The International Monetary Fund (IMF), in its 2005 Report on the Observance of Standards and Codes (ROSC), notes that Lebanon needs to implement institutional and legislative reforms to improve transparency and accountability within the budgetary process. Both in terms of budget preparation and information integrity, the IMF's ROSC cites the need for improvement in order to meet the Fund's Code requirements. Some progress was acknowledged in the ROSC, however. Lebanon adopted a new budget classification standard in 1997 that comports with the methodology employed in the 1986 Government Finance Statistics. It has brought computerization into the fiscal process, and the Ministry of Finance has begun to provide more regular and timely publications on fiscal policy and outcomes. The ROSC also applauded the ongoing progress toward establishing a unitary Treasury account. Nonetheless, the ROSC noted a number of specific shortcomings in Lebanese fiscal policy transparency, including the lack of an external audit, the failure to include audited statements of prior-year budget performance in the current year's budget document, and the continuing reliance on extra-budgetary and quasi-fiscal activities within the budget.

General Overview

In 2005, the International Monetary Fund (IMF) published the fiscal transparency module of its Report on the Observance of Standards and Codes (ROSC) for Lebanon, in which it stated that Lebanon misses the mark in a number of areas, and specifically mentioned the areas of budget preparation and information integrity. With regard to budget preparation, the IMF called for reforms that would include the passage of an organic budget law, citing gaps in existing legislation that impede transparency and accountability. While such legislative reform is important, however, many of the ROSC's recommendations did not require changes in the existing law. In order to improve performance in meeting transparency requirements, Lebanon adopted a new classification system that draws upon the methodology of the Government Finance Statistics of 1986. It introduced computerization into the process, and as of 2005 had nearly finished creating a unitary treasury account. It also improved both the timeliness and regularity of its publications regarding fiscal performance. The 2005 ROSC noted, however, that Lebanon still lacked a functional medium-term budget framework and was not comprehensive enough in its coverage of government activities and state-owned enterprises. In this regard, the ROSC mentioned that there was a great deal of reliance on extra-budgetary and quasi-fiscal activity. Audit procedures were also found to be inadequate. There is no external audit at all, and the budget document does not include an audited report of prior years' execution.

Together, the Lebanese Constitution and the Law on Public Accounting of 1963 provide the core legal basis for the budget process. By law, the Ministry of Finance must prepare a draft budget annually, upon consultation with the government ministries. It must be submitted to the Council of Ministers for review and approval. The constitutionally derived function of the parliament in the budget process is undermined by insufficient information and lack of resources, according to the IMF 2005 ROSC. To address this problem, the ROSC recommended a fundamental overhaul, which would include legislative changes. In 2006, the IMF's Article IV Consultation reported that the strengthening of management procedures for public spending, as well as improvements in the transparency and accountability of the budget process remained critically important. In the "Statement by the Executive Director" of the report it was noted that the IMF had provided Lebanon's Ministry of Finance (MoF) with assistance to develop "an action plan for public financial management reform, with a clear time-bound outline of measures" (p. 3). In addition, the statement asserted that the government had plans for legislative change, including new Fiscal Accountability and Public Procurement laws to improve the control of financial dealings by state-owned enterprises.

The MoF publishes yearly budget reports on its website, although the IMF's 2004 Report on Interim Staff Visit found the website's monthly publication of central government budgetary accounts data to be non-comprehensive. According to the IMF report, "the published figures do not include certain transfers and financing data, omit foreign-financed capital expenditure, and do not cover arrears" (p. 37), and the report goes on to catalog additional data deficiencies that are echoed in the 2005 ROSC,

According to the 2007 concluding statement of the IMF's Article IV Consultation report, Lebanon could look forward to "a strong acceleration of fiscal adjustment in 2008." Revenues were expected to be increased by the introduction of a global income tax and an adjustment to both the value-added tax and the gas tax, which would occur alongside improvements in tax administration. A balance must be struck between containing spending while moving forward with reforms in the social and energy sectors. Reform will require both political will and public support. The IMF suggests that this depends upon sustained economic growth, as well as financial support from the international community. It notes that Lebanon must undertake a planned process to phase out the reliance on extra-budgetary funds and carry out structural reforms in the power sector, then turn its attention to reforming the civil service and continue to move toward privatization. The business sector can be improved by addressing issues of excessive bureaucracy in licensing procedures and providing better public services to businesses. According to the IMF report, "in many sectors, oligopolistic market structures still inhibit competition and need to be dismantled, and the competition law needs to be backed by proper enforcement mechanisms." Regarding the budget process, the IMF approved current plans to reform the public financial management, particularly to contribute to the reduction of government's debt. Cash management improvements are planned, and these should help to "reduce inefficiencies in public financial management." The report called the introduction of a medium-term budget framework "essential," and was encouraged by Lebanon's plan to incorporate this kind of framework in the 2008 budget preparation process. The 2007 report also stated that "a fiscal rule or fiscal responsibility law could eventually help provide self-correcting mechanisms in the budget process to safeguard overall fiscal objectives against unforeseen deviations."

