## 1. The Cost of Delaying Reforms for Depositors

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### Context and crisis impact
- Crisis origins and amplification:
  - Nonresident deposits and other inflows began reversing in 2018 as confidence eroded after years of challenging economic conditions, policy mismanagement, and pervasive corruption.
  - Regional conflicts, including in Syria and the large inflow of displaced people, added to domestic vulnerabilities.
  - Further shocks: default on Eurobond debt service in March 2020, the COVID-19 crisis, the explosion at the Beirut Port in August 2020, and Russia’s war in Ukraine.
- Socioeconomic impact since onset:
  - GDP declined by about 40 percent.
  - Parallel exchange rate lost 98 percent of its value.
  - Inflation at triple-digits.
  - Central bank lost two thirds of its FX reserves.
  - Unemployment rising; poverty at historic highs; increased emigration.
  - Basic services (electricity and water) drastically cut; public sector institutions failing.
- Political environment and reform impediments:
  - Limited action since 2019; three successive governments failed to implement comprehensive policy response.
  - Staff level agreement (SLA) on a package of policies for EFF support reached in April 2022, but progress on agreed reforms has been very slow.
  - Political constraints: fractured parliament after May 2022 elections; caretaker government; president’s term expired in October 2022; BdL Governor’s term ends in July with potential appointment delays.
  - Positive regional development: agreement between Saudi Arabia and Iran to reestablish diplomatic relations; maritime demarcation with Israel on October 27, 2022 offers opportunity to explore offshore gas and oil (but resources will take time to materialize).

### Recent developments (selected indicators and facts)
- Growth and activity:
  - Staff estimates no growth in 2022; BdL estimates growth of 2 percent.
  - Unemployment estimated around 30 percent (58 percent among young people).
  - Half of the Lebanese population currently seen as vulnerable by UN.
- Exchange rate, dollarization, money, and inflation:
  - Parallel market depreciation accelerating: from 4.8 percent per month on average in 2022 to about 32.3 percent per month in Q1 2023.
  - Lira reached 140,000 per US$ in mid-March 2023 before appreciating after BdL announced unlimited intervention on the Sayrafa platform at 90,000.
  - Official exchange rate: 1,507.5 LBP/US$ for first 2½ years, moved to 15,000 LBP/US$ in February 2023.
  - Currency in circulation and M1 increased by about 70 percent in 2022.
  - Inflation reached 190 percent year-on-year in February 2023; food prices increased by 261 percent.
  - FX reserves at the central bank declined to about US$10 billion (compared to US$36 billion at peak in 2017); central bank holds an additional US$17 billion in gold.
- Fiscal and external positions:
  - Fiscal deficit widened to an estimated 5 percent of GDP in 2022.
  - Fiscal revenues estimated to have collapsed to 6 percent of GDP in 2022 (compared to 10 percent of GDP in 2021 and over 20 percent before the crisis).
  - FAD TA mission estimated revenues forgone in 2022 due to mis-valuation of customs and taxes at the border at 4.8 percent of GDP, and additional 0.8 percent of GDP lost because of inflation impact on specific taxes and excises.
  - Staff estimates that incorporating BdL quasi-fiscal operations would further widen the deficit to around 8.5 percent of GDP.
  - After contraction in 2020–21, current account deficit increased significantly in 2022.
  - Lebanon remains in default on its Eurobonds; reported arrears of US$ 39.6 million to bilateral and multilateral creditors at end-2022.
- Banking sector and services:
  - Banks reduced services and essentially stopped extending credit; informal deposit withdrawal restrictions persist with considerable leakage.
  - FX deposits declined by US$30 bn since the crisis; FX loan book decreased by US$27 bn with many loans repaid in local currency at the official exchange rate.
  - Sector reports positive capital position of US$12 bn at the official exchange rate, but recognition of losses on BdL and sovereign exposures will mean large capital shortfalls for most banks.
  - Electricity provision constrained: EdL provides 3–4 hours per day; reliance on expensive private generators.
  - November 2022: electricity tariffs increased for the first time since the 1990s.
- Reform implementation status:
  - Little progress on prior actions agreed under the 2022 SLA.
  - Budget for 2022 enacted only in mid-November with different parameters and few reform measures.
  - Draft law on capital controls and deposit withdrawals falls short of staff advice.
  - BCC preparing an emergency bank resolution law and terms of reference for independent external assessments of 14 largest banks.
  - October 2022: new banking secrecy law adopted with major improvements but critical issues remain.
  - Special audit of BdL by an internationally reputable firm completed; report expected to be released soon.

