## 1lbnea2019001 - Lebanon: Staff Report for the 2019 Article IV Consultation (selected excerpts)

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### Macroeconomic conditions and recent developments
- Inflation and prices:
  - Consumer price (period average): 2018 6.1; 2018 end-of-period consumer prices 4.0.
  - "Average inflation reached over 6 percent in 2018 partly due to high prices of imported fuel but slowed down in the second half of the year and into 2019."
- Growth:
  - Real GDP (market prices): 2018 Est. 0.3; 2019 Proj. 0.2.
- Fiscal outcomes and public debt:
  - Headline fiscal deficit: 11 percent of GDP in 2018 (up from 8.6 percent in 2017).
  - Primary balance (including grants): worsened from 0.5 to -1.4 percent of GDP in 2018.
  - Total government debt (percent of GDP): 2018 151; 2019 proj. 155; projected path to 185 by 2024.
  - Interest payments exceeded 9 percent of GDP in 2018.
- External sector and reserves:
  - Current account: 2018 -25.6 percent of GDP; 2019 proj. -26.4 percent of GDP.
  - Total external debt: 2018 191 percent of GDP; 2019 proj. 196 percent of GDP.
  - Gross reserves (in billions of U.S. dollars): 2018 36.5; 2019 proj. 31.7; 2020 proj. 30.2.
  - Reserves in months of next year imports of goods and services: 2018 12.9; 2019 10.9.
- Banking, deposits and BdL operations:
  - Deposit dollarization (level): 2018 70.7; 2019 proj. 70.0.
  - Commercial bank total assets (percent of GDP): 2018 443; 2019 proj. 443.
- Social and labor conditions:
  - Lebanon hosts approximately 1.5 million Syrian refugees (equivalent to a quarter of the population).
  - Unemployment estimated about 20 percent; youth unemployment about 30 percent.
  - Informality: in 2010 half of the labor force worked in the informal sector.

### Drivers of the 2018 deterioration
- Higher spending associated with a salary scale increase implemented in the second half of 2017 that also raised pensions and lump-sum early retirement payments.
- New hiring despite a hiring freeze increased personnel spending.
- Tax revenues in 2018 were lower than forecast; all tax revenue categories disappointed except taxes on income and profits.
- Tightening of deposit inflows and a widening trade deficit contributed to external financing pressures.

### Outlook, staff projections and risks
- Growth projections (real GDP, market prices): 2019 0.2; 2020 0.9; 2021 2.3; 2022 2.6; 2023 3.1; 2024 2.7.
- Inflation and prices:
  - GDP deflator: 2018 5.3; 2019 3.7; 2020 2.3; 2021–2024 2.1 annually.
  - Consumer prices (period average): 2018 6.1; 2019 3.1; 2020 2.6; 2021–2024 2.4 each year.
- Fiscal trajectory (percent of GDP):
  - Revenue (including grants): 2018 20.5; 2019 21.5; 2020 22.9.
  - Expenditure: 2018 31.5; 2019 31.2; 2020 34.4.
  - Overall balance (including grants): 2018 -11.0; 2019 -9.8; 2020 -11.5; deteriorating to -15.3 by 2024.
- External sector projections:
  - Balance of goods and services: 2018 -24.3 improving gradually to -16.7 by 2024.
  - Current account: 2018 -25.6 to -23.1 by 2024.
- Reserves and vulnerability indicators:
  - Gross reserves: 2018 36.5 to 2024 19.2.
  - Reserves in percent of short-term external debt: 2018 44.2 to 2024 15.9.
- Staff notes significant overvaluation of the real effective exchange rate (REER).

### BdL financial operations and banking-sector effects
- Operations and yields:
  - For each new USD deposit at the BdL, a bank would earn 6.5 percent interest in USD.
  - A bank could borrow a slightly larger amount in LBP at 2 percent and re-deposit it at the BdL at 10.5 percent for 10 years.
  - Effective combined yields on some 10-year placements were approximately 17 percent.
  - Starting July 2019, an additional operation offers a higher total return on 3-year deposits and allows banks to record future profits upfront if retained as capital.
  - Operations since fall 2017 attracted over USD 24 billion from banks through February 2019.
  - Since October 1999 BdL interventions keep the pound around LL 1,507.5 per USD 1 with a bid-ask spread of LL+/-6.5.
- Deposits and reserves:
  - Deposit growth net of interest accrual turned negative; total private deposits (including interest accrual) increased only by 3.4 percent in 2018 — the slowest pace since 2005.
  - Excluding accrued interest, deposit growth estimated slightly negative in 2018; deposit growth rates declined further in first six months of 2019.
  - Deposit dollarization rose to over 71 percent (noted in narrative).
  - BdL financed most of the 2018 fiscal deficit; banking system provided almost 12 percent of GDP of new financing to the government in 2018, with about ¾ coming directly from the BdL.
  - Gross international reserves dropped by over USD 7.5 billion to around USD 36.5 billion between end-February 2018 peak and May 2019.
- Monetary and credit conditions:
  - USD reference lending rate rose from around 7 percent in early 2018 to 9.7 percent in June 2019; translated to higher LBP lending rates.
  - BdL limits on LBP loan book discouraged new LBP lending; overnight interbank LBP rates temporarily exceeded 50 percent on several occasions.
  - Private sector credit fell by 2.5 percent in 2018 and a further 5 percent by May 2019.
  - Non-performing loans (NPLs) increased from 12.5 to 13.8 percent over 2018 (including two banks under liquidation).
  - Banks’ combined exposure to BdL and government rose to 69 percent of their total assets by May 2019 (more than 8 times Tier 1 capital), up from 62 percent at end-2017.
  - Banks earned an additional USD 2.7 billion in interest income from bank accounts in 2018 relative to 2017, producing stable net income of USD 2.2 billion in 2018.

### Market sentiment and sovereign financing conditions
- Eurobond yields increased; rating actions included:
  - Moody’s downgraded Lebanon’s sovereign rating to Caa1 in January 2019.
  - Standard and Poor’s and Fitch changed the outlook to negative on their B- rating.
- Spreads with other emerging markets temporarily rose to record heights in January 2019; subsequently dropped somewhat but remain volatile.

### Policy priorities and recommendations
- Fiscal consolidation:
  - Implement a comprehensive multi-year reform plan targeting a primary surplus of 4–5 percent of GDP over the medium term.
  - Fiscal measures should include raising the VAT rate, broadening the tax base and removing exemptions, increasing fuel excises, and eliminating electricity subsidies.
  - Conduct a thorough expenditure review to identify sustained savings opportunities.
- Structural reforms:
  - Prioritize electricity sector reform (Parliament approved electricity reform plan in April 2019) to reduce fiscal cost.
  - Remove impediments to and lower the cost of doing business.
  - Improve governance and reduce corruption.
  - Successful implementation of the Capital Investment Plan (CIP), concessionally financed, could mitigate contractionary effects of adjustment and raise growth potential.
- Financial sector and BdL policy:
  - Banque du Liban (BdL) should step back from quasi-fiscal operations, strengthen its balance sheet, and reduce support to the government gradually.
  - Require banks to build up their own capital buffers further; align risk weights on banks’ holdings of BdL foreign currency denominated instruments with Basel III.
  - Implement AML/CFT measures efficiently to mitigate risks and secure a positive MENA Financial Action Task Force assessment.
- Social protection and donor engagement:
  - Strengthen the social safety net to protect the most vulnerable during adjustment; allow for an additional 0.5 percentage points of GDP in social safety net (SSN) spending.
  - Accelerate disbursement of the USD 11 billion in pledged concessional financing committed at CEDRE (April 2018) for the CIP as reforms are implemented.

### Fiscal measures, yields and options (IMF staff estimates)
- Revenue measures included in the 2019 budget (annualized IMF staff estimates, percent of GDP):
  - Raising tax on interest income from 7 to 10 percent: 1.1
  - 3 percent tax on imports: 0.3
  - License plate taxes: 0.3
  - Increased customs collection from reduced smuggling: 0.2
  - Exceptional revaluation of assets: 0.1
  - General Security fees: 0.1
  - Other revenue measures: 0.4
- Principal expenditure reductions in the 2019 draft budget (compared with 2018 budget, percent of GDP):
  - Exceptional and emergency spending: 0.1
  - Equipment: 0.2
  - Buildings under construction: 0.3
  - Maintenance: 0.1
  - Total: 3.3
- Other potential measures recommended (percent of GDP):
  - Increase VAT from 11 percent to 15 percent: 1.6
  - Increase VAT from 11 percent to 20 percent: 3.6
  - Remove most VAT exemptions: 1.2
  - Increase total revenue from property taxes by 50 percent: 0.6
  - Increase excise on gasoline by LL5,000 per 20 liters: 0.8
  - Fully eliminate subsidies to EdL: 0.7 (expenditure)
  - Scaled-up targeted transfers to the poor and vulnerable: -0.5 (expenditure net negative number denotes increased spending)

### Electricity sector reform — plan and projected savings
- Current problems:
  - Installed capacity below demand; losses (technical, non-technical, non-collection) equal 43 percent of production (only 57 percent transmitted, billed, collected); tariffs subsidized, burdening government budget.
- Plan components and timing:
  - Reduce losses from 43 to 20 percent by 2025 via DSP/grid improvements and smart meters.
  - Increase capacity to reach zero outage by end-2020 using temporary solutions over 2020–2022 and permanent plants producing from 2023.
  - Use gas as input starting in 2022 (via LNG imports, three FSRUs and underwater pipeline).
  - Increase tariffs: staff suggests increasing average tariffs from USD 9.6 to USD 14.4 cents/kWh, with USD 16.2 cents/kWh possibly necessary to close the primary deficit accounting for capital expenditures.
- Projected savings (percent of GDP) — Electricity Plan total savings 2019–2025:
  - 2019 0.0; 2020 0.1; 2021 0.9; 2022 1.6; 2023 1.7; 2024 1.9; 2025 1.9
- Memorandum items — EdL primary deficit (percent of GDP):
  - Under unchanged policies: 2019 2.7; 2020 2.5; 2021 2.4; 2022 2.4; 2023 2.4; 2024 2.3; 2025 2.3
  - Under the plan: 2019 2.7; 2020 2.4; 2021 1.5; 2022 0.8; 2023 0.6; 2024 0.5; 2025 0.4

### Selected economic indicators (exact values from staff tables)
- Real GDP (market prices): 2018 Est. 0.3; 2019 Proj. 0.2; 2020 Proj. 0.9; 2021 Proj. 2.3; 2022 Proj. 2.6; 2023 Proj. 3.1; 2024 Proj. 2.7.
- Consumer price (period average): 2018 6.1; 2019 3.1; 2020 2.6; 2021–2024 2.4 each year.
- Overall balance (including grants, percent of GDP): 2018 -11.0; 2019 -9.8; 2020 -11.5; 2021 -12.1; 2022 -12.5; 2023 -14.8; 2024 -15.3.
- Total government debt (percent of GDP): 2018 151; 2019 155; 2020 162; 2021 167; 2022 172; 2023 178; 2024 185.
- Current account (percent of GDP): 2018 -25.6; 2019 -26.4; 2020 -26.3; 2021 -25.6; 2022 -24.5; 2023 -23.9; 2024 -23.1.
- Gross reserves (in billions of U.S. dollars): 2018 36.5; 2019 31.7; 2020 30.2; 2021 29.1; 2022 27.0; 2023 23.4; 2024 19.2.
- Deposit dollarization (level): 2018 70.7; 2019 70.0; 2020 68.0; 2021 68.0; 2022 69.0; 2023 70.0; 2024 70.0.
- Three-month treasury bill yield (period average, in percent): 2018 9.0; 2019 10.2; 2020 9.3; 2021 9.1; 2022 9.7; 2023 10.2; 2024 10.5.
- Nominal GDP (in billions of U.S. dollars): 2018 56.4; 2019 58.6; 2020 60.5; 2021 63.1; 2022 66.1; 2023 69.6; 2024 73.0.

