The International Monetary Fund said it expects Lebanon's economic growth to be subdued in 2017, weighed down by rising public debt and regional turmoil that has led to a large inflow of Syrian refugees into the country.
“Lebanon’s economic conditions remain challenging and regional spillovers continue to dominate the near-term outlook," said Chris Jarvis, an IMF official who led the Washington-based lender's visit to Beirut from September 7 to 13.
"Lebanon has made political progress in recent months with the new electoral law ratified in parliament, paving the way for the first parliamentary elections in eight years. Despite these developments, we expect real growth to remain subdued in 2017, while the external balance remains very large."
The IMF expects Lebanon's economy to grow 2 per cent in 2017 and 2.5 per cent in 2018. That's slower than the 2.6 per cent and 3.4 per cent growth the fund expects for the Middle East, North Africa, Afghanistan and Pakistan for this year and next.
Among other challenges, Lebanon's economy has come under pressure in recent years from the presence of over 1 million refugees fleeing Syria's civil war.
The fund noted that the country's wide budget deficit remained a source of vulnerability with public debt reaching 148 per cent of GDP in 2016, among the highest in the world after countries like Japan. That's set to increase after public sector wage hikes this month. To counter the challenge of the fiscal strain, the IMF said the country should halt the rise of public debt to put the economy on a sustainable growth path. It also said the country could boost revenues by increasing fuel taxation and cracking down harder on tax evasion.
"The authorities can also promote sustainable growth through structural reforms, including by taking steps to improve the business climate," Mr Jarvis said.
"There is a need to improve the institutional framework before undertaking large investment projects, and to assess the risks and potential fiscal costs arising from any public private partnership projects."
The Institute of International Finance (IIF) said last week Lebanon's politically motivated move to suspend a new tax law is a setback for much needed new forms of revenue for the government to fund wage and pension increases for civil servants.
The IIF said that several parliamentarians looking to get re-elected in May 2018 believe their prospects are better without the tax law now and think that a crackdown on corruption and tax evasion will cover the public salary increases. Those hikes, which will kick in this month, are expected to add $1.2 billion, or 2.3 per cent of gross domestic product, to the wage bill, it said.
Lebanon swore in a new government in December following a two-year caretaker regime. The country's parliament is expected to pass its first budget since 2005 in the coming weeks, with several major tax reforms announced to tackle the country's deficit.
Moody's Investor Service last month downgraded its long-term issuer ratings for Lebanon, saying that while a return to a fully-functioning political government was a positive move, it was too early to say whether proposed reforms would lift the country's finances.