### Outlook and risks: reform scenario versus status quo
- Reform scenario — key assumptions and policy directions:
  - Banking sector restructuring strategy restores bank soundness and addresses loss overhang; protects small FX deposits in viable banks (available for withdrawal in domestic currency at the market exchange rate though initially subject to withdrawal limits); medium-to-large deposits contribute to banks’ rehabilitation.
  - Control over monetary policy and unification of multiple exchange rates by end-2023; disinflation sets in; pace of nominal depreciation slows; REER stabilizes at 20 percent below pre-crisis level.
  - Fiscal policy focused on revenue mobilization to improve primary balance while creating space for social and development spending.
  - Public debt declines to around 80 percent by 2027, supported by fiscal consolidation and debt restructuring.
  - SOE reform with multilateral support; governance and institutional reforms to improve confidence and reduce informality.
  - Growth accelerates to about 4½ percent in 2025 and then settles at around 3 percent over the medium term.
  - Tight policies and weaker exchange rate narrow current account deficit (excluding official transfers) to around 5 percent of GDP by 2027; gross reserves increase to over 100 percent of the floating ARA metric.
- Sequencing note:
  - Framework illustrative assumption: sovereign debt and banking sector restructurings completed in 2024H1.
- Quantified projections under the reform scenario (2021–27) — preserved exactly:
  - Growth (percent): 2021 -10.0; 2022 0.0; 2023 -0.5; 2024 3.9; 2025 4.5; 2026 3.2; 2027 3.0
  - Consumer Prices (percent change, average): 2021 154.8; 2022 171.2; 2023 296.1; 2024 48.7; 2025 5.1; 2026 33.6; 2027 12.1
  - Nominal GDP (in billions of U.S. dollars): 2021 20.5; 2022 21.8; 2023 16.2; 2024 18.2; 2025 24.7; 2026 26.7; 2027 27.9
  - REER (cumulative, since 2019): 2021 -31.8; 2022 -26.5; 2023 -46.1; 2024 -41.9; 2025 -24.5; 2026 -20.7; 2027 -20.2
  - Current Account (percent of GDP): 2021 -17.3; 2022 -29.0; 2023 -12.5; 2024 -12.2; 2025 -11.0; 2026 -9.3; 2027 -6.0
  - Overall Fiscal Balance (percent of GDP): 2021 1.2; 2022 -5.2; 2023 -6.9; 2024 -19.9; 2025 -3.5; 2026 -2.0; 2027 -1.7
  - Primary Fiscal Balance (percent of GDP): 2021 2.4; 2022 -4.3; 2023 -3.5; 2024 -16.3; 2025 -0.6; 2026 0.7; 2027 0.9
  - Public Gross Debt (percent of GDP): 2021 349.9; 2022 282.3; 2023 509.3; 2024 110.0; 2025 91.5; 2026 83.6; 2027 80.9
- Status quo scenario — major risks and exact projections preserved:
  - Major risks: continued depreciation, spiraling inflation, de facto dollarization, informality and illicit activity entrenchment, BdL reserve losses, accelerating emigration, limited private investment, constrained bank credit, disproportionate burden on small depositors, volatile external position, unsustainable public debt, and deteriorating public services.
  - Lebanon: Key Selected Indicators Under the Status Quo Scenario, 2021–27:
    - Growth (percent): 2021 -10.0, 2022 0.0, 2023 -0.5, 2024 -0.5, 2025 -0.5, 2026 -0.5, 2027 -0.5
    - Consumer Prices (percent change, average): 2021 154.8, 2022 171.2, 2023 296.1, 2024 152.6, 2025 135.1, 2026 169.0, 2027 207.3
    - Nominal GDP (in billions of U.S. dollars): 2021 20.5, 2022 21.8, 2023 13.7, 2024 13.2, 2025 12.8, 2026 12.5, 2027 12.3
    - REER (cumulative, since 2019): 2021 -31.8, 2022 -26.5, 2023 -53.7, 2024 -55.1, 2025 -56.1, 2026 -56.9, 2027 -57.6
    - Current Account (percent of GDP): 2021 -17.3, 2022 -29.0, 2023 -20.0, 2024 -19.1, 2025 -9.6, 2026 -7.2, 2027 0.2
    - Overall Fiscal Balance (percent of GDP): 2021 1.2, 2022 -5.2, 2023 -9.2, 2024 -8.7, 2025 -6.7, 2026 -6.7, 2027 -6.3
    - Primary Fiscal Balance (percent of GDP): 2021 2.4, 2022 -4.3, 2023 -5.5, 2024 -5.4, 2025 -4.9, 2026 -5.4, 2027 -5.6
    - Public Gross Debt (percent of GDP): 2021 349.9, 2022 282.3, 2023 512.0, 2024 453.2, 2025 485.3, 2026 516.7, 2027 547.5

### Quantified cost of delaying financial sector restructuring (box findings)
- Methodology and assumptions (aggregate banking data and illustrative assumptions):
  - Banks’ balance sheets restated assuming: (i) depreciation of LBP/USD to the parallel market rate; (ii) a haircut of 75 percent to the Eurobond holdings; and (iii) 25 percent of banks’ FX loan book are non-performing.
  - Central bank balance sheet restated assuming (i) and (ii), plus (iv) wipe-out of public sector claims and liabilities at BdL, and (v) acknowledgment of BdL equity gap (proxied mostly by BdL’s Other LBP Assets).
  - Banks’ FX claims on BdL reduced to bring BdL negative capital and net FX positions to balance, which reduces FX deposits recoverable.
  - No use of government resources assumed.
- Evaluated at two points in time, March 2020 (Eurobond default) and January 2023:
  - Postponing financial sector restructuring has cost depositors US$10 bn.
  - Loss will be borne by owners of mid-to-large size deposits; small deposits likely protected in full.
- FX deposits and recoveries (preserved exactly):
  - Mar-20: FX deposits before restructuring, US$ bn 117; FX deposits after restructuring, US$ bn 71; Losses in recovered FX deposits, US$ bn -46; Average recovery rate 60%
  - Jan-23: FX deposits before restructuring, US$ bn 96; FX deposits after restructuring, US$ bn 40; Losses in recovered FX deposits, US$ bn -56; Average recovery rate 41%
- Additional losses and transfers identified:
  - Staff and authorities estimate overall losses in the financial system (BdL and commercial banks) at about US$70 bn (more than 300 percent of the estimated 2022 GDP).
  - Decline in banks’ FX loan book resulted in a transfer of wealth to borrowers: estimated implicit subsidy of up to US$15 bn between March 2020 and January 2023, arising from FX loan repayments at official rather than parallel exchange rates.

