IMF 2015 Article IV Consultation with Lebanon
IMF Executive Board Concludes 2015 Article IV Consultation with Lebanon
Press Release No. 15/309
June 30, 2015
On June 26, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Lebanon.
The conflict in Syria, now in its fifth year, dominates Lebanon’s outlook, with refugees now comprising over one-quarter of the population. The refugee crisis is straining local communities, adding to poverty and unemployment, and placing further pressure on the economy’s already-weak public finances and infrastructure. Moreover, Lebanon faces a difficult domestic political situation. The presidency has been vacant since May 2014 and a lack of consensus between the major parties is hindering passage of key legislation.
In the face of this uncertainty, growth remains subdued. Following a sharp drop in 2011, growth has crawled upward to about 2–3 percent but remains well short of potential. IMF staff estimate that GDP increased by only 2 percent in 2014 and project a similarly modest growth rate in 2015. Lebanon’s traditional growth drivers—tourism, real estate, and construction—have received a significant blow and a strong rebound is unlikely soon. Lebanon’s return to potential growth (4 percent) before 2019 is now doubtful. Inflation also declined sharply in 2014 on the back of lower oil prices and other one-off factors, but should return to about 3 percent by end-2015.
On the fiscal side, exceptional factors allowed for a primary surplus in 2014, but without decisive action fiscal deterioration will continue in 2015. The 2014 primary surplus of about 2.5 percent of GDP largely resulted from exceptional telecom transfers and, to some extent, from withheld and delayed payments. But the primary balance is expected to return to a deficit of almost 1.25 percent of GDP in 2015, with public debt remaining high at 132 percent of GDP. Foreign-exchange and financial markets continue to be resilient, despite Lebanon’s sizable external financial requirements. Inflows remain large, particularly from non-resident deposits; and in the context of Lebanon’s currency peg to the U.S. dollar, the Banque du Liban (BdL) has maintained an adequate level of gross foreign exchange reserves.
Executive Board Assessment2
Executive Directors commended the authorities for preserving macroeconomic stability and market confidence despite the unprecedented humanitarian and economic spillovers from the conflict in Syria, including a daunting inflow of refugees which has taken a toll on public finances, infrastructures, and the social fabric. Against this background, they called on the international community to provide greater humanitarian and development assistance to Lebanon. While acknowledging that a very difficult economic and political context limits feasible policy choices, Directors encouraged the authorities to further strengthen confidence and secure more inclusive growth by implementing priority fiscal and structural reforms promptly.
Directors stressed that a sustained fiscal adjustment is essential. They welcomed the primary surplus in 2014, but noted that it mostly reflected one-off factors. They cautioned that, without further adjustment, the public debt ratio will continue to rise and add to existing vulnerabilities, crowding out essential public investment and social spending. As a first step, Directors encouraged the authorities to pass an appropriately ambitious budget for 2015. They also stressed the urgent need to reform the electricity sector to remove a large drain on the public finances.
More broadly, Directors underscored the need to place public indebtedness on a sustainable downward path. In this context, they advised caution in implementing a salary-scale adjustment for public-sector employees. They pointed to significant scope to increase revenue equitably, including by improving compliance and broadening the tax base, starting with fuel taxation. Further, Directors observed that changing the spending mix toward capital and social spending would help mitigate the procyclical impact of fiscal adjustment. They also considered that strengthening the safety nets and reforming the pension system could improve equity and fiscal sustainability.
Directors commended the central bank for supporting macroeconomic stability and maintaining adequate international reserves. They agreed that monetary policy should remain geared to supporting the U.S. dollar peg, which has served Lebanon well. Looking ahead, they underscored that fiscal adjustment would help reduce the financial and institutional burden on the central bank related to quasi-fiscal activities.
Directors noted the critical role played by Lebanon’s banking system in securing sustained, broad-based economic growth. They commended the authorities’ close oversight of the financial system, and stressed the need for continued vigilance and efforts to strengthen the regulatory framework. They highlighted the importance of increasing capital buffers, improving loan classification and restructuring rules, and further enhancing the framework to counter money laundering and terrorism financing. Directors welcomed the authorities’ recent request for an update assessment under the Financial Sector Assessment Program.
Directors underscored the need to advance structural reforms to promote job creation and improve competitiveness. In addition to electricity reform, which is a critical priority, Directors highlighted the need for labor reforms, improvements in public service provision, and legislation to reinvigorate private investment, including in the oil and gas sector. Directors also encouraged the authorities to improve Lebanon’s statistical system, building on ongoing progress.