Lebanon: New World Bank Project to Restore Basic Fiscal Management Functions in Support of Public Service Delivery

Beirut  – The World Bank Group’s Board of Executive Directors approved yesterday a US$34 million project to help Lebanon restore core fiscal management functions of the public administration to support domestic revenue mobilization and the accountable allocation and use of public resources. The Fiscal Management Project will help restore public services to ensure the well-being of citizens and to prepare the foundation for a sustainable economic recovery.

More than four years into an acute economic and financial crisis, Lebanon’s public finances have significantly deteriorated contributing to a breakdown in public service delivery. This deterioration exacerbated long-standing pre-crisis challenges of weak institutional capacity, lack of transparency, and structural issues that have contributed to poor financial governance. Real GDP has contracted by 34 percent between 2018 and 2022, wiping out more than 15 years of economic growth. Since the onset of the crisis in 2019, the Lebanese pound has lost more than 98 percent of its value. Triple digit inflation and currency devaluation have eroded public sector salaries, rendering them too low for civil service staff to afford fuel costs to commute to work or to secure basic necessities. A significant number of staff have left the public sector, either for the private sector where salaries were partially adjusted or for opportunities abroad, opening a critical skills and staffing gap in the public sector. For staff who remain, absenteeism rates are high, with most staff coming to the office only one day per week. This severely impacts the Government’s ability to maintain core government functions. Customs duties and tax revenues also declined sharply with the crisis, rendering domestic revenues insufficient for economic stability, fiscal sustainability, and the funding of critical social services.

“Well-functioning public institutions are critical to address the ongoing crisis effectively and to lay the foundation for recovery,” said Jean-Christophe Carret, World Bank Middle East Country Director. “Addressing the challenges in revenue administration and public expenditure management is critical to restore citizens’ trust in the state’s ability to perform its basic functions and help Lebanon come out of this vicious cycle.”

The Fiscal Management project aims to restore basic public financial management functions by stabilizing revenue administration through enhanced tax compliance, providing training and capacity building for the implementation of the customs law, and critical upgrades to the ICT capacity of tax and customs systems. The project will also restore fiscal controls and support greater government accountability by strengthening budget preparation, regularizing fiscal reporting, timely processing public payments and restoring critical IT functions for core public financial management. The project will further strengthen the oversight and accountability capacity of the Court of Accounts and the Central Inspection, enhance the capacity building functions of the Institute of Finance, and professionalize public procurement practitioners.

For impact, the Project links certain disbursements to specific results or performance-based conditions. Upon the successful achievement of these performance-based conditions –such as timely budget preparation; effective administration of revenue and customs functions; timely and accurate reporting; timely government payments; and timely audits and verification of the wage bill– a portion of the project funds can be used towards incentivizing critical staff at the Ministry of Finance, the Court of Accounts and the Central Inspection. Performance-based conditions were selected for their criticality in restoring core public financial management functions and enhancing accountability and transparency. A solid governance scheme will underpin the disbursements linked to performance-based conditions, which will require a Council of Ministers decree and a ministerial decision for the incentives. There will also be oversight by a multi-stakeholder steering committee, guidance by an advisory committee, independent verification by a third-party agent and periodic independent external audits.

The Fiscal Management Project is financed by a US$28.5 loan from the International Bank for Reconstruction and Development and a US$5.5 million grant from the Lebanon Financing Facility. The project will allocate $14.1 million for ICT systems including hardware, software, licenses, and maintenance. The project will also allocate $12.3 million over 3 years to disbursements that are linked to performance-based conditions. The remaining amount will be allocated to green energy investments and other critical technical assistance and capacity building activities. The project design takes into account public financial management programs of other development partners to enhance synergies and leverage support.

About the Lebanon Financing Facility (LFF)

Established in December 2020 in the aftermath of the August 4 Port of Beirut explosion disaster and following the launch of the Reform, Recovery and Reconstruction Framework (3RF), the LFF is a 5 year multi-donor trust fund that pools grant resources and strengthens the coherence and coordination of financing in support of the immediate socio-economic recovery of vulnerable people and businesses impacted by the explosion. To date, the LFF has received contributions from the governments of Canada, Denmark, France, Germany, and Norway and from the EU totaling US$69.98 million. Subject to the commitment of all Lebanese stakeholders to critical reforms, the LFF will build the foundation for medium-term recovery and the sustainable reconstruction of the Port of Beirut and affected neighborhoods. The LFF prioritizes three focus areas of interventions: 1) Socioeconomic and business recovery; 2) Preparing for reform and reconstruction; and 3) Strengthening coordination, monitoring, accountability and oversight of the 3RF. The LFF benefits from the World Bank’s high fiduciary standards, through the application of its fiduciary framework for financial management, procurement, and environmental and social safeguards. The LLF also ensures that programs promote gender equality and community engagement that target women, youth and vulnerable populations.