Press Release: IMF Mission Conducts Lebanon's Article IV Discussions, Review under EPCA Program
March 5, 2009Press Release No.09/63
An International Monetary Fund (IMF) mission visited Beirut February 19-March 5, 2009, to conduct annual discussions on economic and financial policies and to review performance under the economic program supported by Emergency Post-Conflict Assistance (EPCA).
The mission would like to thank the authorities for their warm hospitality, and the open and constructive discussions.
The Lebanese economy has so far shown remarkable resilience in the face of the unfolding global financial crisis. The domestic financial system has had virtually no direct exposure to distressed financial products or markets and remains very liquid and amply capitalized, while economic growth has remained strong. Despite large fiscal and external vulnerabilities related to the size of the public debt and the government financing requirement, prudent macroeconomic and financial policies in recent years have strengthened the economy's ability to weather external shocks. Primary fiscal surpluses have contributed to lowering the debt-to-GDP ratio by nearly 20 percentage points since 2006; interest rate policy has supported deposit inflows, rapid de-dollarization, and a build-up of international reserves; and strict financial regulation and oversight have shielded banks from exposure to troubled international banks, structured products, and wholesale financial markets.
The IMF has supported these policies through a quarterly monitoring framework and two drawings under the Emergency Post-Conflict Assistance (EPCA). All end-December 2008 quantitative indicative targets under the EPCA-supported program were met, some with wide margins. However, the intended revision of electricity tariffs did not take place, and, largely as a consequence of the ongoing global financial turmoil, telecom privatization has been postponed.
Despite these successes, difficult challenges lie ahead, as spillovers from the global recession and the weakened outlook in the Gulf will be felt in Lebanon. Remittances, tourism, merchandise exports, foreign direct and portfolio investment, and deposit inflows are all likely to be adversely affected, and real GDP growth is expected to drop to 3-4 percent in 2009, from over 8 percent in 2008. The possible confluence of a further deterioration of global conditions, rising funding costs, and domestic political uncertainty could again test the country's fiscal and financial vulnerabilities and heighten the importance of developing contingency plans.
Against the backdrop of an expected widening of the fiscal deficit in 2009, the mission discussed with the authorities the set of policies needed to safeguard the achievements to date against financial and macroeconomic risks, focusing on the following three pillars:
• The realignment of fiscal policies to the deficit and debt reduction objectives of the Paris III reform program, based on cautious budget implementation and the adoption of fiscal consolidation measures after the election. Reducing the debt-to-GDP ratio remains the top priority. Lowering the budgetary cost of energy generation and distribution through reform of the public electricity company (EdL) and revision of tariffs, along with the mobilization of additional revenues, would be key in this regard. With this, the objective should be to avoid an increase in the deficit. At the same time, the expected economic slowdown calls for a targeted redirecting of expenditures—within the existing envelope—to protect the poor.
• A cautious approach to interest rate policy to support ongoing deposit inflows and de-dollarization. Risks over how the global crisis will unfold, combined with domestic political uncertainty ahead of the June parliamentary elections, calls for a continuation of the current prudent monetary stance in the near term.
• Continued vigilance in bank supervision backed by a strengthening of the legal framework. The recent steps to strengthen the bank resolution framework through the implementation of the Merger Law are welcome. This should be supplemented by the extension of legal protection to bank supervisors, in line with international best practices. The Banque du Liban and Banking Control Commission should continue to carry out their effective close monitoring of commercial banks and contingency planning in the wake of the worsening global outlook.