### Debt sustainability, risks and stress-test findings
- Public debt dynamics:
  - Public debt already above 150 percent of GDP; gross financing needs over 30 percent of GDP.
  - Under the baseline debt and gross financing needs projected to reach around 180 percent and 37 percent of GDP, respectively, by 2024.
- Stress-test scenario outcomes (selected):
  - Growth shock: a one standard deviation decline in growth in 2020 and 2021 would raise debt-to-GDP to almost 200 percent and financing needs would exceed 40 percent of GDP in 2024.
  - Real exchange rate shock: a 50-percent real exchange rate shock would affect debt-to-GDP similarly to a growth shock.
  - Interest rate shock: financing needs would reach almost 40 percent of GDP in 2024.
  - Macro-fiscal shock (growth, interest rate, and primary balance shocks simultaneously): debt-to-GDP would exceed 250 percent by 2024 and financing needs close to 50 percent of GDP.
  - Contingent liability shock (10 percent of financial sector assets): would raise debt-to-GDP to 218 and financing needs-to-GDP to 43 percent by 2024 (no feedback on growth and interest rates assumed).
- External debt sustainability:
  - "Lebanon’s external debt is unsustainable." External debt estimated about 190 percent of GDP in 2018.
  - Gross external financing need stood at 174 percent of GDP in 2018.
  - 77 percent of the external debt is non-resident deposits, most with maturities less than one year.
  - A real depreciation shock of 30 percent would increase external debt to over 300 percent of GDP in scenario analysis.

### Data and statistical issues
- Data provision shortcomings significantly hamper surveillance, particularly national accounts and external sector statistics.
- Only annual national accounts data are compiled and disseminated; 2018 national accounts expected to be published in the fourth quarter of 2019; work ongoing to start publishing quarterly national accounts.
- Large net errors and omissions and lack of comprehensive reporting (including arrears and some public enterprise and BdL liabilities) reduce accuracy of external and fiscal indicators.
- Gross international reserves (excluding gold) — date of latest observation 05/31/19; GDP latest observation 12/31/17.

### Implementation challenge and timeframe
- "The new government has a narrow window to reverse the current unsustainable trends."
- Restoring fiscal and external sustainability requires sustained multi-year efforts:
  - Achieving and sustaining primary surpluses of 4–5 percent of GDP for several years to bend down the public debt-to-GDP ratio.
  - Decreasing debt ratio to 70 percent (DSA benchmark for emerging markets) would require maintaining such surpluses for about 20 years.
- Policy sequencing and credibility, improvement in governance and anti-corruption measures, and donor concessional financing (CEDRE) are critical to success.

*Source: IMF — Lebanon: Staff Report for the 2019 Article IV Consultation (selected excerpts provided in content unit 1lbnea2019001).*

### 2019. Inflation spiked to 6 percent in 2018, up from 4.5 percent in 2017, partly due to high

### 1lbnea2019001 - 2019. Inflation spiked to 6 percent in 2018, up from 4.5 percent in 2017, partly due to high

### Key findings on macroeconomic conditions
- Inflation: "Average inflation reached over 6 percent in 2018 partly due to high prices of imported fuel but slowed down in the second half of the year and into 2019." (Consumer price (period average) 6.1 for 2018; end-of-period consumer prices 4.0 for 2018.)
- Growth: Real GDP (market prices) growth was 0.3 for 2018 and is projected 0.2 for 2019.
- Fiscal deficits and public debt:
  - Headline fiscal deficit reached 11 percent of GDP in 2018, up from 8.6 percent of GDP in 2017.
  - Primary balance (including grants) worsened from 0.5 to -1.4 percent of GDP in 2018.
  - Total government debt was 151 (percent of GDP) in 2018 and projected 155 in 2019; projected path to 185 by 2024.
  - Interest payments exceeded 9 percent of GDP in 2018.
- External sector and twin deficits:
  - Current account over 25 percent of GDP in 2018 (table: Current account -25.6 for 2018, -26.4 for 2019 proj).
  - External debt: total external debt 191 (percent of GDP) in 2018 and projected 196 in 2019.
  - Gross reserves (in billions of U.S. dollars): 36.5 in 2018, projected 31.7 in 2019 and 30.2 in 2020.
  - In months of next year imports of goods and services: 12.9 for 2018, 10.9 for 2019.
- Banking, deposits and BdL operations:
  - Deposit dollarization (level) 70.7 for 2018 and projected 70.0 for 2019.
  - BdL continued financial operations to facilitate banks offering high returns on USD deposits to attract USD deposits and maintain foreign reserves; deposit inflows slowed in 2018.
  - Commercial bank total assets (percent of GDP) 443 for 2018 and 443 projected for 2019.
- Social and labor conditions:
  - Lebanon hosts approximately 1.5 million Syrian refugees (equivalent to a quarter of the population).
  - Unemployment estimated about 20 percent with youth unemployment about 30 percent.
  - Informality: in 2010 half of the labor force worked in the informal sector.

### Drivers of the 2018 deterioration
- Higher spending associated with a salary scale increase implemented in the second half of 2017 that also raised pensions and lump-sum early retirement payments.
- New hiring despite a hiring freeze increased personnel spending.
- Tax revenues in 2018 were lower than forecast; all tax revenue categories disappointed except taxes on income and profits.
- Tightening of deposit inflows and a widening trade deficit contributed to external financing pressures.

### Outlook and risks (from staff projections and assessment)
- Growth projections: Real GDP projected 0.2 (2019), 0.9 (2020), 2.3 (2021), 2.6 (2022), 3.1 (2023), 2.7 (2024).
- Inflation and prices: GDP deflator 5.3 (2018), 3.7 (2019), then 2.3 (2020) and 2.1 annually 2021–2024; Consumer prices (period average) 6.1 (2018), 3.1 (2019), 2.6 (2020), 2.4 (2021–2024).
- Fiscal trajectory: Revenue (including grants) 20.5 (2018) rising to 21.5 (2019) and 22.9 (2020); Expenditure 31.5 (2018) 31.2 (2019) 34.4 (2020); Overall balance (including grants) -11.0 (2018) -9.8 (2019) -11.5 (2020) and deteriorating thereafter through -15.3 (2024).
- External sector projections: Balance of goods and services -24.3 (2018) improving gradually to -16.7 (2024); Current account -25.6 (2018) to -23.1 (2024).
- Reserves and vulnerability indicators decline over projection horizon (Gross reserves 36.5 in 2018 to 19.2 in 2024; In percent of short-term external debt 44.2 in 2018 to 15.9 in 2024).
- Staff notes significant overvaluation of the real effective exchange rate (REER) (see Annex II referenced).

### Policy priorities and recommendations
- Fiscal consolidation:
  - Implement a comprehensive multi-year reform plan targeting a primary surplus of 4–5 percent of GDP over the medium term.
  - Fiscal measures should include raising the VAT rate, broadening the tax base and removing exemptions, increasing fuel excises, and eliminating electricity subsidies.
  - Conduct a thorough expenditure review to identify sustained savings opportunities.
- Structural reforms:
  - Prioritize electricity sector reform (Parliament approved electricity reform plan in April 2019) to reduce fiscal cost.
  - Remove impediments to and lower the cost of doing business.
  - Improve governance and reduce corruption to address vulnerabilities.
  - Successful implementation of the Capital Investment Plan (CIP), concessionally financed, could mitigate contractionary effects of adjustment and raise growth potential.
- Financial sector and BdL policy:
  - Banque du Liban (BdL) should step back from quasi-fiscal operations, strengthen its balance sheet, and reduce support to the government gradually.
  - Require banks to build up their own capital buffers further.
  - Implement AML/CFT measures efficiently to mitigate risks and secure a positive MENA Financial Action Task Force assessment.
- Social protection and donor engagement:
  - Strengthen the social safety net to protect the most vulnerable during adjustment.
  - Accelerate disbursement of the USD 11 billion in pledged concessional financing committed at CEDRE (April 2018) for the CIP as reforms are implemented.

### Selected economic indicators (exact values from staff table)
- Real GDP (market prices): 2018 Est. 0.3; 2019 Proj. 0.2; 2020 Proj. 0.9; 2021 Proj. 2.3; 2022 Proj. 2.6; 2023 Proj. 3.1; 2024 Proj. 2.7.
- Consumer price (period average): 2018 6.1; 2019 3.1; 2020 2.6; 2021–2024 2.4 each year.
- Overall balance (including grants, percent of GDP): 2018 -11.0; 2019 -9.8; 2020 -11.5; 2021 -12.1; 2022 -12.5; 2023 -14.8; 2024 -15.3.
- Total government debt (percent of GDP): 2018 151; 2019 155; 2020 162; 2021 167; 2022 172; 2023 178; 2024 185.
- Current account (percent of GDP): 2018 -25.6; 2019 -26.4; 2020 -26.3; 2021 -25.6; 2022 -24.5; 2023 -23.9; 2024 -23.1.
- Gross reserves (in billions of U.S. dollars): 2018 36.5; 2019 31.7; 2020 30.2; 2021 29.1; 2022 27.0; 2023 23.4; 2024 19.2.
- Deposit dollarization (level): 2018 70.7; 2019 70.0; 2020 68.0; 2021 68.0; 2022 69.0; 2023 70.0; 2024 70.0.
- Three-month treasury bill yield (period average, in percent): 2018 9.0; 2019 10.2; 2020 9.3; 2021 9.1; 2022 9.7; 2023 10.2; 2024 10.5.
- Nominal GDP (in billions of U.S. dollars): 2018 56.4; 2019 58.6; 2020 60.5; 2021 63.1; 2022 66.1; 2023 69.6; 2024 73.0.