The Principles

Clarity of roles and responsibilities.

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The primary legislation covering Lebanese fiscal policy is the Constitution of 1926, amended through 1996, and the Public Accounting Law of 1963. According to the IMF's 2005 ROSC, the legislation provides a clear definition of the various government agencies, and the constitution provides a clear statement of the different roles and responsibilities assigned to the three branches of government. It also provides a clear differentiation between government activities, the activities of public financial institutions, and the activities appropriate to non-financial public entities. The IMF's 2005 ROSC adds that, "public bodies of the central administration do not undertake commercial activities. Quasi-budgetary operations undertaken by non-budgetary entities are limited in nature, although their size can be large" (p. 5) However, the ROSC found that the financial relationships between the executive branch and the broader public sector are unclear, due in part to inadequate enforcement of the relevant legislation regarding financial reporting. Similar reporting problems exist in the area of government equity holdings, which can be extensive. The public at large does not have access to any list of the government's equity holdings. The ROSC further found that "relations between the budget and some key autonomous entities are not well defined and are characterized by weak coordination and a lack of transparency that hinders the assessment of underlying fiscal risks" (p. 9). In the absence of a formal law governing the budget process, the Law of Public Accounting provides some guidance, but lacks comprehensiveness and, according to the IMF's 2005 ROSC "it does not include provisions on the content and structure of the annual budget law, nor does it specify a resource allocation strategy taking into account macroeconomic and fiscal constraints" (p. 8)

However, the ROSC does note progress in the area of tax law. According to the report, the Customs Code of 2000 and the Value-Added Tax (VAT) Law of 2002 are largely consistent with international standards and employ modern principles of tax policy. The ROSC does note, however, that there is no uniform tax code, and there is no agency tasked with the development of a coherent tax policy. Further reforms are in the works, some of which will address the need for greater clarity and accountability in the administration of taxes. With regard to ethical responsibilities, the ROSC reports that the Office of the Minister of State and Administrative Reform published a Code of Conduct for all Lebanese civil servants in February 2002 that addressed the rights and responsibilities of all employees in the public sector. At the time of the ROSC, the Ministry of Finance (MoF) was still preparing a similar document, and the Council of Ministers approved a "citizen's charter" that called for the creation of a new relationship between Lebanese citizens and the public administration. The IMF's 2005 ROSC notes that additional legislation or other regulations are in the works, dealing with such issues as "illicit enrichment" and the use of public funds. To address Lebanon's many problems in the area of clarity of roles and responsibilities, the ROSC made several broad recommendations, such as strengthening the MoF and key central agencies, adopting a permanent BSL, strengthening relations with line ministries and other public bodies, developing a tax unit, to name a few.

Open budget processes

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The 2005 IMF ROSC found that Lebanon's system of budget classification is consistent with the standard set by the Government Finance Statistics of 1986, and that the budget is prepared according to a timeframe that, on paper, meets the requirements of international best practice. However, political issues have at times been allowed to interfere with the meeting of formally established deadlines. The formulation and execution of the annual budget is not governed by any overarching budget law, but is covered under the provisions of the Constitution and the Public Accounting Law. According to the 2005 ROSC, the Law on Public Accounting provides the procedures to be used in budget preparation and execution, establishes the timetable for the process, and allocates accountability. However, the IMF found the law to be insufficiently comprehensive.

