The World Bank Fiscal Management Project (P181155) @#&OPS~Doctype~OPS^blank@pidaprcoverpage#doctemplate Project Information Document (PID) Appraisal Stage | Date Prepared/Updated: 04-Nov-2023 | Report No: PIDA0067 Nov 07, 2023 Page 1 of 9 The World Bank Fiscal Management Project (P181155) @#&OPS~Doctype~OPS^dynamics@pidaprbasicinformation#doctemplate BASIC INFORMATION A. Basic Project Data Project Beneficiary(ies) Region Operation ID Operation Name MIDDLE EAST AND NORTH Lebanon P181155 Fiscal Management Project AFRICA Financing Instrument Estimated Appraisal Date Estimated Approval Date Practice Area (Lead) Investment Project 17-Oct-2023 24-Jan-2024 Governance Financing (IPF) Borrower(s) Implementing Agency Minister of Finance Ministry of Finance Proposed Development Objective(s) project development objective is to restore the basic functions for domestic revenue mobilization and accountable allocation and use of public resources. Components 1. Stabilizing revenue administration 2. Restoring fiscal controls 3. Re-vitalizing oversight and accountability institutions and procurement capacity building 4. Project Management 5. Contingent Emergency Response Component (CERC) @#&OPS~Doctype~OPS^dynamics@pidprojectfinancing#doctemplate PROJECT FINANCING DATA (US$, Millions) Maximizing Finance for Development Is this an MFD-Enabling Project (MFD-EP)? No Is this project Private Capital Enabling (PCE)? No SUMMARY Total Operation Cost 32.00 Total Financing 32.00 of which IBRD/IDA 28.50 Nov 07, 2023 Page 2 of 9 The World Bank Fiscal Management Project (P181155) Financing Gap 0.00 DETAILS World Bank Group Financing International Bank for Reconstruction and Development (IBRD) 28.50 Non-World Bank Group Financing Trust Funds 3.50 Lebanon Financing Facility 3.50 @#&OPS~Doctype~OPS^dynamics@envsocriskdecision#doctemplate Environmental And Social Risk Classification Moderate Decision The review did authorize the team to appraise and negotiate Other Decision (as needed) B. Introduction and Context Country Context 1. For more than three years, Lebanon has been impacted by the most devastating multipronged crisis in its modern history. The crisis is possibly amongst the worst three crises episodes globally since the mid-nineteenth century.1 Real GDP has contracted by 34 percent between 2018 and 2022, wiping out more than 15 years of economic growth. In 2023, real GDP is expected to grow, after five consecutive years of contraction (2018-2022), by a mere 0.2 percent. In July 2022, Lebanon was reclassified by the World Bank as a lower middle-income country, from an upper middle-income country. Since the onset of the economic and financial collapse in 2019, the Lebanese pound has lost more than 98 percent of its value. Triple digit inflation and currency depreciation show no sign of abating, inducing a pervasive and growing dollarized cash-based economy. Inflation averaged 171.2 percent in 2022 and is projected to reach about 231 percent in 2023.2 Inflation is highly regressive, 1 World Bank (2021), Lebanon Economic Monitor, Spring 2021: Lebanon Sinking (To the Top 3). (Link) 2 World Bank (2022), Lebanon Economic Monitor, Fall 2022: Time for an Equitable Banking Resolution. (Link) Nov 07, 2023 Page 3 of 9 The World Bank Fiscal Management Project (P181155) disproportionally affecting the poor and vulnerable, especially since basic goods including food items are the primary drivers of overall inflation. Sectoral and Institutional Context 5. Public finances have deteriorated, contributing to a breakdown in public service delivery. Fiscal challenges have contributed to weak public finances which have been exacerbated by the crisis. Revenues are estimated to have declined from an already low 13.1 percent of GDP in 2020 to 6.1 percent of GDP in 2022. At the same time, total public expenditures declined from 16.4 percent of GDP in 2020 to 9 percent of GDP in 2022, pointing to reduced state capacity amid the unfolding crisis. The Parliament ratified a new public procurement law No. 244 in 2021 but it is yet to ratify a government budget for 2023, while ad-hoc and piecemeal measures on both the expenditure and revenue side of the government budget continue to be adopted. Mis-valuation of VAT, customs, excises, and lack of correction for inflation in specific excises resulted in losses to revenues equivalent to 5.6 percent of GDP in 2022 (IMF, 2023).3 Pre-crisis legacy 6. The current crisis unfolded within the context of long-standing issues regarding weak institutional capacity, lack of transparency, and structural issues leading to poor financial governance. For example, since 2015 the Open Budget Survey consistently assessed budget oversight by the