### Banking sector restructuring strategy — objectives, options, and safeguards
- Sources of large financial system losses: exchange rate depreciation; non-performing private sector loans; restructuring of public debt; central bank operations (including financial engineering operations and quasi-fiscal operations).
- Proposed broader objectives for rehabilitation:
  - Restore banks’ profitability and solvency; ensure compliance with prudential requirements.
  - Roadmap options could include:
    - Writing off capital, subordinated debt instruments, and related-party deposits.
    - Internal recapitalization through reducing overall deposits via a combination of: (i) write-offs; (ii) conversion into equity or long-term bonds in banks; and (iii) lirafication of deposits at non-market rates.
    - Protection of small FX depositors up to a certain amount in viable banks that will undergo restructuring and recapitalization based on forward-looking business plans.
    - Fresh capital from current and/or new shareholders for viable banks under credible and time-bound plans.
    - Exit of unviable banks (liquidation or mergers).
- Bank-by-bank assessment required, which requires lifting bank secrecy:
  - Assessment must evaluate each bank’s deposit structure and loss exposures to BdL, NPLs, and FX positions.
  - Shortcomings in the new Banking Secrecy Law adopted in October 2022 should be remedied to allow BdL, BCC, and NDGI and third parties to access client-level transaction and deposit data.
- Any use of public resources should be limited and consistent with debt sustainability:
  - Staff cautioned against allocating state assets to benefit a small group of depositors or sizable injections to recapitalize banks, due to debt sustainability and moral hazard concerns.
  - Staff open to limited use of public resources to improve BdL’s capital position, subject to strict governance preconditions.
- Governance reforms needed for BdL and banking authorities:
  - Align BdL’s mandate with best practices by prohibiting development function, significant quasi-fiscal operations, and participations in public utility companies or mixed national companies.
  - Enhance BdL accountability through public and internal oversight by the Central Council; introduce Audit Committee, internal audit and external audit in line with best practices.
  - Strengthen appointment and dismissal requirements and procedures, including legal protections.
  - Enhance BdL’s institutional, operational, and financial autonomy; eliminate Government representation on the Central Council and ensure majority independent non-executive Directors.
  - Introduce policies and procedures to mitigate conflicts of interest; discontinue BdL’s role in the Special Investigation Committee (SIC); eliminate monetary financing; enhance BCC’s autonomy.

### Monetary policy, exchange rate unification, and operational measures
- Finding a credible nominal anchor is critical to restore confidence and arrest inflation and exchange rate depreciation; decision on a new monetary regime should follow major transitional processes and some stabilization.
- Interim priority: unifying the exchange rate for permitted transactions and eliminating BdL circulars that created multiple exchange rates.
- Exchange rate unification implementation elements:
  - a) A proper trading platform (either building on Sayrafa or otherwise) for price discovery and large-sized trading for permitted transactions.
  - b) Approval and implementation of an appropriate CFMs and deposit withdrawal limits law:
    - Temporary withdrawal restrictions needed for both FX and LL accounts to limit FX market pressures, minimize impact on official reserves, and preserve bank deposits during restructuring.
    - Rules should include repatriation requirements for exporters and money transfer companies to ensure adequate FX supply.
    - Removal of CFMs should be contingent on economic developments; deposit withdrawal limits set flexibly depending on financial sector liquidity.
  - c) FX intervention policy: interventions should be limited to disorderly market conditions and should not suppress underlying trends implied by fundamentals.
- Recommendation: Tight monetary policy is required to steadily reduce inflation and support exchange rate unification.
  - Make use of all available monetary policy tools.
  - Strict prohibition of budget financing by the central bank (BdL).
  - Strengthen BdL’s decision-making structure.
- Operational actions taken/planned:
  - BdL initiated transformation of the Sayrafa platform into a trading platform.
  - Authorities plan to use the Sayrafa rate (or the market rate once unified) for budget items in the 2023 budget.

