobond due July 2017.

Secondary market yields in Q1 2010 decreased by an average of 54 bps on Eurobonds that were issued and active from 31 December 2009 and 31 March 2010.

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Publication:The Daily Star (Beirut, Lebanon)
Date:Sep 21, 2010
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