*International Monetary Fund — Lebanon: Staff Report for the 2019 Article IV Consultation (August 21, 2019).*

### 10.      BdL’s efforts to secure external financing have come under strain as deposit inflows

### 10.      BdL’s efforts to secure external financing have come under strain as deposit inflows have declined and the BdL’s gross foreign exchange reserves have fallen

### BdL financial operations and their impact on the financial sector
- BdL has continued unconventional financial operations to attract inflows and support the peg.
- Operations provided high marginal returns on new USD deposits at the BdL:
  - For each new USD deposit at the BdL, a bank would earn a 6.5 percent interest in USD.
  - In addition, a bank could borrow a slightly larger amount in LBP at 2 percent and re-deposit it at the BdL at 10.5 percent for 10 years.
- Effective combined yields on some 10-year placements were approximately 17 percent.
- Starting in July 2019, an additional operation offers a higher total return on 3-year deposits and allows banks to record future profits upfront if retained as capital.
- Volume of operations: operations in place since fall of 2017 attracted over USD 24 billion from banks through February 2019 in sales to or deposits at the BdL.
- BdL interventions: de jure arrangement is free floating; de facto classified as stabilized. Since October 1999, BdL has been intervening to keep the pound around a mid point parity of LL 1,507.5 per USD 1, with a bid-ask spread of LL+/-6.5.

### Deposits, reserves, and bank-sector effects
- Deposit inflows have decreased; deposit growth net of interest accrual turned negative.
- Total private deposits (including interest accrual) increased only by 3.4 percent in 2018 — the slowest pace since 2005.
- Excluding accrued interest, deposit growth is estimated to have been slightly negative in 2018.
- Deposit growth rates declined further in the first six months of 2019.
- Deposit dollarization rose to over 71 percent.
- BdL financed most of the 2018 fiscal deficit given limited interest by banks and the private sector:
  - Banking system provided almost 12 percent of GDP of new financing to the government in 2018, with about ¾ of the financing coming directly from the BdL.
- Gross international reserves dropped by over USD 7.5 billion to around USD 36.5 billion between their previous peak at end-February 2018 and May 2019, declining below 90 percent of the ARA metric.
- BdL accumulated foreign currency liabilities through its financial operations.

### Monetary conditions, credit, and bank balance-sheet exposures
- Financial operations contributed to very tight monetary conditions:
  - USD reference lending rate rose from around 7 percent in early 2018 to 9.7 percent in June 2019.
  - These increases translated into higher LBP lending rates.
- BdL set limits on size of LBP loan book relative to total bank lending, discouraging new LBP lending and tightening LBP liquidity.
- Overnight interbank LBP rates temporarily exceeded 50 percent on several occasions due to lack of LBP liquidity at some banks.
- Private sector credit:
  - Fell by 2.5 percent in 2018.
  - Fell a further 5 percent by May 2019.
- Non-performing loans (NPLs) increased from 12.5 to 13.8 percent over the course of 2018.
  - Construction loans NPLs rose from about 15 to 19 percent.
  - Note: including two banks under liquidation. Excluding these banks, NPLs increased from 9.2 to 10.3 percent.
- Banks’ combined exposure to the BdL and government rose to 69 percent of their total assets by May 2019 (more than 8 times Tier 1 capital), up from 62 percent at end-2017.
- Banks earned an additional USD 2.7 billion in income from interest on their bank accounts (most at the BdL) in 2018 relative to 2017, producing stable net income of USD 2.2 billion in 2018.

### Market sentiment and sovereign financing conditions
- Reflecting weakening fundamentals and sentiment:
  - Eurobond yields increased.
  - Lebanon was subject to sovereign rating actions:
    - Moody’s downgraded Lebanon’s sovereign rating to Caa1 in January 2019.
    - Standard and Poor’s and Fitch changed the outlook to negative on their B- rating.
  - Spreads with other emerging markets temporarily rose to record heights in January 2019; subsequently dropped somewhat but remain volatile and above November 2017 levels.

### Outlook and risks
- Economic outlook depends critically on policy actions and reforms in the period ahead.
- Government fiscal adjustment efforts in 2019–20 and planned structural reforms aim to shore up confidence, give breathing space, and accelerate concessional financing disbursements for CIP committed at CEDRE.
- Higher public investment spending can stimulate near-term growth and help gradual recovery.
- However:
  - Fiscal adjustment in the budget will not suffice to bend down the public debt-to-GDP ratio; public debt will remain unsustainable under current plans.
  - Structural reforms proposed thus far will not substantially reduce the current account deficit or lift growth sufficiently to reduce unemployment; many benefits are temporary in medium-term projections.
  - Growth begins decreasing by 2024 as initial boosts from the CIP and fiscal stimulus fade; deposit growth declines and interest rates increase by 2023 as fiscal outcomes deteriorate and confidence declines.
- Possible upside events over the medium-term:
  - Major reconstruction effort and possible gradual return of refugees if Syria situation is resolved.
  - Potential discovery of a natural gas field in Lebanon’s territorial waters (exploration just started).
- Downside risks are tilted to the short run and large vulnerabilities remain:
  - Domestic risks: failure to achieve fiscal targets and advance reforms, political infighting, social tensions.
  - External risks: intensification of security risks in parts of the Middle East; weaker-than-expected global growth (Europe); further economic sanctions affecting financial services.
- Risk Assessment Matrix highlights several high-likelihood, high-impact risks and policy mitigations, including:
  - Maintain a high level of reserves, implement sustainable fiscal policy adjustment, pass key legislation, strengthen banks’ capital and liquidity buffers.
  - Continue progress on AML/CFT and international tax compliance to mitigate correspondent-banking related risks.

### Policy priorities and fiscal consolidation
- Decisive implementation of a strong reform program is critical to maintain confidence.
- Rebalancing the economy under the exchange rate peg requires:
  - Steadfast implementation of a large and credible fiscal adjustment.
  - Ambitious structural reforms to reduce imbalances, improve business climate and governance, and reduce corruption.
- Regaining fiscal and external sustainability requires a consistent, multiyear effort:
  - Bending down public debt-to-GDP ratio will require achieving primary surpluses of 4–5 percent of GDP and sustaining them for several years.
  - Decreasing debt ratio to 70 percent (DSA benchmark for emerging markets) requires maintaining such surpluses for about 20 years.
  - This fiscal effort coupled with structural reforms will gradually improve the current account and allow reduction of reliance on deposit inflows.
  - Bringing the current account deficit down further to its norm would require upside events (e.g., gas development, resolution of Syria conflict) or further structural reforms with equivalent impact.

### 2019 budget and fiscal measures
- 2019 budget approved by parliament in July targets a deficit of 7.6 percent of GDP, aiming to reverse prior slippages and catch up with CEDRE commitments.
- To deliver a 3½ percent of GDP adjustment in half a year, temporary measures (three years) include:
  - Increasing the tax on interest income from 7 to 10 percent.
  - A 3 percent tax on imported goods subject to VAT (excluding fuel, industrial equipment and raw materials).
  - Freeze of public sector hiring and early retirement.
  - Other measures: tax on private electricity generators, license plate taxes, increased General Security fees.
- IMF staff project the budget measures will reduce the cash-basis fiscal deficit to around 9¾ percent of GDP — wider than authorities’ projection due to more conservative assumptions on implementation speed, underlying revenue trends, cash-basis constraints, and nominal GDP level.
- Uncertainty remains about stock of arrears and outstanding payment orders and the process for their clearance, which will affect the cash deficit for 2019.
- The projection benefits from temporary savings on interest payments due to the zero-interest BdL bridge loan covering a delay in Eurobond issuance (not included in debt figures).

### Electricity sector reform and impacts
- New plan to eliminate large subsidies to EdL aims to:
  - Reduce non-technical and technical losses.
  - Switch fuel to natural gas to reduce production costs.
  - Increase EdL’s capacity and subsequently raise tariffs to eliminate electricity subsidies of about 2½ percent of GDP by 2023.
- So far in 2019 authorities increased electricity bill collections by about 0.2 percent of GDP and completed high-voltage lines in Mansourieh to reduce technical losses by 1 percent.
- IMF staff (with World Bank energy expert discussions) estimate full implementation could achieve 1.9 percent of GDP savings by 2025.
- Authorities’ current electricity plan could yield a further 2.7 percentage points of GDP in savings over the medium term.

### Key recommendations
- Announce a medium-term fiscal plan based on credible and permanent measures to yield a substantial primary fiscal surplus over the medium-term.
- IMF staff project a primary surplus of around 4–5 percent of GDP is needed to noticeably reduce the debt-to-GDP ratio over the medium to long run.
- Identify and agree upfront on measures to increase credibility and boost confidence; on current plans about 1 percentage point of GDP of the 2019 revenue measures will be permanent.
- Authorities need to identify and implement additional permanent fiscal measures to achieve the necessary primary position.
- Ensure measures are sufficient to achieve the primary balance target without resorting to further build-up of delayed payments and arrears and allow for their expeditious clearance.

*Source: IMF country report text provided in content unit 1lbnea2019001.*

### 23.      Revenue measures should include raising the value-added tax (VAT) and increasing

### 1lbnea2019001 - 23.      Revenue measures should include raising the value-added tax (VAT) and increasing

### Revenue measures and tax administration
- Primary recommendation: raise the value-added tax (VAT) and increase fuel excises, and strengthen efforts to increase tax compliance.
- VAT currently at 11 percent is identified as relatively low.
- Broadening the VAT base by removing exemptions on items such as foreign-registered yachts, diesel used for electricity generation, and road vehicles could raise significant revenue.
- The temporary increase of interest income tax in the 2019 budget (from 7 to 10 percent) could be made permanent.
- Decisive improvement in tax administration is required to deliver meaningful additional revenue and reduce tax evasion; better compliance would also realize the potential of VAT and other tax increases.
- Recent BdL decision requiring businesses to use Ministry of Finance-certified financial statements to obtain bank loans is noted as encouraging for enforcement.
- Successful improved collection of existing taxes may reduce the necessary future increase in tax rates.

### Expenditure savings: electricity sector and tariffs
- Eliminating electricity subsidies is the most significant potential expenditure saving.
- Authorities must ensure effective implementation of the current electricity plan, including a tariff increase sufficient to close EdL’s deficit under robust and realistic assumptions about reductions in technical and non-technical losses.
- It is crucial to start increasing tariffs as soon as possible to generate fiscal savings, possibly targeting the largest consumers first.
- The authorities need to overcome resistance from vested interests to implement electricity reforms.

### Public expenditure review, wage bill, and social protection
- Authorities should conduct a thorough public expenditure review to identify potential savings, building on ongoing work on the wage bill and pensions.
- Wage bill and pensions currently absorb a disproportionate share of revenue.
- Savings in current spending could create space to increase education spending, which is relatively low and may need to rise over the medium run to support higher growth.
- Fiscal tightening should be complemented with scaled-up targeted transfers to the poor and vulnerable:
  - Allow for an additional 0.5 percentage points of GDP in social safety net (SSN) spending.
  - Most of the additional SSN could be channeled through a scaled-up National Poverty Targeting Program.