### Fiscal policy, debt sustainability, and quantified consolidation measures
- Fiscal strategy objectives:
  - Restore debt sustainability and public service provision while opening space for social and investment spending.
  - Gradual fiscal consolidation to bring the primary balance to a surplus of 1 percent of GDP by 2027.
  - Combined with a debt restructuring operation, reduce government debt to around 80 percent of GDP by 2027 and place it on a downward path thereafter.
- Immediate fiscal steps for stabilization:
  - Adopt promptly a credible 2023 budget incorporating an appropriate exchange rate for the computation of all taxes and inflation adjustments to specific taxes and excises.
- Quantified fiscal consolidation measures (annual, % of GDP) — Fiscal Consolidation Under the Reform Scenario 2023–27 (preserved numbers):
  - Total Measures (change in primary balance, excluding BdL recapitalization): -0.7, 0.3, 2.0, 1.5, 0.5 (for 2023, 2024, 2025, 2026, 2027 respectively).
  - Revenue-Enhancing Measures (by component; 2023, 2024, 2025, 2026, 2027):
    - Customs (ER valuation): 0.6, 1.4, -0.3, 0.0, 0.0
    - Excises (restore specific excises): 0.0, 0.4, 0.1, 0.1, 0.0
    - VAT (import valuation, reducing exemptions): 0.8, 1.2, 0.3, 0.1, 0.0
    - CIT (ER valuation/reducing incentives): 0.0, 0.6, 0.2, 0.2, 0.1
    - PIT (ER valuation/streamlining deductions): 0.0, 0.4, 0.3, 0.0, 0.0
    - Property tax (ER valuation, streamline exemptions): 0.2, 0.4, 0.1, 0.1, 0.1
    - Administrative fees adjustment (restore to adjust for inflation): 0.3, 0.3, 0.2, 0.0, 0.0
    - Revenue administration: 0.1, 0.2, 0.1, 0.2, 0.1
    - Total revenue-enhancing sum by year: 2.0, 4.9, 0.9, 0.7, 0.4
  - Expenditure Reducing Measures and Other Fiscal Components (2023–2027):
    - Electricity sector reform (expenditure reducing): -0.8, 0.5, 0.9, 0.5, 0.1
    - Personnel costs (expenditure increasing): -1.0, -0.6, -0.5, 0.0, 0.0
    - Social and reconstruction (expenditure increasing): -0.4, -1.3, 0.4, 0.2, 0.3
    - Capital spending (incl. CEDRE financed): -0.2, -3.1, 0.5, 0.1, -0.3
    - Macroeconomic factors (inflation) and One-offs: 1.5, 0.6, 0.0, -0.3, -0.2
    - Change in primary balance (excl. BdL recapitalization): 0.8, 0.9, 2.0, 1.2, 0.3
- Staff caveat: The parameters are sensitive to macroeconomic assumptions and therefore subject to high uncertainty.

### SOEs, electricity sector, and governance priorities
- SOE findings and reform priorities:
  - Prepare a comprehensive inventory of all SOEs and publish annual financial statements.
  - Conduct financial audits by reputable international firms for large SOEs.
  - Approve an SOE ownership strategy by cabinet and carry out SOE triage (keep, privatize, liquidate).
  - Adopt a new SOE law aligned with the ownership strategy and international standards.
- Electricity sector immediate focus and targets:
  - Improve EdL operational performance and financial sustainability, enhance transparency in EdL’s financial reporting and cash management, establish an independent Electricity Regulatory Authority (ERA).
  - Target: mobilize donor financing to increase electricity supply and achieve cost recovery by 2026.
  - November 2022 electricity tariff increase implemented: new tariffs noted in source; impact depends on EdL’s capacity to enforce collection and reduce non-technical losses.
- Governance, anti-corruption, and AML/CFT:
  - Strengthen AML/CFT regime, leverage recent banking secrecy legislation reform, ensure operational independence of the SIC, enhance AML/CFT risk-based supervision, and address MENAFATF assessment deficiencies.
  - IMF undertaking a governance diagnostic at authorities’ request to prioritize and sequence reforms.

### Deposit protection, targeted measures, and political-consensus mitigations
- Banks hold almost US$100 bn worth of FX deposit accounts.
- FX deposits by tranche as of December 31, 2022 (solo basis) — preserved exactly:
  - Less than US$100,000: Number of Accounts 1,246,741; Deposit Values, US$ mn 16,761; Percent of Accounts 88%; Percent of Deposits 18%; Cost of protecting up to 100K, US$ mn 16,761
  - US$100,000 to US$1 mn: Number of Accounts 152,527; Deposit Values, US$ mn 40,795; Percent of Accounts 11%; Percent of Deposits 44%; Cost of protecting up to 100K, US$ mn 15,253
  - US$1 mn to US$10 mn: Number of Accounts 10,790; Deposit Values, US$ mn 24,416; Percent of Accounts 1%; Percent of Deposits 26%; Cost of protecting up to 100K, US$ mn 1,079
  - More than US$10 mn: Number of Accounts 443; Deposit Values, US$ mn 10,234; Percent of Accounts 0.03%; Percent of Deposits 11%; Cost of protecting up to 100K, US$ mn 44
  - Total: Number of Accounts 1,410,501; Deposit Values, US$ mn 92,206; Cost of protecting up to 100K, US$ mn 33,136.7
- Proposed mitigations to build political consensus (preserved formulations):
  - Distinguish “eligible” and “non-eligible” deposits (including deposits converted into dollars at the official exchange rate of 1,500 LBP to the dollar since October 2019).
  - Claw back excess interest earnings; staff estimate interest amount over LIBOR during 2015–21 could be about US$15 bn.
  - Recapitalize BdL via a marketable bond to reduce write-off of BdL’s FX liabilities to commercial banks, subject to strict governance preconditions.
  - Consider Deposit Recovery Fund funded from proceeds of state asset management contracts, recovery of stolen assets, and future oil and gas revenues, subject to conditions (successful reforms, public debt below program targets, and benchmarks).
  - Cautions on Deposit Recovery Fund: such a fund would constitute a contingent claim on government resources, undermining debt sustainability and constraining fiscal policy.
  - Operational difficulties: bank secrecy law and unclear ownership structures complicate granular verifications required for “ineligible” deposit identification.

