Progress on economic reforms in Lebanon continues to stagnate, with policymakers in deadlock even as the country's economy remains “severely depressed”, the International Monetary Fund said on Wednesday.
Completion of the reforms are essential for the IMF's board to approve a $3 billion four-year bailout programme, the fund said in a statement following its mission visit to Lebanon from September 19 to 21.
“Despite the urgency for action to address Lebanon’s deep economic and social crisis, progress in implementing the reforms agreed under the April SLA [staff-level agreement] remains very slow,” said Ernesto Ramirez Rigo, who led the mission.
“The Lebanese economy remains severely depressed against continued deadlock over much needed economic reforms and high uncertainty.”
Lebanon continues to deal with political deadlock over the formation of a new Cabinet four months after parliamentary elections and amid its worst economic crisis in decades.
Inflation rose to 168 per cent in July from the same month a year earlier, Lebanon's Central Administration of Statistics Consumer Price Index showed, marking its 25th consecutive month of triple-digit inflation.
The country's gross domestic product has contracted by more than 40 per cent since 2018, inflation remains in the triple digits, foreign exchange reserves are declining and the parallel exchange rate has reached 38,000 Lebanese pounds to a US dollar, Mr Rigo said.
Its economy contracted about 58 per cent between 2019 and 2021, with GDP falling to $21.8bn in 2021, from about $52bn in 2019, the World Bank reported — the largest contraction on a list of 193 countries.
“Amidst collapsing revenues and drastically suppressed spending, public sector institutions are failing and basic services to the population have been drastically cut. Unemployment and poverty are at historically high rates,” he said.
Lebanon's economy collapsed after it defaulted on about $31bn of Eurobonds in March 2020, with its currency sinking more than 90 per cent against the dollar on the black market.
The country's public debt ballooned to more than $100bn, or about 212 per cent of GDP, in 2021.
Lebanon has the fourth-highest debt-to-GDP ratio in the world, surpassed only by Japan, Sudan and Greece, and the country's economic crisis is among the three most severe since the mid-19th century, the World Bank said.
The Lebanese Parliament has not yet approved its 2022 budget with the long delay meaning that for macroeconomic purposes, the focus should now turn to preparing and approving a credible 2023 budget, the IMF said.
“This should be based on realistic macroeconomic assumptions, with the necessary revenue raising measures, including the use of a realistic exchange rate … for all tax purposes. This should allow for a significant increase in social and investment spending and adjustment to public sector spending to restart the basic functioning of the public administration at a time where public services are all but disappearing with noticeable impact on revenues collection,” the fund said.
Existence of several exchange rates is also causing “significant distortions to economic activity” and creating “opportunities for corruption and rent-seeking, leading to excessive pressures on the central bank’s FX reserves”.
“While the reform of Banking Secrecy Law that was approved by Parliament in July contained some positive steps, it fell short of the changes needed to bring it in line with best international practice,” the IMF said.
While it acknowledged that Parliament is reviewing some of these aspects, more needs to be done to “fight corruption, eliminate impediments to effective banking sector supervision and restructuring, tax administration as well as investigate financial crimes and recover misappropriated assets”.
The fund also stressed that the financial sector rehabilitation strategy, which was approved by the Cabinet, should be enacted to allow a healthier banking system to function normally again and attract deposits.
“The large losses in the sector need to be recognised and addressed upfront, while respecting the hierarchy of claims. Small depositors must be fully protected … and recourse to public resources — assets belonging to all Lebanese citizens, with or without a bank account — should be limited,” it said.
In justifying the shutdown extension, the Association of Banks in Lebanon cited the continued risks that bank employees and customers face. It also pointed to an “absence of any procedures or even assurances” from the government and security forces that would ensure a safe working environment.
“Reforms agreed in the April SLA are crucial for the recovery of the Lebanese economy to begin. Delaying their implementation only increases the costs to the country and its population,” Mr Rigo said.