### Authorities’ views on fiscal measures (summary)
- Authorities confident 2019 budget measures would deliver their target deficit and yield revenue/savings soon after approval.
- Emphasized expenditure restraint already implemented in early 2019 and commitment to approve 2020 budget during 2019.
- Intend to further reduce the overall deficit below the 2019 outcome via full-year impact of 2019 measures, electricity plan effects, and further fiscal reforms.
- Any further adjustment should be gradual to avoid threatening growth and should focus on governance and wasteful spending.

### Yield of Budget and Other Potential Fiscal Adjustment Measures (percent of GDP, full-year effect)
- Revenue measures included in the 2019 budget (annualized IMF staff estimates):  
  - Raising tax on interest income from 7 to 10 percent 2/ : 1.1  
  - 3 percent tax on imports 2/ : 0.3  
  - License plate taxes : 0.3  
  - Increased customs collection from reduced smuggling : 0.2  
  - Exceptional revaluation of assets 3/ : 0.1  
  - General Security fees : 0.1  
  - Other revenue measures : 0.4  
- Principal expenditure reductions in the 2019 draft budget (compared with the 2018 budget and based on 2019 GDP):  
  - Exceptional and emergency spending : 0.1  
  - Equipment : 0.2  
  - Buildings under construction : 0.3  
  - Maintenance : 0.1  
  - Total : 3.3  
- Medium-term savings from implementation of the authorities' electricity plan : 2.0

- Other potential measures recommended by IMF staff (percent of GDP):  
  Revenue:  
  - Increase VAT from 11 percent to 15 percent : 1.6  
  - Increase VAT from 11 percent to 20 percent : 3.6  
  - Remove most of VAT exemptions : 1.2  
  - Increase total revenue from property taxes by 50 percent : 0.6  
  - Increase the excise on gasoline by LL5,000 per 20 liters : 0.8  
  Expenditure:  
  - Fully eliminate subsidies to EdL 5/ : 0.7  
  - Scaled-up targeted transfers to the poor and vulnerable : -0.5

- Notes from table footnotes:  
  - 4/ Compared with the 2018 budget and based on 2019 GDP. Staff does not have details of expenditure measures in the 2019 budget approved by Parliament.  
  - 1/ Annualized IMF staff estimates, actual yields will depend on the number of months of collection.  
  - 3/ One-off revenues, with reduction in revenues in subsequent years due to claims for depreciation.  
  - 5/ Estimated savings under 2019 oil price assumptions.  
  - 2/ To be cancelled after three years.

### Growth- and export-enhancing structural reforms (key recommendations)
- Approve and implement legislation of key reforms in the CEDRE vision to reduce costs of doing business: accelerate implementation of the code of commerce and law on judicial intermediation; approve new customs law, regulation on closing a business, bankruptcy law, insolvency practitioner law, and law on secured lending; resolve regulatory obstacles for industrial zones.
- Implement recommendations of the Public Investment Management Assessment (PIMA) before executing most of the CIP, including incorporating CDR spending in the budget and passing and implementing a public procurement law.
- Improve legal and institutional arrangements for managing fiscal implications of PPPs, per IMF technical assistance.
- Advance the electricity sector plan to achieve 24/7 supply, reducing constraints on businesses and yielding positive effects on income distribution, balance of payments, environment, and fiscal deficit.
- Urgently reduce corruption: enact pending anti-corruption legislation (including illicit enrichment and asset declaration), finalize and implement a prioritized anti-corruption strategy focusing on higher-risk areas, operationalize a strong and independent anti-corruption commission, and strengthen governance across state functions.

### Box 2 — The 2019 Electricity Plan (summary and projected savings)
- Key problems: installed capacity below demand; losses (technical, non-technical, non-collection) equal 43 percent of production (only 57 percent transmitted, billed, collected); electricity tariffs subsidized, burdening government budget.
- Plan objectives and notes:  
  - Reduce losses: two projects—improve DSP framework/distribution grid (technical losses) and install smart meters (non-technical losses). Staff estimates reduction of losses to 20 percent of production in the medium-term.  
  - Increase capacity: temporary solution to reach 24/7 supply in 2020 in parallel with permanent solution; capacity increase could start by end 2020.  
  - Reduce production costs: use gas input via LNG imports, build three FSRUs and underwater pipeline; gas could be used starting in 2022.  
  - Increase tariffs: raise average tariffs from USD 9.6 to USD 14.4 cents/kWh after increasing capacity and adopt automated fuel indexation; staff suggests USD 16.2 cents/kWh may be necessary to close the primary deficit accounting for capital expenditures and realistic timelines.

- Projected savings (In percent of GDP) — components and total (years 2019–2025):
  - 1. Reduction of losses from 43 to 20 percent by 2025 1/ : 0.0, 0.1, 0.2, 0.3, 0.4, 0.5, 0.5 (2019–2025)
  - 2. Increase capacity to achieve zero outage by end 2020 2/ : 0.0, -0.1, -0.8, -0.8, -0.9, -0.9, -0.8 (2019–2025)
  - 3. Use of gas as input starting in 2022 3/ : 0.0, 0.0, 0.0, 0.7, 0.7, 0.7, 0.7 (2019–2025)
  - 4. Increase tariff from 9.6 to 14.4 cents/kWh in 2021 : 0.0, 0.0, 0.7, 0.7, 0.7, 0.7, 0.6 (2019–2025)
  - Electricity Plan - Total Savings 4/ : 0.0, 0.1, 0.9, 1.6, 1.7, 1.9, 1.9 (2019–2025)

- Memorandum items (EdL primary deficit, percent of GDP):  
  - EdL's primary deficit under unchanged policies : 2.7, 2.5, 2.4, 2.4, 2.4, 2.3, 2.3 (2019–2025)  
  - EdL's primary deficit under the plan : 2.7, 2.4, 1.5, 0.8, 0.6, 0.5, 0.4 (2019–2025)

- Notes from Box 2 footnotes:  
  - 1/ Non-technical losses are reduced from 21 to 10 percent, technical losses from 17 to 10 percent and non-collection losses from 5 to zero percent. These assumptions follow cross-country experience and represent a lower reduction than in the authorities' plan in the medium-term.  
  - 2/ Capacity is expected to be increased gradually to reach zero outage by end-2020. It is increased through a temporary solution (barges) over 2020-2022, while the permanent solution (new power plants) is expected to start producing electricity in 2023.  
  - 3/ Gas is used as an input to power plants in 2022.  
  - 4/ Savings of the four components of the plan do not sum to total savings because of significant interactions between the components.

### Monetary policy and financial stability (key recommendations)
- The BdL has been central to financial stability and protecting the peg, but this has intensified sovereign-bank linkages and weighed down BdL’s balance sheet while protecting banks’ profitability.
- Recommended actions for BdL: gradually step back from quasi-fiscal operations, strengthen its balance sheet, phase out government bond purchases and other financing facilities (including zero-interest overdraft facility and bridge financing) as fiscal adjustment reduces financing needs and yields decline.
- Support measures for banking sector resilience: continue building banks’ capital buffers; align risk weights on banks’ holdings of BdL foreign currency denominated instruments with Basel III (current risk weight is 50 percent, below the 100 percent per Basel Capital Accord) to raise effective capital requirements.
- Increase deposit insurance coverage levels and provide for insured depositors’ preference in creditor hierarchy rules for resolution and liquidation of failed banks.
- Continue effective implementation of AML/CFT measures to mitigate ML/TF risks and ensure a positive MENAFATF AML/CFT assessment; failure could adversely affect investment and correspondent banking relationships.
- Review tools for coping with financial distress in systemic institutions; BCC should identify critical functions to preserve and develop bank-specific resolution plans.

### Staff appraisal summary
- Lebanon shows resilience but vulnerabilities have grown: by 2018 fiscal deficit rose over 10 percent of GDP for the first time in a decade, current account deficit around 25 percent of GDP, external position substantially weaker than consistent with fundamentals, and bank deposit inflows that financed deficits have largely dried up.
- Economic growth has virtually stopped and unemployment is high; external environment and Syria conflict have exacerbated challenges.

*Source: IMF staff calculations and analysis contained in the provided PDF content.*

### 41.      The new government has a narrow window to reverse the current unsustainable

### The new government has a narrow window to reverse the current unsustainable trends.

### Fiscal adjustment: assessment and recommendations
- The authorities have passed the 2019 budget with "ambitious fiscal adjustment goals," but staff judges the budget is "based on optimistic projections" and that "its effects will be more limited."
- A multi-year fiscal adjustment is required to restore sustainability:
  - Lebanon needs a credible strategy to improve its primary balances to "4–5 percent of GDP in the next 2–3 years."
  - The size of adjustment implies both substantial revenue and expenditure measures.
  - Given Lebanon’s institutional capacity, policy measures will likely include "a significant rise in the VAT rate and removal of exemptions as well as higher fuel excises."
  - Authorities must "implement tangible measures to improve tax collection across the economy."
  - The electricity plan must not be delayed and must include "a price increase sufficient to eliminate subsidies to the EdL."
  - Complementary actions: "a thorough expenditure review to achieve sustained fiscal savings."
  - Mitigating measures: "A stronger safety net protecting the most vulnerable and the government’s CIP, financed on concessional terms, can help mitigate the contractionary effect of the adjustment on growth."

### Structural reforms to revive growth and enable external adjustment
- The authorities have initiated reforms: "implementation thus far of the electricity sector plan and legislative progress on the government’s CEDRE vision reforms are a good start."
- However, deeper structural reforms are required to remove growth bottlenecks and allow external adjustment under the currency peg.
- A high-priority structural objective: "the authorities must tackle the pervasive issue of corruption with great resolve."

### Banque du Liban (BdL) and financial sector priorities
- BdL "has long protected the country’s economy and maintained financial stability but now it must also start rebuilding its own financial strength."
- Past support has weakened BdL’s balance sheet and intensified sovereign-bank links.
- Policy guidance:
  - BdL should "limit its support to the government" over time and place "more importance on the strength of financial system, both in terms of its balance sheet and requiring commercial banks to build up their own buffers further."
  - Continue effective implementation of AML/CFT measures "to mitigate ML/TF risks and to ensure a positive MENAFATF AML/CFT assessment."
- Procedural note: "Staff propose that the next Article IV consultation take place on the standard 12-month cycle."