### Risk assessment and public debt sustainability (selected highlights)
- RAM external and domestic risks (likelihood and impacts preserved qualitatively):
  - Intensification of regional conflict(s): Likelihood: High; Possible Impact: High.
  - Lack of progress on reforms: Likelihood: High; Possible Impact: High.
  - Widespread social discontent and political instability: Likelihood: High; Possible Impact: Medium.
- Public Debt Sustainability Assessment — summary:
  - Final assessment: High overall risk.
  - Baseline assumes authorities will complete debt restructuring (illustratively completed in 2024).
  - Conditional outcome: prompt and full implementation of reforms could deliver significant near-term reduction of debt and manageable financing needs; status quo leaves debt unsustainable.
- Selected macro and fiscal projection lines (preserved exactly from illustrative scenario tables):
  - Real GDP (market prices): 2018 -1.9; 2019 -6.9; 2020 -25.9; 2021 -10.0; 2022 0.0; 2023 -0.5; 2024 3.9; 2025 4.5; 2026 3.2; 2027 3.0
  - GDP deflator: 2018 5.5; 2019 4.1; 2020 61.1; 2021 40.8; 2022 165.0; 2023 290.0; 2024 143.0; 2025 70.0; 2026 30.0; 2027 10.0
  - Central government revenue (including grants, percent of GDP): 2018 21.0; 2019 20.8; 2020 16.0; 2021 9.8; 2022 6.3; 2023 9.5; 2024 15.2; 2025 16.1; 2026 16.3; 2027 16.2
  - Total government debt (percent of GDP): 2018 155.1; 2019 172.3; 2020 150.6; 2021 349.9; 2022 282.3; 2023 509.3; 2024 110.0; 2025 91.5; 2026 83.6; 2027 80.9
  - Gross reserves (excl. gold, year-end, millions USD, memo): 2018 31,447; 2019 24,521; 2020 17,650; 2021 13,614; 2022 10,624; 2023 9,531; 2024 11,680; 2025 13,339; 2026 14,030; 2027 15,470
  - Net IIP estimate (staff): close to -$72 billion or about -350 percent of GDP in 2021 (staff estimate).
- Annex III external sector assessment highlights:
  - Current account (ex. official transfers, millions USD): 2018 -15,670; 2019 -14,247; 2020 -3,832; 2021 -3,539; 2022 -6,479; 2023 -2,159; 2024 -2,427; 2025 -2,952; 2026 -2,596; 2027 -1,687
  - Usable international reserves peaked at $36,8 billion in October 2017; dropped to $10.4 billion as of December 2022 (use of gold requires parliamentary approval).
  - Reserves adequacy: current level about 37 percent of the ARA metric for floating regimes — well below recommended 100–150 percent range.

### Staff appraisal and policy priorities (concise recommendations)
- Overarching assessment:
  - Lebanon is at a dangerous crossroads; further delays in implementing reforms will keep the economy depressed with irreversible consequences, particularly for low-to-middle income households.
- Recommended comprehensive recovery plan centered on five pillars:
  - debt sustainability;
  - bank rehabilitation;
  - monetary and exchange rate policy credibility;
  - SOE restructuring;
  - institutional and governance reforms.
- Financial sector restructuring priorities:
  - Address upfront BdL and commercial banks’ large losses, respect hierarchy of claims, protect small depositors to the extent possible, limit recourse to public sector, restructure viable banks under timebound plans, and exit unviable banks.
  - Change the Banking Secrecy Law to address outstanding weaknesses; carry out bank-by-bank assessments.
- Monetary and exchange rate policy:
  - Unify exchange rates and adopt tight monetary policy using all available tools; strictly prohibit central bank financing of the government; limit FX interventions to disorderly markets; accompany unification with temporary capital controls and deposit withdrawal limits as needed.
- Fiscal and structural reforms:
  - Adopt 2023 Budget using a unified market exchange rate for taxes and customs; mobilize revenue via tax base widening and administration reforms; reduce SOE transfers (especially for electricity); pursue PFM modernization and procurement reforms.
- Governance, AML/CFT, and data:
  - Strengthen AML/CFT framework, remediate MENAFATF deficiencies, publish governance diagnostic, enhance judicial independence, and improve data collection and statistical capacity to inform policy.