legislature and audit institutions to be weak, and consistently gave Lebanon some of the lowest scores for transparency. Informality and inefficient tax organization structures have had an impact on revenue collection. Tax evasion is endemic as the cash economy grows. Opposition from the business community to comply with customs formalities is also common. Public spending was not governed by a budget for 13 years between 2005 and 2017, as no budget was passed and the budget has traditionally not been policy oriented. A 20-year backlog in fiscal reporting has led to the non-availability of fiscal information for monitoring and decision making. The public oversight institutions, such as the Court of Accounts and Central Inspection face common challenges such as lack of independence, being prone to political interference, outdated legislation and regulations, limited capacities, understaffed and lack of financial resources, as a result undermining their ability to uncover and address increased risks of corruption and misuse of public funds. Further, there is a lack of a mechanism for lodging complaints regarding public procurement transactions, and procurement performance information or data are not available. Context during the crisis 7. The crisis has caused staff attrition and absenteeism in the public sector, severely impacting the Government’s ability to respond to the crisis, maintain core government operations and basic services for citizens, and to create the foundations for recovery. Currency devaluation has eroded public sector salaries, rendering them too low for civil service staff to afford fuel costs to commute and secure basic day-to-day necessities. As a result, a significant number of staff have left the public sector, either for the private sector where salaries have been World Bank (2023), Lebanon Economic Monitor, Spring 2023: The Normalization of Crisis Is No Road for Stabilization (Link) World Bank (2023), Lebanon Macro Poverty Outlook, Fall 2023 3 https://www.imf.org/en/Publications/CR/Issues/2023/01/13/Lebanon-Technical-Assistance-Report-on-Putting-Tax-Policy-Back-on-Track-528121 Nov 07, 2023 Page 4 of 9 The World Bank Fiscal Management Project (P181155) partially adjusted or for opportunities abroad, leaving a critical skills gap in the public sector. For staff that remain, there are high absenteeism rates with a majority of staff only coming to the office one day per week. 8. The customs duties and tax revenues fell sharply during the crisis, rendering it difficult for domestic revenues to support economic stability, fiscal sustainability, and in funding critical social services at a time when the Government has no borrowing capacity. Total revenues fell from pre-crisis levels of over 20 percent of GDP (2018) to 13.1 percent by 2020 and are estimated to have declined further to only 6 percent in 2022. Tax revenues dropped from pre-crisis levels of 15 percent (2018) to 9 percent (2020) and an estimated 4.8 percent in 2022. Value Added Tax (VAT) and custom revenues experienced the biggest declines. The volume and value of foreign trade almost halved from 2019 to 2020, further reducing the tax base. Revenue-related administrative responses also impacted domestic revenue mobilization. However, the most serious concerns at present are the severe staff shortages that prevent the performance of revenue critical activities as well as the lack of funding to meet the daily running costs of offices. 9. In this time of severe economic constraints, the lack of national budget inhibits maintaining aggregate expenditure at an affordable level, responding effectively to the crisis, and recovery. However, the 2022 budget was approved in September 2022, nine months into the government’s fiscal year and in 2023 the budget had not yet been presented to Parliament as of September 2023. Treasury advances are at an all-time high for unbudgeted activities, thereby weakening fiscal controls quite considerably. Furthermore, fiscal information and audit reports are not available to support decision making and ensure accountability. Due to staff shortages and absenteeism in the respective agencies, the exercise of clearing the backlog of year-end financial statements and the finalization of audit reports has discontinued. Year-end financial statements have not been prepared since government’s FY20 and in-year fiscal information has not been available since FY22. Public accountability is further eroded by the delays in operationalizing the Public Procurement Authority, the Public Procurement Complaints Authority, and the National Anticorruption Commission. Moreover, systematic training and professionalization of the public procurement workforce could not be deployed to support the appropriate implementation of the public procurement law (244/2021). 