### Key numerical findings and projections (selected)
- Primary balance target: improve to "4–5 percent of GDP in the next 2–3 years."
- Central government overall balance (including grants), percent of GDP (Table 2a):
  - Overall balance: "-11.0 -9.8 -11.5 -12.1 -12.5 -14.8 -15.3" (series as presented).
  - Primary balance (including grants): "-1.4 -0.3 0.3 0.2 0.5 -1.3 -1.2" (series as presented).
  - Total government debt (percent of GDP): "151 155 162 167 172 178 185" (series as presented).
- Output and prices (Table 1):
  - Real GDP (market prices): "0.3 0.2 0.9 2.3 2.6 3.1 2.7" (series as presented).
  - GDP deflator: "5.3 3.7 2.3 2.1 2.1 2.1 2.1" (series as presented).
  - Consumer prices (end-of-period): "4.0 3.4 2.4 2.4 2.4 2.4 2.4" (series as presented).
- External sector (Table 3):
  - Current account balance (in percent of GDP): "-25.6 -26.4 -26.3 -25.6 -24.5 -23.9 -23.1" (series as presented).
  - Gross reserves (excl. gold, year-end, in millions of US$): "36,467 31,711 30,164 29,070 27,045 23,404 19,241" (series as presented).
  - Exports, f.o.b. (in millions of US$): "3,847 4,228 4,549 4,847 5,210 5,559 5,954" (series as presented).
  - Imports, f.o.b. (in millions of US$): "-18,993 -18,939 -19,695 -20,140 -20,332 -20,988 -21,546" (series as presented).
- Monetary and financial indicators (selected, Table 4 and Table 5):
  - Broad money (M5), in trillions of Lebanese pounds: "271.2 282.0 298.9 313.9 326.4 336.2 346.3" (series as presented).
  - Gross international reserves (excluding gold, billions of USD): "36.5 31.7 30.2 29.1 27.0 23.4 19.2" (series as presented).
  - Banking-sector regulatory capital to risk-weighted assets*: "15.1 16.6 17.1 16.6" (2015–2018, end of period, as presented).
  - Nonperforming loans to gross loans (end of period): "10.8 11.1 12.5 13.8" (2015–2018, as presented).

### Implementation challenge and timeframe
- The report stresses that "reducing the current imbalances and rebalancing the Lebanese economy will require further simultaneous actions on several fronts sustained over many years."
- Returning to fiscal and external sustainability "will need to be sustained for many years in order to return to fiscal and external sustainability and will require determined implementation and broad political and social support."

*Source: IMF staff report excerpts (Lebanon).*

### 3.      The 2018 consultation stressed the importance of structural reforms—particularly

### 1lbnea2019001 - 3.      The 2018 consultation stressed the importance of structural reforms—particularly

### Progress on reforms and macroeconomic policy
- Fiscal:
  - The authorities passed the 2019 budget, which "aims for a large fiscal adjustment."
  - Budget measures include increasing the tax on interest income from 7 to 10 percent, a tax on imported goods, and a freeze of public sector hiring and early retirement; these measures are for "three years only."
  - Other recommended measures not proposed: increase in VAT and the reinstatement of gasoline excises and fuel taxes.
- Monetary and financial:
  - Banque du Liban (BdL) continued to employ financial operations rather than more conventional interest rate policies but plans to phase them out as fiscal adjustment proceeds.
  - BdL remained active in the T-bills and Eurobonds primary markets, providing financing for the payment of wages and the debt service.
  - BdL ended 2018 with a loss of about USD 4 billion in reserves.
  - Need remains to continue building up capital buffers and fully aligning the risk weights placed on banks’ holdings of BdL foreign currency denominated instruments.
- Structural:
  - Authorities approved the electricity sector plan but have yet to increase power supply, raise tariffs and simplify their structure.
  - Passed the Access to Information Law, initiated work on an anti-corruption strategy, and prepared a draft of a modern public procurement law.
  - "Further steps are still needed to reduce corruption and improve governance."

### External sector assessment — key indicators and vulnerabilities
- External position:
  - External debt was "unsustainable at 190 percent of GDP in 2018."
  - Current account deficit stood at "over 25 percent of GDP."
  - Gross international reserves were at "90 percent of the IMF’s ARA reserve adequacy metric."
- Net international investment position (IIP) and composition (2018):
  - Net IIP estimated at "about -128 percent of GDP in 2018."
  - Net external debt position: "-98 percent of GDP."
  - Net FDI position: "-97 percent of GDP."
  - Gross FX reserves: "65 percent of GDP."
  - About "40 percent of external gross liabilities (125 percent of GDP) was FDI-related" (predominantly in real estate).
  - The remainder ("185 percent of GDP") comprised debt liabilities; government debt accounted for "about 20 percent of the external debt liabilities," the majority comprised short-term non-resident deposits.
  - On the asset side, debt securities held by the banking system, FDI assets, and gross reserves together account for "190 percent of GDP."
- Current account (2018):
  - Current account deficit "remained around 25 percent of GDP in 2018."
  - Trade deficit: "24 percent of GDP."
  - Interest payments: "4 percent of GDP."
  - Net inflows in current transfers: "3 percent of GDP" (noted as "the lowest level seen in more than a decade").
  - Inbound current transfers declined to "14 percent of GDP in 2018" after peaking at "20 percent in 2014."
  - Surplus in service trade reached "2.6 percent of GDP," compared to a 10-year average of "7.4 percent of GDP."
  - Based on fundamentals, the current account norm in 2018 was "-5.6 percent of GDP", implying a current account gap of "20.3 percent of GDP."
  - The external sustainability approach suggests a current account norm of "-8.3 percent of GDP" and a CA gap of "15.8 percent of GDP in 2024."
- Financing conditions and reserve developments:
  - Government has not placed Eurobonds in the market since 2017.
  - May 2018 Eurobond issuances were underwritten by the BdL; BdL paid maturing Eurobonds and external interest on behalf of the government, leading to a negative government FX cash balance (overdraft) at the BdL and a bridge loan at zero percent interest rate.
  - Gross growth of official non-resident deposits increased in 2018 to "almost 9 percent" though non-resident deposit inflows slowed in 2019.
  - BdL lost "7.4 percent of GDP in reserves in 2018" (some attributed to BdL’s paying Eurobond principal and coupon on behalf of the government).

### Exchange rate valuation assessments
- EBA-light and external sustainability results:
  - EBA-light suggests the real effective exchange rate is "significantly overvalued."
  - External sustainability approach implies a "50 percent overvaluation if net foreign assets were to be stabilized at the 2018 level of -128 percent of GDP."
  - Exchange rate is overvalued by "66 percent if the net foreign assets were to be brought down to -100 percent of GDP by 2024."
  - Current account approach suggests a real exchange rate gap of "63 percent in 2018" (compared to "45 percent estimated in 2017").
  - IREER approach suggests a much smaller REER gap of "9.1 percent."
  - The REER has appreciated "over 30 percent since the lows in 2008."
- Data quality caveat:
  - Results should be treated with caution given concerns about current account data quality and "very large positive errors and omissions in 2018 equivalent to about 10 percent of GDP" and the impact of the Syria conflict.

### Reserves adequacy
- Reserves and ARA metric:
  - Gross reserves at "65 percent of GDP at end-2018."
  - Reserves stand at "90 percent of the Fund’s Assessing Reserves Adequacy (ARA) metric."
  - ARA metric projected to fall to "70 percent by end-2019."

### Adjustment scenario — macroeconomic implications of staff recommendations
- Fiscal and macro targets in the adjustment scenario:
  - Scenario incorporates additional fiscal adjustment delivering a primary balance of "4.6 percent of GDP by 2022" through a front-loaded fiscal adjustment.
  - Stabilizes debt-to-GDP ratio at "166 percent by 2022," then declining to "163 percent in 2024."
  - Current account deficit declines to "about 20 percent of GDP by 2024."
  - Growth in the scenario is lower than baseline through 2022 due to contractionary fiscal tightening; by 2024 growth reaches "almost 4 percent."
  - BdL’s foreign reserves begin substantially increasing by 2022 in the scenario.
- Model and multiplier:
  - Projections use a fiscal multiplier of "0.6 with 0.4 in the same year and 0.2 the following year."

### Governance — corruption, reforms, and priorities
- Evidence and past progress:
  - World Bank’s Business Enterprise Survey (2013): "61.4 percent of firms identify corruption as a major constraint" compared to "49.1 percent in the MENA region."
  - Electricity reported as a constraint by "55.1 percent of firms."
  - Progress: 2017 Parliament approved the Access to Information Law; work on an anti-corruption strategy initiated; draft public procurement law prepared; an Anti-Corruption Law and whistleblower protection legislation adopted.
- Main areas and recommendations to reduce corruption and improve governance:
  - Anti-corruption framework:
    - Prompt and effective implementation of existing legislation, including appointment of "an independent, sufficiently empowered and resourced anti-corruption commission."
    - Enactment and urgent implementation of pending illicit enrichment and asset declaration legislation in line with best practices.
    - Adoption of an anti-corruption strategy and undertaking corruption investigations and prosecutions to obtain a number of corruption convictions and confiscations commensurate with risks.
  - Fiscal governance:
    - Better monitoring of the use of public funds, including public employment (noting "around 5,000 people were illegally hired after the hiring freeze of the 2017 salary scale law").
    - Include spending by the Council for Development and Reconstruction (CDR) in the budget.
    - Pass a public procurement law in preparation for the CIP.
    - Stronger management of core tax functions: reforms to the Tax Identification Number (TIN) system, compliance risk management and collection of tax arrears.
    - Better oversight of tax administration through establishment of an independent internal audit unit and improving transparency of external reporting.
  - Regulatory framework and rule of law:
    - Improve doing business framework by decreasing delays with construction permits and contract enforcement and streamlining border procedures.
    - Solicit public comments on proposed regulations.
  - AML/CFT:
    - Authorities strengthened AML/CFT legislative framework and report two national risk assessments (NRA).
    - Priorities include sharing NRA outcomes with stakeholders; improving risk-based supervision and effective application of preventive measures (including PEPs); ensuring timely availability of accurate beneficial ownership information; improving targeted financial sanctions requirements; and increasing prosecutions and convictions for ML commensurate with risks.
    - Plans by BdL and the Association of Banks in Lebanon to fully abolish numbered/secret accounts are "commendable and should be implemented without delay."
    - Modernize banking secrecy provisions to allow timely and direct access to financial information by law enforcement and judicial bodies.
  - Footnote on information sharing: Some banking information not shareable domestically is shared with foreign authorities via FATCA/CRS and FATF cross border wire transfer transparency requirements.

### Public debt sustainability analysis — baseline and risk scenarios
- Baseline outlook and key assumptions:
  - Public debt already "above 150 percent of GDP" with gross financing needs "over 30 percent of GDP"; under the baseline, debt is unsustainable.
  - Debt and gross financing needs projected to reach "180 percent" and "37 percent" of GDP, respectively, by 2024.
  - Baseline assumptions include:
    - Real GDP growth: starting at "0.2 percent in 2019", projected to pick up in 2021 and peak at "3.7 percent in 2023."
    - Inflation (GDP deflator): projected to ease from "5.3 percent in 2018 to 2.1 percent in 2021."
    - Primary deficit: estimated at "1.4 percent of GDP in 2018"; projected to narrow in 2019 and turn into a small surplus in 2020, but measures are temporary and projected to lead to a primary deficit again by 2023.
- Drivers and sensitivity to shocks:
  - Deterioration driven mainly by projected positive interest rate-growth differential.
  - Gross financing needs-to-GDP ratio falls through 2022 but rises to "37 percent of GDP in 2024"; increase driven by debt maturity profile of around "five and seven years" for domestic and foreign debt, respectively.
  - Shock scenarios and impacts by 2024:
    - Growth shock: a one standard deviation decline in growth in 2020 and 2021 would raise debt-to-GDP to "almost 200 percent" and financing needs would exceed "40 percent of GDP in 2024."
    - Real exchange rate shock: a "50-percent real exchange rate shock" (with inflation pass-through coefficient 0.25) would affect debt-to-GDP similarly to a growth shock.
    - Interest rate shock: would result in financing needs reaching "almost 40 percent of GDP in 2024."
    - Macro-fiscal shock (growth, interest rate, and primary balance shocks simultaneously): debt-to-GDP would exceed "250 percent" at the end of the projection horizon and financing needs would rise to "close to 50 percent of GDP."
    - Contingent liability shock: standardized shock of "10 percent of financial sector assets" would raise debt-to-GDP and financing needs-to-GDP to "218" and "43 percent" by 2024, respectively (no feedback on GDP growth and interest rates assumed).