There is only limited discussion of the macroeconomic assumptions that underlay the budget document, and the MoF does not contain a formal unit dedicated to the development of a macroeconomic framework. Because of this, the budget does not provide much by way of a discussion of medium-term policy objectives. All in all, Lebanon evinces a poorly integrated expenditure management cycle. In the words of the 2005 ROSC, "a comprehensive internal control system is in place, but there are duplications, implementation is weak, and not all public entities are covered" (p. 15). The ROSC does acknowledge that some progress toward international standards had been achieved in the central government's accounting system, but notes that the lack of comprehensive data coverage within the budget renders accounting reports limited in their utility. The lack of internal audit units within agencies of the central government poses another problem. The ROSC notes that internal audits generally fall to the Central Inspection Board, created in November 1959. However, the board's primary concern is to see that public funds are used appropriately, and its focus is on enforcing compliance with existing law.

The IMF's 2005 ROSC asserts that, in the absence of a formal mid-year budget review by the legislature, the MoF is called upon to provide information at the midpoint of the budget cycle, and may be called upon to answer other questions posed by the legislature as they might arise. Final accounts at the end of the budget year are subject to a significant lag. As of the ROSC report, the Treasury had succeeded in producing only the core financial accounts for the year 1997, although it was expected that similar reports for the years 1998 to 2000 would be available in the near term. The ROSC does report that the Paris II agreement has led to the initiation of a reform effort that includes fiscal policy practices. The ROSC recommends that the MoF be given the legislative and institutional capability to more effectively fulfill its primary functions.

Public availability of information.

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The IMF's 2005 ROSC notes that Lebanon's budget documents exclude all information regarding local governments, extrabudgetary funds, and data on foreign-financed investments. The data that is provided fails to meet international standards, and excludes Treasury advances and other central government lending activity. The ROSC further finds that Lebanon's annual budget provides only limited data regarding prior years' budget performance and makes no projections into future years. Although data on contingent liabilities are available to the budget planners, they are not fully assessed, and data regarding unfunded entitlements are excluded from the budget as well. While data on the public debt is provided, there is no comparable treatment of the government's financial assets. Although the ROSC team found that the public generally has good access to fiscal data, there is little legislative guarantee that such information be published. The Law on Public Accounting does not mandate fiscal reporting, but the MoF has undertaken the task of publishing a variety of documents on its website, including quarterly financial statements, a monthly statistical table, and an annual economic and fiscal report, as well as special occasional publications. In 2004, Nasser Saidi reported that Lebanon's central bank was working with a variety of international organizations to create LebStat, the Lebanese Statistical Portal, to provide a single point of access for members of the public who wished to access a wide range of economic statistical data. As of November 2007, however, this has yet to be achieved. According to the IMF's General Data Dissemination System (GDDS) website, Lebanon subscribes to the GDDS and began posting metadata on the IMF's site in January 2003. However, Lebanon does not subscribe to the more rigorous Special Data Dissemination Standard (SDDS).

Independent assurances of integrity.

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The IMF's 2005 ROSC found a number of significant shortcomings in Lebanon's ability to provide independent assurances of integrity with regard to fiscal data. Budget estimates are unreliable due to the government's reliance on off-budget advances from the treasury, for example, and there are large differences between the amount of budgeted investment spending and expenditures that are actually made. The ROSC noted that there are procedures in place for fiscal and accounting data reconciliation, and the MoF has a dedicated accounting unit. However, the methodology employed is not made public, nor is the source data reported publicly, so the reliability of the procedures is in question. In addition, the ROSC found that there are significant deficiencies in the preparation of the annual budget, first because the process pays insufficient attention to macroeconomic constraints, and second because of significant coverage gaps in national accounts, price data, non-budgetary fiscal accounts, labor statistics, social indicators, and other important datasets. The IMF's SDDS and GDDS websites disclose that, at present, Lebanon does not subscribe to the SDDS, but participates in the less rigorous GDDS program. It first subscribed to the GDDS on January 16, 2003.

Lebanon's external audit function is the province of the Court of Accounts (CdC). Although legislation establishes the CdC's independence, the ROSC found that the relationship between the CdC and the executive branch of government does not meet internationally recognized standards. Indeed, the IMF ROSC staff found the CdC to be weak in regard to external audits and notes that no external audit is done of the final report on budget execution or on the financial accounts. Further, the ROSC adds that such reports as are generated by the CdC receive no follow-up by the legislature. Finally, a lack of institutional coordination and other issues make it difficult to upgrade the government's statistical systems. The ROSC does note that there is broad recognition by the government that these shortcomings exist, but current reform efforts are hampered by the fact that they are undertaken piecemeal by a variety of agencies.