10. Well-functioning public institutions are critical to address the crisis effectively and to lay the foundation for stabilization and recovery. However, the crisis-induced compression in revenue and expenditures has resulted in budget cuts and lower service provision in key sectors such as health and education. The dramatic depreciation of wages has led to high levels of staff attrition and absenteeism which have crippled the operations of public institutions. Recently announced revenue mobilization measures aimed at correcting the mis-valuation in the exchange rate for customs and taxes, are expected to increase revenues. However, with weaknesses in tax administration, realizing the full potential of these policy changes will be a challenge. For citizens to be willing to contribute to public revenues, they must trust in the state’s capability to perform its basic functions and deliver public services. The proposed project will harness this link between revenue and expenditure by directing budget allocations towards critical functions and enhancing the accountability and transparency of the state in the use of public finances. If the challenges in revenue administration and public expenditure management are not addressed as a matter of priority, Lebanon will remain in a vicious cycle. The proposed operation will contribute to increasing revenue collection and improve the strategic allocation of public resources to respond to the crisis more effectively in the short term and to facilitate stabilization and recovery over the medium term. Nov 07, 2023 Page 5 of 9 The World Bank Fiscal Management Project (P181155) C. Proposed Development Objective(s) Development Objective(s) (From PAD) The project development objective is to restore the basic functions for domestic revenue mobilization and accountable allocation and use of public resources. Key Results ▪ Increase in the number of tax declarations and the audits of large taxpayers (of Income Tax and VAT) ▪ Increase in the number of risk-based, desk and premises, post clearance audits, for Beirut port customs clearance ▪ Timely submission to the Council of Ministers (CoM) of a budget linked to the macro fiscal framework ▪ Timely generation of annual financial reports and timely publishing of audit reports ▪ Fiscal Performance Report published ▪ Timely review of supplier and pension payment documentation ▪ Regular payroll audits D. Project Description 11. Progress towards achieving the Project Development Objective (PDO) will help restore public services to prevent further erosion of the economy and to prepare the ground for a sustainable recovery. The deepening of the crisis has eroded institutional capacity to effectively respond to the crisis and to manage recovery. The proposed project aims to change this dynamic by restoring and maintaining core public financial management functions. This includes: (a) stabilizing revenue administration, including tax and customs; (b) restoring fiscal controls, including budgeting and reporting; and (c) revitalizing oversight and accountability institutions, and procurement capacity building. 12. The proposed World Bank intervention would take the form of Investment Project Financing (IPF) that combines both input-based disbursements and Performance Based Conditions (PBC). PBCs will incentivize the restoration of core public financial management (PFM) functions for both expenditure management and domestic revenue mobilization and provide the necessary stability in PFM that is needed to support recovery. It aims to incentivize critical staff at the Ministry of Finance (MoF), Court of Accounts and Central Inspection. Eligible expenses for the PBCs are the essential operating and capital costs that will ensure staff availability and suitable working conditions to achieve the PBCs. Eligible expenses will be incurred directly by the project, and they will not support government budget lines. Furthermore, eligible expenditures will be incremental to government spending and transitional in nature; they will not in any form replace current government spending. The proposed project will provide a six month advance to meet the funding needs for these expenditures. In addition to PBCs, there will be financing for technical assistance consultancies, essential training and capacity building, and ICT equipment for PFM functions. 