*IMF staff report excerpt (1lbnea2019001).*

### 5. The fan figures show significant uncertainty around the baseline. The width of the

### 5. The fan figures show significant uncertainty around the baseline. The width of the

### Uncertainty around the baseline
- The symmetric fan figure is estimated at around 60 percent of GDP, illustrating the degree of uncertainty for equal-probability upside and downside shocks.
- Figure percentiles shown: 10th-25th, 25th-75th, 75th-90th with baseline and symmetric distribution and a restricted (asymmetric) distribution also presented.
- Restrictions on upside shocks: 15, 45, 13%, 1, 2 (as indicated in figure notes).

### Lebanon’s debt profile and market indicators
- Projected public GFNs are very high and generate significant rollover risks.
- External financing needs are almost 12 times the upper risk-assessment benchmark.
- Bond spreads have been rising and now exceed the upper risk-assessment benchmark by 242 basis points.
- Public debt in foreign currency is about halfway between the lower and upper risk-assessment benchmarks.
- Selected indicators (2018, as presented):
  - EMBIG (average 01-May-19 through 30-Jul-19) shown in figures and tables.
  - EMBIG referenced values: 842 bp and 874 (figure cells).
  - EMBIG (bp) in DSA table: 874.
  - 5Y CDS (bp): 923.
  - Gross nominal public debt (percent of GDP) by year (selected):
    - 2017: 140.7
    - 2018: 149.0
    - 2019: 151.0
    - 2020: 155.1
    - 2021: 161.8
    - 2022: 167.0
    - 2023: 172.0
    - 2024: 178.2 and 185.2 (two series appear in the table)
  - Public gross financing needs (in percent of GDP) shown in the DSA table:
    - 2017: 37.0
    - 2018: 40.8
    - 2019: 35.2
    - 2020: 29.3
    - 2021: 28.1
    - 2022: 24.7
    - 2023: 24.4
    - 2024: 26.0
  - Real GDP growth (in percent) projections (table):
    - 2017: 4.2
    - 2018: 0.6
    - 2019: 0.2
    - 2020: 0.2
    - 2021: 0.9
    - 2022: 2.3
    - 2023: 2.6
    - 2024: 3.1 and 2.7 (two series appear)
  - Inflation (GDP deflator, in percent) entries include: 4.1, 3.6, 5.3, 3.7, 2.3, 2.1, 2.1, 2.1 (as presented).
  - Effective interest rate (in percent) entries include: 7.1, 6.7, 6.8, 6.5, 7.9, 7.9, 8.1, 8.2, 8.3 (as presented).

### DSA coverage limits and contingent liabilities
- The DSA coverage is limited to the central government (public sector defined as central government).
- The DSA does not capture the stock of government expenditure arrears; the exact magnitude of arrears is uncertain.
- Liabilities of public enterprises and the Banque du Liban (BdL) are not captured in the DSA and pose risks to public debt sustainability.
- The BdL has accumulated foreign currency liabilities over the last decade.

### Public DSA — baseline dynamics and identified debt-creating flows
- Change in gross public sector debt (cumulative, projections to 2024) shows increasing debt with cumulative change of 34.1 (percent of GDP) over projection horizon (table cumulative line).
- Identified debt-creating flows (selected table entries):
  - Primary deficit (percent of GDP) entries include: -1.5, -0.8, 1.4, 0.3, -0.3, -0.2, -0.5, 1.3, 1.2, 1.9 (as shown).
  - Primary (noninterest) revenue and grants cumulative: 131.6 (table cumulative).
  - Primary (noninterest) expenditure cumulative: 133.6 (table cumulative).
- Automatic debt dynamics (derived formula provided); interest rate/growth differential contributions and breakdown:
  - Automatic debt dynamics entries: -1.9, 3.4, 1.7, 3.8, 7.0, 5.4, 5.4, 4.8, 5.8, 32.2 (percent contributions over years as presented).
  - Of which: real interest rate contributions: 3.7, 4.2, 2.1, 4.0, 8.3, 9.0, 9.5, 9.9, 10.5, 51.3 (as listed).
  - Of which: real GDP growth contributions: -5.6, -0.8, -0.4, -0.3, -1.3, -3.6, -4.1, -5.1, -4.7, -19.1 (as listed).
- Residual, including asset changes entries: 0.9, 0.1, -1.1, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 (table).

### Composition of public debt and alternative scenarios
- Baseline, Historical, and Constant Primary Balance scenarios presented with underlying assumptions (selected):
  - Baseline real GDP growth (2019–2024): 0.2, 0.9, 2.3, 2.6, 3.1, 2.7
  - Historical scenario real GDP growth (2019–2024): 0.2, 2.9, 2.9, 2.9, 2.9, 2.9
  - Constant Primary Balance scenario primary balance: -0.3 repeated across years (-0.3, -0.3, -0.3, -0.3, -0.3, -0.3)
  - Effective interest rate examples: Baseline 6.5, 7.9, 7.9, 8.1, 8.2, 8.3; Historical 6.5, 7.9, 7.6, 7.5, 7.3, 7.2; Constant Primary Balance 6.5, 7.9, 7.9, 8.1, 8.2, 8.3
- Composition charts indicate debt by maturity (medium and long-term vs short-term) and by currency (local vs foreign currency) over 2017–2024 with gross nominal public debt and public gross financing needs series.

### Stress tests and scenario outcomes
- Stress tests include Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, Contingent Liability Shock, and Combined Macro-Fiscal Shock.
- Selected underlying assumptions for stress tests (examples from figure):
  - Primary Balance Shock real GDP growth (2019–2024): 0.2, 0.9, 2.3, 2.6, 3.1, 2.7; primary balance includes shocks such as -0.6, -0.6, 0.5, -1.3, -1.2 in years indicated.
  - Real GDP Growth Shock real GDP growth series includes negative values in early years: 0.2, -2.5, -1.0, 2.6, 3.1, 2.7 (as shown).
  - Real Interest Rate Shock effective interest rate series includes values up to 9.5 (2019–2024 example values: 6.5, 7.9, 8.3, 8.8, 9.1, 9.5).
  - Real Exchange Rate Shock inflation entry includes 19.0 in one year in the scenario table (as presented).
- Stress-test outcomes (selected):
  - Gross nominal public debt (in percent of GDP) under adverse scenarios rises substantially over 2019–2024 with scale shown on charts up to 270 (percent of GDP) and higher under extreme scenarios.
  - Public gross financing needs (in percent of GDP) series under stress scenarios shown with scales up to 55 (percent of GDP) in charts.
  - Gross nominal public debt (in percent of revenue) under stress scenarios shown up to 1,300 in chart scales.

### Annex VI — External Debt Sustainability Analysis (summary)
- Key conclusions:
  - "Lebanon’s external debt is unsustainable."
  - External debt is estimated at about 190 percent of GDP in 2018.
  - The current account deficit excluding interest payments is high at 20 percent of GDP.
  - Non-interest current account deficit must reach 5.9 percent to stabilize external debt over the long term at the 2024 level (214 percent of GDP).
- External debt composition:
  - 77 percent of the external debt is non-resident deposits, most of which are short-term with maturities less than one year.
  - Government debt accounts for about 10 percent of total external debt.
  - Only about a third of the outstanding Eurobond is estimated to be held by foreign investors.
  - The remainder of external debt is debt owed by the BdL, bank non-deposit liabilities, and non-bank liabilities.
- Gross external financing need:
  - Gross external financing need stood at 174 percent of GDP in 2018.
  - In 2018 the government did not issue any Eurobonds in the market; Eurobonds were issued to the BdL and then partially re-sold to the market at a discount to attract foreign exchange.
- Scenario sensitivities:
  - A real depreciation shock of 30 percent would increase external debt to over 300 percent of GDP.
  - Growth shock, non-interest current account shock, and combined shock lead to external debt that exceeds 220 percent of GDP by 2024.
  - The analysis highlights the importance of reducing external imbalances and reliance on external financing.

*Source: IMF staff (As of July 30, 2019).*

### 5.      To restore external sustainability, a decisive external adjustment is needed. Over the

### 1lbnea2019001 - 5.      To restore external sustainability, a decisive external adjustment is needed. Over the

### External sustainability and energy-sector potential
- "To restore external sustainability, a decisive external adjustment is needed."
- Structural reforms, particularly in the energy sector that would shift the inputs from oil to gas, can yield gains from production efficiencies and reduction of losses.
- "Potential extraction of gas inside Lebanon can help to reduce the demand for expensive fuel imports, including diesel."