*Source: IMF staff report excerpt, "1. The Cost of Delaying Reforms for Depositors."*

### 1. The Cost of Delaying Reforms for Depositors _______________________________________________  13

### 1. The Cost of Delaying Reforms for Depositors

### Context
- Crisis origins and amplification:
  - Nonresident deposits and other inflows began reversing in 2018 as confidence eroded after years of challenging economic conditions, policy mismanagement, and pervasive corruption.
  - Regional conflicts, including in Syria and the large inflow of displaced people, added to domestic vulnerabilities.
  - Further shocks: default on Eurobond debt service in March 2020, the COVID-19 crisis, the explosion at the Beirut Port in August 2020, and Russia’s war in Ukraine.
- Socioeconomic impact since onset:
  - GDP declined by about 40 percent.
  - Parallel exchange rate lost 98 percent of its value.
  - Inflation at triple-digits.
  - Central bank lost two thirds of its FX reserves.
  - Unemployment rising; poverty at historic highs; increased emigration.
  - Basic services (electricity and water) drastically cut; public sector institutions failing.
- Political environment and reform impediments:
  - Limited action since 2019; three successive governments failed to implement comprehensive policy response.
  - A staff level agreement (SLA) on a package of policies for EFF support reached in April 2022, but progress on agreed reforms has been very slow.
  - Political constraints: fractured parliament after May 2022 elections; caretaker government; president’s term expired in October 2022; BdL Governor’s term ends in July with potential appointment delays.
  - Positive regional development: agreement between Saudi Arabia and Iran to reestablish diplomatic relations; maritime demarcation with Israel on October 27, 2022 offers opportunity to explore offshore gas and oil (but resources will take time to materialize).

### Recent Developments
- Growth and activity:
  - After sharp contraction since 2018, some stabilization in 2022 supported by end of COVID restrictions, rebound in tourism, strong inflows of remittances, and decline in international energy and food prices in H2 2022.
  - Staff estimates no growth in 2022; BdL estimates growth of 2 percent.
  - Unemployment estimated around 30 percent (58 percent among young people).
  - Half of the Lebanese population currently seen as vulnerable by UN.
- Exchange rate, dollarization, money, and inflation:
  - Parallel market depreciation accelerating: from 4.8 percent per month on average in 2022 to about 32.3 percent per month in Q1 2023.
  - Lira reached 140,000 per US$ in mid-March 2023 before appreciating after BdL announced unlimited intervention on the Sayrafa platform at 90,000.
  - Official exchange rate: 1,507.5 LBP/US$ for first 2½ years, moved to 15,000 LBP/US$ in February 2023.
  - Dollarization accelerated: businesses allowed to set prices in US dollars; growing share of contracts and wages in US dollars.
  - Currency in circulation and M1 increased by about 70 percent in 2022.
  - Inflation reached 190 percent year-on-year in February 2023; food prices increased by 261 percent.
  - FX reserves at the central bank declined to about US$10 billion (compared to US$36 billion at peak in 2017); central bank holds an additional US$17 billion in gold.
- Fiscal and external positions:
  - Fiscal deficit widened to an estimated 5 percent of GDP in 2022.
  - Fiscal revenues estimated to have collapsed to 6 percent of GDP in 2022 (compared to 10 percent of GDP in 2021 and over 20 percent before the crisis).
  - FAD TA mission estimated revenues forgone in 2022 due to mis-valuation of customs and taxes at the border at 4.8 percent of GDP, and additional 0.8 percent of GDP lost because of inflation impact on specific taxes and excises.
  - BdL financing, limited donor support, and SDR allocation used to fund critical spending.
  - Staff estimates that incorporating BdL quasi-fiscal operations would further widen the deficit to around 8.5 percent of GDP.
  - After contraction in 2020–21, current account deficit increased significantly in 2022 (wider deficit largely due to accelerating imports and opportunistic purchases and possible over-invoicing).
  - Lebanon remains in default on its Eurobonds; reports of some arrears on bilateral and multilateral loans; at end-2022 reported arrears of US$ 39.6 million to bilateral and multilateral creditors.
- Banking sector and services:
  - Banks reduced services and essentially stopped extending credit; informal deposit withdrawal restrictions persist with considerable leakage.
  - FX deposits declined by US$30 bn since the crisis; FX loan book decreased by US$27 bn with many loans repaid in local currency at the official exchange rate.
  - Sector reports positive capital position of US$12 bn at the official exchange rate, but recognition of losses on BdL and sovereign exposures will mean large capital shortfalls for most banks.
  - Electricity provision constrained: EdL provides 3–4 hours per day; reliance on expensive private generators; deal with World Bank (June 2022) to finance gas purchases from Egypt contingent on meeting project conditions.
  - November 2022: electricity tariffs increased for the first time since the 1990s.
- Reform implementation status:
  - Little progress on prior actions agreed under the 2022 SLA.
  - Budget for 2022 enacted only in mid-November with different parameters and few reform measures.
  - Draft law on capital controls and deposit withdrawals falls short of staff advice.
  - BCC preparing an emergency bank resolution law and terms of reference for independent external assessments of 14 largest banks, but political decisions on banking restructuring specifics still needed.
  - October 2022: new banking secrecy law adopted with major improvements but critical issues remain.
  - Special audit of BdL by an internationally reputable firm completed; report expected to be released soon.

