IMF Executive Board Concludes 2014 Article IV Consultation with Lebanon

Press Release No. 14/376
July 31, 2014

On June 26, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lebanon.1

Lebanon is facing a number of difficult challenges. The economy is suffering from abroad-based deterioration. Growth stood at 2.5 percent in 2012 and decelerated to 1.5 percent in 2013 as traditional drivers of growth—real estate-related activity, construction and tourism—have been affected by increasing uncertainty and worsening security. Inflation appears contained, though there are reportedly pressures on housing prices. The external current account deficit remained large at about 13 percent of GDP in 2012–13.

The crisis in Syria is having a dramatic impact on Lebanon. The refugee influx, according to United Nations figures, has reached one quarter of the population, fueling already high unemployment and poverty, and straining local communities and public services. The crisis has further exacerbated domestic political uncertainties. The term of the president ended in May, and the presidential vacuum is disrupting efforts to pass legislation, including a salary increase for the public sector. Parliamentary elections in November (already postponed from June 2013) add to uncertainty.

Fiscal imbalances have widened. The primary fiscal position turned negative in 2012 and deteriorated to about 1 percent of GDP in 2013, reflecting cyclical factors—spending pressures and revenue declines from weak economic activity—as well as discretionary policies, namely the introduction of a Value Added Tax exemption on gasoil and a cost-of-living adjustment for public sector wages in 2012. Hosting the large refugee population is adding to fiscal strains. As a result, public debt—already one of the highest in the world as a share of GDP—has been on an upward trajectory since 2012, reaching 141 percent of GDP in 2013.

The Banque du Liban has continued to finance the government and attract commercial banks’ foreign currency deposits, which brought international reserves to US$35 billion at end-April. It has also supported credit to the private sector by providing low-cost funds to banks to on-lend to specific economic sectors.

Financial markets have been largely resilient, but the environment is increasingly challenging. Banks’ profitability has deteriorated, and their high exposure to the sovereign has continued to increase. Nonperforming loans remain low, but their provisioning has declined and the use of overdraft facilities is widespread. On the positive side, deposits have continued to grow at 7–8 percent a year, and liquidity buffers are strong. Eurobond spreads have moved in line with regional averages and stand at levels similar to those at the end of 2011.

Without a resolution in Syria, economic performance is expected to remain weak, with high downside risks from a further weakening of public finances and delays in structural reforms. Growth is likely to be subdued at around 2 percent this year, reflecting domestic and regional uncertainties, and return only gradually to potential—a moderate 4 percent. Inflation could pick up with the planned salary increase. Financing needs would remain high, due to large fiscal and current account deficits.

Executive Board Assessment2

Directors noted that the conflict in Syria and domestic political uncertainty are adding stress to Lebanon’s already difficult economic situation. Growth is subdued, fiscal imbalances are widening, and public debt is rising. Directors emphasized that commitment to sound macroeconomic policies and structural reforms is essential to foster strong and sustainable growth and improve social conditions.

Directors commended the authorities’ efforts for receiving an unprecedented inflow of Syrian refugees. They recognized, however, that this is straining the economic and social structures and fueling already high unemployment and poverty. They agreed that Lebanon needs additional support from the international community to address the adverse impact of the refugee crisis.

Directors emphasized the importance of a credible and balanced fiscal adjustment strategy to prevent further fiscal deterioration, reestablish primary surpluses, and put public debt on a sustainable path. In this context, they urged caution in implementing the planned salary scale adjustment for public sector employees. Directors encouraged the authorities to undertake revenue-enhancing measures, such as broadening the tax base and strengthening collection, while ensuring that they are equitable and minimize distortions. They also underscored the need to reform the electricity sector by raising average tariffs toward costs recovery, while mitigating the impact on the poor and rebalancing freed-up resources toward capital and social spending. In addition, Directors considered that stronger fiscal management, including adhering to a budget calendar and pursuing a medium-term budget framework, would contribute to fiscal sustainability.

Directors agreed that monetary policy should remain geared towards maintaining adequate foreign exchange reserves and supporting the exchange rate peg as a signal of commitment to macrofinancial stability. They encouraged the authorities to scale back the government’s reliance on central bank financing as fiscal consolidation advances, and take measures to further strengthen the central bank’s balance sheet.

Directors noted that the banking sector has been resilient, but is facing an increasingly challenging environment. They emphasized the need to further strengthen capital buffers and improve loan classification and restructuring rules. Directors also encouraged further strengthening of the AML/CFT framework.

Directors emphasized the importance of undertaking structural reforms to unlock Lebanon’s growth potential and improve social conditions. They called for measures to lower the cost of doing business and improve services, starting from electricity provision. Additional efforts are also needed to enhance labor markets and support job creation, while strengthening social safety nets. Directors encouraged the authorities to take further steps to improve Lebanon’s statistical system, building on ongoing progress.

Lebanon--Selected Economic Indicators, 2011–15



2013 2014 2015

Output and prices

(Annual percentage change)

Real GDP (market prices)

2.0 2.5 1.5 1.8 2.5

GDP deflator

3.4 4.6 3.2 3.4 4.4

Consumer prices (period average)

7.2 5.9 3.2 3.1 4.0

Central government finances (cash basis)

(In percent of GDP)


22.8 22.3 20.9 20.9 21.9


28.7 31.0 30.1 32.0 33.7

Budget balance

-5.9 -8.6 -9.2 -11.1 -11.9

Primary balance

3.5 -0.2 -0.8 -2.4 -2.5

Total government debt

134 134 141 145 148

Monetary sector

(Annual percentage change, unless otherwise indicated)

Credit to the private sector

12.9 10.5 9.6 7.1 6.9

Broad money 1/

7.2 7.9 9.0 8.0 8.0

Interest rates (period average, in percent)


Three-year Treasury bill yield

6.0 6.5 6.6 6.7 7.0

Five-year Eurobond yield

5.2 5.0 5.4 5.7 6.1

External sector

(In percent of GDP, unless otherwise indicated)

Exports of goods (in US$, percentage change)

0.1 2.0 -1.0 4.7 5.2

Imports of goods (in US$, percentage change)

1.0 1.9 1.9 4.7 4.1

Current account balance

-12.8 -12.7 -12.8 -12.6 -12.2

Foreign direct investment

6.8 6.7 6.7 7.1 7.7

Total external debt 2/

169 168 174 177 177

Gross reserves (in billions of U.S. dollars) 3/

31.6 32.2 33.9 35.0 36.3

In percent of short-term external debt 4/

53.8 51.5 49.6 47.6 45.9

In percent of total banking system deposits

27.3 25.7 24.9 23.8 22.8

Exchange rate


Real effective exchange rate (annual average, percentage change)

-1.2 -0.1 4.0 -0.4 1.4

Sources: Lebanese authorities; and IMF staff estimates.
1/ Defined as currency in circulation plus resident and nonresident deposits.
2/ Includes nonresident deposits.
3/ Excluding gold and encumbered assets.
4/ Short-term debt on a remaining maturity basis, including short-term nonresident deposits.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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