### External Debt Sustainability Framework — headline levels and dynamics (2014–24)
- Baseline: External debt 166.6 (2014), 166.6 (2015), 182.0 (2016), 189.4 (2017), 191.1 (2018), 195.7 (2019), 207.0 (2020), 214.7 (2021), 218.7 (2022), 219.0 (2023), 219.4 (2024).
- Debt-stabilizing non-interest current account: -5.3.
- Change in external debt: 5.4 (2014), 0.0 (2015), 15.4 (2016), 7.5 (2017), 1.6 (2018), 4.6 (2019), 11.3 (2020), 7.7 (2021), 4.1 (2022), 0.3 (2023), 0.4 (2024), 0.0 (final listed).
- Identified external debt-creating flows (4+8+9): 20.1 (2014), 10.9 (2015), 16.0 (2016), 17.1 (2017), 12.8 (2018), 22.7 (2019), 20.5 (2020), 16.1 (2021), 14.3 (2022), 13.1 (2023), 13.1 (2024), 3.60.0 (appears in table formatting).
- Current account deficit, excluding interest payments: 24.7 (2014), 15.5 (2015), 18.3 (2016), 20.4 (2017), 19.4 (2018), 18.6 (2019), 18.1 (2020), 17.1 (2021), 15.7 (2022), 15.2 (2023), 14.4 (2024), 5.3 (listed).
- Deficit in balance of goods and services: 25.2 (2014), 23.9 (2015), 28.0 (2016), 25.4 (2017), 19.6 (2018), 18.5 (2019), 19.9 (2020), 19.3 (2021), 19.1 (2022), 18.6 (2023), 18.1 (2024).
- Exports (percent of GDP): 39.9 (2014), 39.7 (2015), 37.3 (2016), 35.9 (2017), 34.8 (2018), 35.9 (2019), 36.5 (2020), 36.7 (2021), 36.9 (2022), 37.0 (2023), 37.2 (2024).
- Imports (percent of GDP): 65.1 (2014), 63.6 (2015), 65.3 (2016), 61.3 (2017), 54.4 (2018), 54.4 (2019), 56.4 (2020), 56.4 (2021), 56.0 (2022), 55.9 (2023), 55.6 (2024), 55.3 (additional listing).
- Net non-debt creating capital inflows (negative): -3.3 (2014), -2.7 (2015), -3.0 (2016), -1.4 (2017), -2.8 (2018), -3.3 (2019), -4.2 (2020), -4.9 (2021), -4.9 (2022), -4.4 (2023), -3.8 (2024), -3.8 (additional).
- Automatic debt dynamics 1/: -1.3 (2014), -1.9 (2015), 0.7 (2016), -1.8 (2017), -3.8 (2018), 7.4 (2019), 6.6 (2020), 3.9 (2021), 3.5 (2022), 2.2 (2023), 2.9 (2024), -1.5 (listed).
  - Contribution from nominal interest rate: 3.5 (2014), 3.7 (2015), 4.8 (2016), 5.5 (2017), 6.2 (2018), 7.8 (2019), 8.2 (2020), 8.6 (2021), 8.8 (2022), 8.7 (2023), 8.7 (2024).
  - Contribution from real GDP growth: -2.9 (2014), -0.7 (2015), -2.6 (2016), -1.0 (2017), -0.4 (2018), -0.4 (2019), -1.6 (2020), -4.6 (2021), -5.3 (2022), -6.5 (2023), -5.7 (2024), -5.7 (additional).
  - Contribution from price and exchange rate changes 2/: -1.8 (2014), -4.9 (2015), -1.5 (2016), -6.4 (2017), -9.6 (2018), ... (table indicates continuation and -4.5 in later entries).
- Residual, incl. change in gross foreign assets (2-3) 3/: -14.7 (2014), -11.0 (2015), -0.6 (2016), -9.7 (2017), -11.1 (2018), -18.1 (2019), -9.2 (2020), -8.4 (2021), -10.3 (2022), -12.8 (2023), -13.2 (2024), 0.0 (listed).
- External debt-to-exports ratio (in percent): 417.8 (2014), 419.9 (2015), 488.3 (2016), 528.0 (2017), 549.7 (2018), 545.1 (2019), 566.4 (2020), 584.7 (2021), 593.1 (2022), 592.1 (2023), 589.1 (2024).
- Gross external financing need (in billions of US dollars) 4/: 76.4 (2014), 77.6 (2015), 84.1 (2016), 89.7 (2017), 98.0 (2018), 99.0 (2019), 104.8 (2020), 111.0 (2021), 118.7 (2022), 126.2 (2023), 132.8 (2024).
- Gross external financing need (in percent of GDP): 158.1 (2014), 155.3 (2015), 164.1 (2016), 168.0 (2017), 173.9 (2018), 10-Year 10-Year 169.1 173.3 175.8 179.5 181.3 181.9 (table formatting shows sequence under "10-Year" headings).
- Scenario with key variables at their historical averages 5/: 195.7, 197.9, 200.7, 201.9, 200.9, 199.7, -12.4 (table entries).

### Bound tests and scenario shocks (Figure highlights)
- Baseline external debt level shown as 219 (baseline marker in figure).
- Interest rate shock, current account (CA) shock, growth shock, combined shock, and real depreciation shock are presented as scenario tests producing higher external debt trajectories:
  - Interest rate shock path and levels depicted with labeled series; baseline 219.
  - Non-interest current account shock (in percent of GDP) baseline and scenario values shown: Baseline: 4.3, Scenario: 4.5, Historical: 2.6 (figure listings).
  - Growth shock (in percent per year): Baseline: 2.3, Scenario: 0.6, Historical: 2.9.
  - Current account balance (non-interest) historical/baseline/scenario: Baseline: -16.1, Scenario: -18.1, Historical: -19.1.
  - Real depreciation shock: one-time real depreciation of 30 percent occurs in 2020 (noted as scenario 4/ and reflected in a combined scenario producing higher debt peaks up to 324 in the figure).

### World Bank–IMF collaboration: macrocritical structural reforms (summary)
- Shared assessment: approval of the electricity reform plan and discussion on the 2019 budget are important first steps for fiscal adjustment to stabilize and then put public debt-to-GDP on a downward path.
- Identified macrocritical reform areas:
  - Implementation of a credible medium-term fiscal plan aiming for a substantial and sustained primary fiscal surplus to reduce public debt-to-GDP over time; plan to include reforms to the value-added tax (VAT) including broadening the base, eliminating exemptions, improving compliance, and assessing socio-economic distributional impact.
  - Increasing gasoline excise and fuel taxes (noted as straight-forward measures requiring approvals from the ministers of energy and finance).
  - Gradually eliminating the electricity subsidy; electricity reform plan approved by Cabinet (April 9, 2019) and Parliament (April 17, 2019) aims to reduce technical and non-technical losses, switch fuel to natural gas to reduce production costs, increase EdL’s capacity, and subsequently raise tariff to eliminate electricity subsidies; plan should incorporate a tariff increase sufficient to close EdL’s deficit in the medium term under robust assumptions and target largest consumers first to generate fiscal savings.
  - Implementing recommendations of the Public Investment Management Assessment (PIMA): incorporate CDR spending in the budget and pass a public procurement law (drafted with Bank assistance).
  - Scaling up and out the National Poverty Targeting Program (NPTP) to protect the most vulnerable during fiscal adjustment.

### Division of labor and assistance programs
- Fund responsibilities and assistance:
  - Capacity building on International Public Sector Accounting Standards and Fiscal Reporting (IPSAS), public accounting, gender sensitive budgeting, PPPs fiscal costs and risks, tax and PFM reform, capacity building for the macro fiscal unit.
  - Assist in implementing PIMA recommendations.
  - Provide TA on CPI, PPI, and national accounts; develop stress-test model for banking sector vulnerabilities.
- World Bank responsibilities and assistance:
  - Technical assistance to follow-up on electricity reform plan implementation.
  - Support scaling up the NPTP and moving it toward a productive safety net linking safety nets to employability.
  - Ongoing project and program support across power, transport, water, SME innovation, and financial sector monitoring.
- Requests for information:
  - Teams request to be kept informed of progress on the other institution’s agenda when milestones are reached (and at least semi-annually).

### Planned activities and timing (selected items)
- Fund work program items labeled "Ongoing" and planned for 2020 (e.g., Article IV Consultation Staff Report, TA on IPSAS and fiscal reporting, TA to improve annual national accounts methodology, continuing CPI/PPI work, stress-test model development).
- Bank work program projects listed as ongoing with expected delivery dates:
  - Supporting Innovation in SMEs Project — Ongoing — 06/30/2020.
  - Greater Beirut Water Supply — Ongoing — 11/30/2020.
  - Roads and Employment Project — Ongoing — 06/30/2022.
  - Greater Beirut Public Transport Project — Ongoing — 12/31/2023.
  - PCB Management in the Power Sector — Ongoing — 06/30/2020.
  - Emergency National Poverty Targeting Project — Ongoing — 12/31/2019.
  - Lebanon Power Sector Reforms Program — Ongoing — 06/14/2021.
  - Lebanon financial sector monitoring and policy dialogue — Ongoing — 06/30/2020.

*Prepared by Middle East and Central Asia Department (Informational Annex, staff report excerpts).*

### 3. Joint Work

### 3. Joint Work

### Program
- CIP assessment/Follow-up on the CEDRE process — Ongoing 2020

### Statistical Issues — Assessment of Data Adeacy for Surveillance
- General
  - Data provision has serious shortcomings that significantly hamper surveillance, particularly in national accounts and external sector statistics.
  - Lack of timely, comprehensive and reliable national accounts data and social and labor market indicators undermine accountability and economic analysis.
  - Fiscal reporting is lagging, and irregular treasury inflows and outflows undermine data compilation.
- National accounts
  - Only annual data are compiled and disseminated at this time.
  - Data are available through 2017 and 2018 national accounts are expected to be published in the fourth quarter of 2019.
  - Work is ongoing to start publishing quarterly national accounts data.
  - Responsibility for producing national accounts statistics was transferred to the Central Administration of Statistics (CAS) in 2012 for the publication of 2011 accounts.
  - Data sources are limited mainly to administrative data.
  - Access to comprehensive business financial records maintained by the Ministry of Finance would greatly improve annual national accounts estimates and support the release of quarterly data.
  - Expected improvements from ongoing efforts at the ministry to promote electronic tax declarations and e-service portals.
  - BdL is yet to publish the updated Coincident Indicator — the one still used to date includes a set of high frequency indicators selected and weighed in 1993.
- Price statistics
  - A Consumer Price Index (CPI) was released in March 2014 by the CAS with Fund assistance.
  - Improvements: dissemination of more detailed national level index data on the CAS website; publication of regional indexes; monthly collection of rent prices; improved index calculation methods.
  - The CPI covers all areas in Lebanon and is disseminated within three weeks after the end of the reference month.
  - CPI weights are expected to be updated based on the results of the 2020 household budget survey.
  - Immediate need: regular and timely statistics on producer prices.
  - Medium- to long-term needs: data on labor markets, wages and real estate prices.
- Government finance statistics (GFS)
  - Significant delays continue in the release of fiscal data.
  - Dissemination of central government finance statistics has improved in recent years, but coverage is not comprehensive.
  - Published monthly data on central government budgetary accounts do not cover items such as certain transfers, financing data, foreign-financed capital expenditure, and arrears; they include dues that should eventually be transferred to third parties (Telecom revenue due to municipalities).
  - Some (treasury) spending is only identified ex post and presented in an economic classification with a lag.
  - Some missing items are provided to the Lebanon team in the context of surveillance activities.
  - Government finance statistics are on a modified cash basis for revenue (transfers from the Telecom) and for budgetary expenditure data (issuance of payment orders).
  - GFS data for budgetary central government based on 2001 Government Finance Statistics (GFS) Manual are published yearly in the Government Finance Statistics Yearbook; these data cover only transactions and no balance sheet data are reported.
  - In 2018, data was reported based on GFS 2014 for the year 2017.
- Monetary and financial statistics
  - Sectorization of institutional units and classification of financial instruments in data reported to STA fall short of what is needed for the compilation of Standardized Report Forms.
  - Reflecting in part restrictions imposed by domestic legislation, the Banque du Liban (BdL) does not publish externally-audited financial statements.
  - In February 2018, the BdL adopted the International Financial Reporting Standards (IFRS) reporting standards.
  - The BdL does not submit SDDS-compliant numbers.
  - Lack of a reliable classification of deposits by residency (also due to bank secrecy) and large net errors and omissions complicate balance of payments analysis.
- Financial sector surveillance
  - Lebanon is a regular reporter of Financial Soundness Indicators (FSIs).
  - All core and eight encouraged FSIs are reported on regular quarterly basis, except for the two indicators on capital adequacy that are reported on semi-annual basis.
  - Compilation of FSIs for other sectors (other financial corporations, non-financial corporations, households, real estate markets) is needed to expand the list of FSIs compiled by Lebanon for macro prudential analysis.
- Balance of payments (BoP)
  - Efforts to improve BoP statistics have included improving survey quality through better compliance.
  - Significant challenges remain: data issues in the current account (unrecorded exports and imports; uncertainty in private sector services, workers’ remittances, and investment income), the capital account (grants), and the financial account (foreign direct investment, equity investment in the nonbank private sector, and corporate borrowing abroad).
  - METAC assisted CAS to re-establish the rest of the world (ROW) account to reduce discrepancy between National Accounts and BoP statistics.
  - Data are subject to frequent and very large revisions that hamper accurate assessment of the external sector position of Lebanon.
  - An IIP statement was compiled with technical assistance though not yet ready for publication.
  - Forms and reporting requirements for banks and non-banks were amended in January 2010 and May 2013 to include more comprehensive and detailed breakdown of BoP components.
  - Lack of effective inter-agency cooperation and data sharing between the BdL, CAS, customs and the Ministry of Finance are among the main factors impeding progress; there is a noted increase in the lack of cooperation and coordination among various agencies on data sharing.