### Outlook and Risks: Reform Scenario versus Status Quo
- Reform scenario (authorities’ stated strategic objective; implementation unlikely until new president and full cabinet approved):
  - Key assumptions and policies:
    - Banking sector restructuring strategy restores bank soundness and addresses loss overhang; protects small FX deposits in viable banks (available for withdrawal in domestic currency at the market exchange rate though initially subject to withdrawal limits); medium-to-large deposits contribute to banks’ rehabilitation.
    - Control over monetary policy and unification of multiple exchange rates by end-2023; disinflation sets in; pace of nominal depreciation slows; REER stabilizes at 20 percent below pre-crisis level.
    - Fiscal policy focused on revenue mobilization to improve primary balance while creating space for social and development spending; structural fiscal reforms to improve tax administration, PFM, and fiscal framework.
    - Public debt declines to around 80 percent by 2027, supported by fiscal consolidation and debt restructuring.
    - SOE reform with multilateral support to improve financial position and services.
    - Governance and institutional reforms to improve confidence and reduce informality.
    - Growth accelerates to about 4½ percent in 2025 and then settles at around 3 percent over the medium term.
    - Tight policies and weaker exchange rate narrow current account deficit (excluding official transfers) to around 5 percent of GDP by 2027; gross reserves increase to over 100 percent of the floating ARA metric.
  - Sequencing and timing notes:
    - Framework illustrative assumption: sovereign debt and banking sector restructurings completed in 2024H1.
    - Proper sequencing of complex reforms is particularly important; delaying reforms has a very large near-term cost and could set a different trajectory.
- Quantified projections under the reform scenario (2021–27):
  - Growth (percent): 2021 -10.0; 2022 0.0; 2023 -0.5; 2024 3.9; 2025 4.5; 2026 3.2; 2027 3.0
  - Consumer Prices (percent change, average): 2021 154.8; 2022 171.2; 2023 296.1; 2024 48.7; 2025 5.1; 2026 33.6; 2027 12.1
  - Nominal GDP (in billions of U.S. dollars): 2021 20.5; 2022 21.8; 2023 16.2; 2024 18.2; 2025 24.7; 2026 26.7; 2027 27.9
  - REER (cumulative, since 2019): 2021 -31.8; 2022 -26.5; 2023 -46.1; 2024 -41.9; 2025 -24.5; 2026 -20.7; 2027 -20.2
  - Current Account (percent of GDP): 2021 -17.3; 2022 -29.0; 2023 -12.5; 2024 -12.2; 2025 -11.0; 2026 -9.3; 2027 -6.0
  - Overall Fiscal Balance (percent of GDP): 2021 1.2; 2022 -5.2; 2023 -6.9; 2024 -19.9; 2025 -3.5; 2026 -2.0; 2027 -1.7
  - Primary Fiscal Balance (percent of GDP): 2021 2.4; 2022 -4.3; 2023 -3.5; 2024 -16.3; 2025 -0.6; 2026 0.7; 2027 0.9
  - Public Gross Debt (percent of GDP): 2021 349.9; 2022 282.3; 2023 509.3; 2024 110.0; 2025 91.5; 2026 83.6; 2027 80.9

### Sequencing and Interplay of Proposed Reforms (summary logic)
- Preparatory and Stage actions:
  - Pre-crisis and crisis-related measures to contain immediate pressures: capital controls and deposit withdrawal limits to safeguard scarce FX resources; start bank restructuring strategy (mergers, capital injections, closures); start government debt restructuring negotiations.
  - Monetary and exchange rate policies: unification of exchange rates to reduce pressures on GIR and boost government revenues; BdL governance reforms and interim monetary framework for disinflation; new monetary regime.
  - Fiscal policy: approval of budget with short-term tax policy and revenue administration measures; expenditure review, procurement reforms, modern PFM law, integrated TSA.
  - Structural policies and governance: bank secrecy, audits of banks and BdL to evaluate losses and available assets; governance, transparency, accountability reforms (judicial, asset declaration, AML/CFT).
  - Energy and SOE reforms: energy tariff reforms, further energy sector reforms to reduce transmission and distribution losses and enhance governance; SOE reforms for transparency and oversight.
  - Social and growth outcomes: restored public administration and increased provision of public services and social safety nets; resumption in growth supporting inflows (FDI & equity); deposit insurance reform; meaningful growth impulse as reforms complete.
- Expected medium-term benefits:
  - Reduced uncertainties, improved infrastructure and regulatory frameworks, less corruption, increased and improved provision of public services and social safety nets, and a new sustainable growth model with restored macroeconomic stability and better social conditions.

*Source: IMF staff report excerpt, "1. The Cost of Delaying Reforms for Depositors."*

### 14.      The continuation of the status quo presents the largest risk to Lebanon’s economic

### 14. The continuation of the status quo presents the largest risk to Lebanon’s economic and social stability

### Major risks and dynamics under the status quo
- Uncertainty will keep confidence depressed and cash dollarization of the economy will continue, until Lebanon becomes de facto dollarized.
- The exchange rate will continue to depreciate, fueling the already high inflation.
- Economic activity will move into informal (and illicit) sectors, complicating fiscal revenue collection.
- BdL, saddled with unaddressed losses and a lack of credibility, will continue to lose international reserves.
- Emigration, especially among skilled professionals, may gain pace, undermining future growth.
- Investment in physical capital will be limited to real estate and maintenance of existing facilities.
- Banks will not be able to meaningfully extend credit and real growth will remain subdued.
- Small depositors will continue to gradually withdraw their FX savings with large haircuts, while medium-to-large deposits will remain inaccessible.
- Allocation of losses in the financial sector will fall disproportionately on smaller depositors, while large depositors might eventually extract compensation in the form of state assets.
- The external position will be highly volatile, with limited aid from multilateral and regional partners.
- Import compression will continue; trade balance driven by imports of essential products and energy inputs.
- Public debt will remain unsustainable as restructuring is unlikely in the absence of reforms, severely limiting the government’s ability to borrow.
- Provision of services by the state will be limited, forcing further expenditure compression (capital investment, employment, and wages).
- Social conditions will become increasingly untenable.