13. The proposed project will have the following technical components and subcomponents. Nov 07, 2023 Page 6 of 9 The World Bank Fiscal Management Project (P181155) ▪ Component 1: Stabilizing Revenue Administration Reforms in Domestic Revenue Mobilization o Subcomponent 1.1: Strengthening Large Taxpayer Office and Large Debtor Unit o Subcomponent 1.2: Restoring basic functions of Customs o Subcomponent 1.3: Restoring Revenue management ICT systems ▪ Component 2: Restoring Fiscal Controls o Subcomponent 2.1: Strengthening Budget Preparation o Subcomponent 2.2: Regularizing Fiscal Reporting o Subcomponent 2.3: Maintaining Timely Payments o Subcomponent 2.4: Restoring Cross-cutting ICT functions ▪ Component 3: Revitalizing Oversight and Accountability Institutions and Procurement Capacity Building o Subcomponent 3.1: Increase Capacity to oversight and accountability institutions o Subcomponent 3.2: Procurement certification programs and training @#&OPS~Doctype~OPS^dynamics@pidaprlegalpolicy#doctemplate Legal Operational Policies Triggered? Projects on International Waterways OP 7.50 No Projects in Disputed Area OP 7.60 No Summary of Screening of Environmental and Social Risks and Impacts 14. The project has a “Moderate� Environmental and Social (E&S) risk classification. The following Environmental and Social Safeguards (ESSs) apply: ESS1, ESS2, ESS3, ESS4 and ESS10. The client will prepare the following E&S instruments which will be disclosed before commencement of project activities: Labor Management Procedures (LMP), Stakeholder Engagement Plan (SEP), Occupational Health and Safety Plan (OHS), Waste Management Plan (WMP) and the Environmental and Social Commitment Plan (ESCP). The implementing agency, the Ministry of Finance, conducted stakeholder consultations as indicated in the SEP during the period June, July and October 2023. MoF will build on its existing grievance uptake channels to meet the ESS10 requirements and will ensure ongoing consultations as per the SEP. The MoF will also hire an E&S specialist before commencement of project activities to ensure satisfactory implementation of the E&S instruments in line with the ESCP. The MoF will compile all E&S updates and will submit these in quarterly progress reports as per the ESCP. On potential solar panel investments, the environmental and social impacts and respective mitigation measures are assessed in the relevant instruments including the SEP, LMP, OHS and WMP plans. E. Implementation Institutional and Implementation Arrangements Nov 07, 2023 Page 7 of 9 The World Bank Fiscal Management Project (P181155) 15. The Project Coordination Unit (PCU) under the MoF will be responsible for project coordination and liaising with the departments that implement the project. The PCU will include a full-time Project Director as well as full-time and part-time project staff. The project will have a multi-stakeholder project steering committee that MoF will convene periodically, consisting of heads of relevant agencies who will discuss cross cutting areas. Development partner forums will also be organized periodically as an information sharing platform to enhance coordination. A third-party monitoring agent will be hired by the project to independently verify PBCs and to closely monitor project expenditures, including spot checks as needed, in addition to the regular monitoring and evaluation (M&E) function. Robust internal control process will be followed for all project payments, and these will be reflected in the project operations manual. A thorough identification process will be followed for the payment of staff allowances, including a verification process by the third-party verification agent. The verification agent will check the authenticity of the information and track the payments to the beneficiaries. To further reduce risk of corruption, the project will adopt the direct payment method for large payments. A phone line will be maintained to receive complaints, and this will be incorporated in a broader grievance redressal mechanism of the project. @#&OPS~Doctype~OPS^dynamics@contactpoint#doctemplate CONTACT POINT World Bank Jiwanka B. Wickramasinghe Senior Financial Management Specialist Rima Abdul-Amir Koteiche Senior Financial Management Specialist Borrower/Client/Recipient Minister of Finance Youssef El Khalil, Minister , ykhalil@finance.gov.lb Implementing Agencies Ministry of Finance Georges Maarrawi, Acting Director General , georgesm@finance.gov.lb FOR MORE INFORMATION CONTACT The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Nov 07, 2023 Page 8 of 9 The World Bank Fiscal Management Project (P181155) @#&OPS~Doctype~OPS^dynamics@approval#doctemplate APPROVAL Task Team Leader(s): Jiwanka B. Wickramasinghe, Rima Abdul-Amir Koteiche Approved By Practice Manager/Manager: Country Director: Jean-Christophe Carret 07-Nov-2023 Nov 07, 2023 Page 9 of 9