IMF Executive Board Concludes Article IV Consultation with Lebanon

Stocks and Financial Services Press Releases Friday June 22, 2018 09:23
IMF--22 Jun--International Monetary Fund
On May 11, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Lebanon.

Lebanon's economic growth remains low, estimated at about 1-1.5 percent in 2017 and 2018. The traditional drivers of growth in Lebanon are subdued with real estate and construction weak and a strong rebound is unlikely soon. Going forward, under current policies growth is projected to gradually increase towards 3 percent over the medium term. Inflation spiked to 5 percent in 2017 as the cost of oil imports rose and U.S. dollar weakened.

The headline fiscal balance posted an improvement in 2017 to a deficit of 7.3 percent of GDP, partly due to one-off revenues from taxing higher bank profits arising from Banque du Liban's (BdL) financial operations undertaken in 2016. Parliament approved the 2017 budget in October 2017 and the 2018 budget in March 2018, these being the first approved budgets in 12 years. Staff projects that the 2018 fiscal deficit will increase relative to 2017 and will contribute to a further increase in the already high public debt, which was over 150 percent of GDP at the end of last year.

Deposit inflows, which finance Lebanon's twin deficits, slowed down in 2017 mostly due to some limited outflows during the November 2017 political crisis. The BdL has increased interest rates through its monetary and financial operations, especially on local currency products, to support inflows and arrest dollarization.

The upside potential for growth is significant. Early resolution of the conflict in Syria would benefit Lebanon. The outcome of the recent CEDRE investment conference, where international organizations and donors supported the government's Capital Investment Program (CIP), represents an opportunity for growth-enhancing reforms and investment. But large vulnerabilities and downside risks remain, stemming from regional political developments as well as domestic events that might affect deposit flows.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic situation in Lebanon continues to be difficult with high public debt, twin deficits, and tightening financial conditions. Spillovers from the conflict in Syria, including large numbers of refugees, have affected growth and strained public infrastructure and services. Directors commended the authorities for their generous efforts in hosting refugees and agreed that Lebanon needs continued international support to address this challenge. They encouraged the authorities to use the current political momentum and financial pledges secured at the recent investment conference to undertake ambitious policies and reforms to tackle internal and external imbalances, improve investor confidence, and raise growth prospects.

Directors stressed that an immediate and substantial fiscal adjustment is essential to improve debt sustainability, which will require strong and sustained political commitment. They noted that a well?defined fiscal strategy, including a combination of revenue and spending measures, amounting to about 5 percentage points of GDP is ambitious but necessary over medium?term to stabilize public debt and place it on a declining path. In this regard, they recommended increasing VAT rates, gradually eliminating electricity subsidies, and restraining public wages. Directors emphasized the need to strengthen public investment management to ensure successful implementation of the authorities' Capital Investment Program. They welcomed the authorities' request for a public investment management assessment (PIMA) from the Fund, and encouraged expeditious efforts to address the weaknesses identified in the PIMA before increasing public investment.

Directors commended the Banque Du Liban (BdL) for its critical role in attracting deposit inflows and effectively managing the difficult situation. They emphasized that the BdL should take a long?term view in its policymaking and return to more conventional monetary policy tools. They encouraged BdL to raise interest rates as necessary while being vigilant of debt dynamics.

Directors emphasized the need to reduce financial sector vulnerabilities by strengthening buffers and taking steps to address rising credit risks. They also stressed the importance of strengthening the crisis management and AML/CFT frameworks in line with the 2016 FSAP recommendations which are based on the stricter 2012 FATF standards.

Directors encouraged the authorities to push forward the necessary structural reforms to remove growth bottlenecks and help external rebalancing. These reforms should include, in particular, the implementation of fundamental reforms in the electricity sector, including a gradual elimination of costly subsidies and expansion of production capacity, while minimizing the impact on the vulnerable population. Directors also encouraged the authorities to redouble their efforts to improve governance and reduce corruption, and called for further improvements to the statistical system.

It is expected that the next Article IV consultation with Lebanon will be held on the standard 12?month cycle.

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