### Data Standards and Quality
- Lebanon joined the General Data Dissemination System in January 2003.
- Metadata and plans for improvement need to be updated.
- No Report on the Observance of Standards and Codes (ROSC) for data dissemination is available for Lebanon.

### Reporting to STA
- Lebanon currently reports annual data based on GFSM 2001 to be published in the Government Finance Statistics Yearbook (GFSY), but the data suffer from weaknesses, mainly limited coverage.
- CAS does not currently report any data to STA.
- Lebanon reports monetary statistics on a regular monthly basis, covering the Central Bank and commercial banks only.
- Monetary data are reported with a timeliness of approximately three months.
- In September 2011, the BdL started regular submission of core Financial Soundness Indicators data and metadata, and data for Q1-2019 were posted on the IMF website.

### Table of Common Indicators Required for Surveillance — Selected entries
- Exchange Rates — Date of Latest Observation: 07/12/19; Date Received: 07/12/19; Frequency of Data: D; Frequency of Reporting: D; Frequency of Publication: D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of Latest Observation: 05/31/19; Date Received: 07/02/19; Frequency: M; Reporting: M; Publication: M
- Reserve/Base Money — Date of Latest Observation: 05/31/19; Date Received: 07/01/19; Frequency: M; Reporting: M; Publication: M
- Broad Money — Date of Latest Observation: 05/31/19; Date Received: 07/01/19; Frequency of Data: W/M; Frequency of Reporting: W/M; Frequency of Publication: M
- Central Bank Balance Sheet — Date of Latest Observation: 05/31/19; Date Received: 07/01/19; Frequency: M; Reporting: M; Publication: M
- Consolidated Balance Sheet of the Banking System — Date of Latest Observation: 05/31/19; Date Received: 07/01/19; Frequency: M; Reporting: M; Publication: M
- Interest Rates — Date of Latest Observation: 05/31/19; Date Received: 07/01/19; Frequency of Data: W/M; Frequency of Reporting: W/M; Frequency of Publication: W/M
- Consumer Price Index — Date of Latest Observation: 05/31/19; Date Received: 06/21/19; Frequency: M; Reporting: M; Publication: M
- Revenue, Expenditure, Balance and Composition of Financing – Central Government — Date of Latest Observation: 12/31/18; Date Received: 06/18/19; Frequency: M; Reporting: M; Publication: M
- Stocks of Central Government and Central Government-Guaranteed Debt — Date of Latest Observation: 05/31/19; Date Received: 07/08/19; Frequency: M; Reporting: M; Publication: M
- External Current Account Balance — Date of Latest Observation: 05/31/19; Date Received: 07/09/19; Frequency: Q; Reporting: Q; Publication: Q
- Exports and Imports of Goods and Services — Date of Latest Observation: 05/31/19; Date Received: 05/31/19; Frequency: Q; Reporting: Q; Publication: Q
- GDP/GNP — Date of Latest Observation: 12/31/17; Date Received: 12/04/18; Frequency: A; Reporting: A; Publication: A
- Gross External Debt — Date of Latest Observation: 05/31/19; Date Received: 06/25/19; Frequency: M; Reporting: M; Publication: M
- International Investment Position — N/A; N/A; Frequency: N/A; Reporting: N/A; Publication: N/A

### Statement by Mr. Hazem Beblawi and Mr. Sami Geadah (September 11, 2019) — Key messages and policies
- Macroeconomic context and outlook
  - Long-standing resilience faced increased challenges over the past year.
  - Growth— which averaged about 8 percent before the Syrian civil war— plummeted to very low rates.
  - Stagnation in growth and deterioration in the fiscal position increased an already high public debt to GDP ratio.
  - Low growth, combined with a massive influx of refugees, contributed to significant increases in poverty and unemployment.
  - Growth in private deposit inflows started to soften in 2019.
  - Despite persistent refugee challenges and geopolitical spillovers, growth is expected to benefit in coming years from structural reforms, gas exploration, infrastructure spending, and a revival of tourism following lifting the ban on travelers from Gulf countries.
- International support and CEDRE
  - The international community pledged more than US$11 billion in pledges for concessional loans and grants for infrastructure projects at CEDRE in April 2018.
  - The government presented a comprehensive vision to jumpstart growth: revamping physical infrastructure, restructuring the public sector, modernizing legislation and procedures, enhancing governance including fiscal governance and improving transparency, updating procurement laws and procedures, and promoting productive sectors.
  - These reforms were formulated in the context of continued macroeconomic stability, facilitated through a significant fiscal adjustment.
- Authorities’ actions and commitments
  - Authorities addressed economic challenges with seriousness and determination; fiscal policy was significantly tightened soon after the government took office in early 2019 and structural reform work was expedited.
  - The President convened main political actors in August and declared an economic emergency; formed an economic committee headed by the Prime Minister.
  - Authorities confirmed commitment to a fixed exchange rate; a significant fiscal adjustment; a plan to start US$3.3 billion of projects approved by Parliament; full implementation of the power sector reform agenda; and laws to fight tax evasion, modernize customs and public procurement legislation.
- Fiscal policies and budgets
  - Public spending cuts in early 2019; Parliament approved a budget aiming to reduce the deficit by about 2 percentage points of GDP in 2019.
  - Budget measures included increasing the tax on interest earnings, introducing a tax on imports, raising fees, freezing public sector hiring, and raising the minimum years of service for retirement from government (including military) employment by 5 years.
  - Authorities indicated readiness to take additional measures to achieve a meaningful reduction in the fiscal deficit in 2019.
  - Delays in processing payment orders submitted at end-2018 amounted to about 0.6 percent of GDP.
  - Draft budget for 2020 aims at a primary surplus of 3 percent of GDP.
  - Authorities plan to increase the primary surplus by 1 percentage point of GDP in each of 2021 and 2022.
  - Draft budget proposes to lower electricity subsidies to US$1 billion, freeze public sector wages and hiring, raise the VAT rate on luxury goods to 15 percent, liquidate or sell state-owned enterprises, and include fiscal reforms needed to utilize foreign assistance pledged at CEDRE.
  - Authorities are reluctant to raise the VAT rate on necessities because of effects on vulnerable populations.
  - Preparations for the 2020 budget are advanced; a draft was prepared to present to Parliament in October to be adopted before the end of this year in line with constitutional deadlines.
- Structural reforms — electricity and governance
  - Electricity sector reform is important for public finances, economic growth, and the environment.
  - In July 2019, Parliament adopted a plan to reform the sector which would provide 24-hour electricity by 2022.
  - Reforms will eliminate significant budget subsidies.
  - Staff recommends immediate tariff increases; authorities prefer to raise tariffs in conjunction with increased electricity supply to reduce reliance on private generators.
  - Authorities expect financial savings to come largely from reducing costs, lowering technical and nontechnical losses, increasing efficiency, and improving collections, rather than tariff increases.
  - Authorities recognize the importance of fighting corruption, strengthening governance and accountability, modernizing procurement rules, reforming customs, and improving public investment management.
  - Legislative developments: Parliament passed access to information and whistleblower protection laws, a law establishing a national anti-corruption commission, a law on transparency in oil and gas, the e-transaction law, and updated the code of commerce; implementation decrees are being completed.
  - Work ongoing with EU and UN agencies to strengthen anti-corruption bodies and intention to join the Open Government Partnership.
- Financial sector policies and stability
  - Difficult fiscal situation influenced central bank policies; BdL aims to maintain confidence in the currency peg while attracting nonresident inflows without unduly increasing government interest costs or discouraging bank lending.
  - In absence of Parliamentary approval of budgets in past years, BdL undertook quasi-fiscal activities to support growth and resorted to unconventional monetary policies.
  - Authorities expect fiscal adjustment and structural reforms to alleviate pressure on central bank policies.
  - The financial system remains well capitalized, liquid, and profitable.
  - Bank capitalization exceed Basel III requirements, and complies with the International Financial Reporting Standards (IFRS9).
  - Fitch downgraded Lebanon’s sovereign credit rating in late August; Standard and Poors did not change its rating.
  - The downgrade may necessitate raising weights on banks’ holdings of Lebanese government debt from 100 percent to 150 percent.
  - If a 150 percent weight were applied on bank holdings of BdL certificates of deposit, the banking system capital adequacy ratio could decline from 17.9 percent to 11.7 percent.
  - If the weight on BdL certificates of deposit were 50 percent, the capital adequacy ratio could decline to 15.7 percent.
  - It is expected that required increases in provisioning would be accommodated smoothly.
  - Staff recommended that the banking system increase buffers by applying weights used for sovereign exposures to placements with the central bank; authorities question this recommendation because the central bank keeps these placements in high quality liquid assets abroad.
- The Syrian crisis — scale and impact
  - Lebanon hosts about 1½ million displaced Syrians — about one-third of the Lebanese population — for a ninth year, causing economic, social and political stresses.
  - Capacities of host communities and government infrastructure and services have been overstretched and exhausted, including education and medical services.
  - Most displaced Syrians remain reluctant to return because of lack of security, infrastructure, services, and opportunities.
  - Lebanon is increasingly stressed with the seemingly open-ended continuation of the crisis, drawing comparisons with Palestinian refugees driven into Lebanon about seventy years ago.

*Italic: IMF staff summary of "3. Joint Work" — Lebanon, Statistical Issues Appendix and associated statements (as of July 31, 2019 and September 11, 2019).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1lbnea2019001.pdf_