IMF urges Lebanon to rebalance economy and check risks

Public debt, currently $86.3bn and 150% of economic output, is forecast to increase to 155% by the end of 2019

Public anger in Lebanon simmered since parliament passed an austerity budget in July to help trim a ballooning deficit and flared on Thursday over new plans to tax calls on messaging applications such as WhatsApp, forcing the government to axe the unpopular proposal. AFPShow less

Lebanon needs to implement new measures to reduce domestic and external imbalances while mitigating vulnerabilities, the International Monetary Fund said.

“Rebalancing the economy in the current framework of an exchange rate peg requires the steadfast implementation of a large and credible fiscal adjustment and ambitious structural reforms.” the Washington lender said in a note on Thursday. “These need to sharply reduce imbalances and significantly improve Lebanon’s business climate and governance as well as reduce corruption, which in turn can boost investment, growth and exports.”

Lebanon’s economy grew 0.3 per cent last year as confidence ebbed, uncertainty increased, monetary policy tightened and the real estate contracted, the fund said. The economy is forecast to slow down to 0.2 per cent this year.

Though the new government has taken “some important policy steps to start the needed policy adjustment, which could help raise confidence among investors and donors,” the fund said. “However, substantial new measures are still needed to reduce the exceptionally large domestic and external imbalances and mitigate Lebanon’s vulnerabilities.”

Rebalancing the economy requires measures on the revenue and expenditure sides the fund said. Fiscal measures should include raising the VAT rate, broadening the tax base and removing exemptions, as well as increasing fuel

excises and eliminating electricity subsidies.

“These measures should be complemented by a thorough expenditure review to achieve sustained fiscal savings,” the IMF’s directors said. “A successful implementation of the government’s Capital Investment Plan, financed on concessional terms, could help mitigate the contractionary effect of the adjustment on growth. To protect the most vulnerable people, [the fund’s] directors underscored the need for a stronger social safety net.”

In tandem with the government’s fiscal adjustment measures and structural reforms that aim to boost economic output and a primary surplus of 4–5 per cent of GDP, Lebanon also needs to take “decisive actions to remove growth bottlenecks and enable external adjustment in the context of the currency peg.”

Reforming the electricity sector which saps the government of about $2 billion (Dh7.3bn) a year should be a priority. The government should also focus on removing obstacles and reducing the cost of doing business, as well as improving governance and reducing corruption. According to a World Bank survey corruption is identified as a major constraint by the highest number of firms in Lebanon, followed by electricity which is reported as a constraint by 55.1 per cent of firms.

Authorities should build buffers in the country’s financial system and the central bank “should gradually reduce the support it provides to the government and strengthen its balance sheet,” the fund said.

The government needs to press on with reforms tied the CEDRE international donor conference in order to unlock $11bn of pledges that will finance projects, it added.

Lebanon’s fiscal deficit increased to 11 per cent of GDP in 2018, from 8.6 per cent the year before, and though the 2019 budget targets a deficit of 7.6 per cent of GDP, the IMF estimates the deficit will likely be higher.

Public debt, currently $86.3bn and about 150 per cent of GDP, is forecast to increase to 155 per cent of GDP by the end of 2019, the fund said. Lebanon is one of the most indebted in the world and has historically relied on deposit growth and capital flows attracted by high interest rates, to finance its deficits and service its debt.

Deposit inflows have slowed down during the past year, which reduced the maneuvering space of the government, which is what requires additional measures by the government, the fund said. Earlier this month Moody's Investors Service put the deposit ratings of Lebanon’s top banks under review for a downgrade after warning the country its own rating was in danger of being cut deeper into junk territory.

“Against this precarious backdrop,” the fund warned, “the economic outlook depends critically on policy actions and reforms in the period ahead.”