### Lebanon: Key Selected Indicators Under the Status Quo Scenario, 2021–27 (Act./Est. Projections)
- Growth (percent): 2021 -10.0, 2022 0.0, 2023 -0.5, 2024 -0.5, 2025 -0.5, 2026 -0.5, 2027 -0.5
- Consumer Prices (percent change, average): 2021 154.8, 2022 171.2, 2023 296.1, 2024 152.6, 2025 135.1, 2026 169.0, 2027 207.3
- Nominal GDP (in billions of U.S. dollars): 2021 20.5, 2022 21.8, 2023 13.7, 2024 13.2, 2025 12.8, 2026 12.5, 2027 12.3
- REER (cumulative, since 2019): 2021 -31.8, 2022 -26.5, 2023 -53.7, 2024 -55.1, 2025 -56.1, 2026 -56.9, 2027 -57.6
- Current Account (percent of GDP): 2021 -17.3, 2022 -29.0, 2023 -20.0, 2024 -19.1, 2025 -9.6, 2026 -7.2, 2027 0.2
- Overall Fiscal Balance (percent of GDP): 2021 1.2, 2022 -5.2, 2023 -9.2, 2024 -8.7, 2025 -6.7, 2026 -6.7, 2027 -6.3
- Primary Fiscal Balance (percent of GDP): 2021 2.4, 2022 -4.3, 2023 -5.5, 2024 -5.4, 2025 -4.9, 2026 -5.4, 2027 -5.6
- Public Gross Debt (percent of GDP): 2021 349.9, 2022 282.3, 2023 512.0, 2024 453.2, 2025 485.3, 2026 516.7, 2027 547.5

### Box 1 — The Cost of Delaying Reforms for Depositors: key findings
- Postponing reforms has been costly: reduction in economic activity and increased unemployment have led to large declines in consumption and investment.
- Large depreciation of the LBP drastically reduced the value of LBP-denominated assets, including deposits.
- Rationing of FX forced many depositors (mainly small liquidity-constrained individuals and households) to accept losses when accessing FX deposits at highly disadvantageous exchange rates.
- Inaction decreased the FX deposits recoverable when the financial sector is restructured.
- Methodology (aggregate banking data and illustrative assumptions):
  - Banks’ balance sheets restated assuming: (i) depreciation of LBP/USD to the parallel market rate; (ii) a haircut of 75 percent to the Eurobond holdings; and (iii) 25 percent of banks’ FX loan book are non-performing.
  - Central bank balance sheet restated assuming (i) and (ii), plus (iv) wipe-out of public sector claims and liabilities at BdL, and (v) acknowledgment of BdL equity gap (proxied mostly by BdL’s Other LBP Assets).
  - Banks’ FX claims on BdL reduced to bring BdL negative capital and net FX positions to balance, which reduces FX deposits recoverable.
  - No use of government resources assumed.
- Evaluated at two points in time, March 2020 (Eurobond default) and January 2023:
  - This shows postponing financial sector restructuring has cost depositors US$10 bn.
  - Loss will be borne by owners of mid-to-large size deposits; small deposits likely protected in full.
- FX deposits and recoveries:
  - Mar-20: FX deposits before restructuring, US$ bn 117; FX deposits after restructuring, US$ bn 71; Losses in recovered FX deposits, US$ bn -46; Average recovery rate 60%
  - Jan-23: FX deposits before restructuring, US$ bn 96; FX deposits after restructuring, US$ bn 40; Losses in recovered FX deposits, US$ bn -56; Average recovery rate 41%
- Main back-up resources: BdL’s FX deposits and gold holdings, banks’ net assets abroad, and banks’ FX assets (mainly loans).
- In 2017, the system had enough to cover almost all FX deposits; over time the gap opened due to continued financing of subsidized imports and government spending at preferential exchange rates and BdL interventions.

### Additional losses and transfers identified
- Staff and authorities estimate overall losses in the financial system (BdL and commercial banks) at about US$70 bn (more than 300 percent of the estimated 2022 GDP).
- Decline in banks’ FX loan book resulted in a transfer of wealth to borrowers: estimated implicit subsidy of up to US$15 bn between March 2020 and January 2023, arising from FX loan repayments at official rather than parallel exchange rates.

### Authorities’ views (summary)
- Authorities agreed with the assessment of the outlook under both scenarios, but were more optimistic about growth under the reform scenario.
- Noted private non-financial corporate sector showing some signs of recovery (large deleveraging; activity in import-substituting industries).
- Emphasized advances in digitalization, agrobusiness, small-scale industrialization, and tourism.
- Stressed high uncertainty and risks from the status quo; political economy constraints (divided Parliament) impede reforms.
- Highlighted the burden of a large refugee presence and requested Fund assessment of economic costs and help mobilizing international support.
- Proposed modifications that could improve deposit recovery rates, including:
  - Clawing back excess interest earnings.
  - Reversing some LBP-to-FX transactions.
  - Distinguishing “eligible” and “non-eligible” deposits (including deposits converted into dollars at the official exchange rate of 1,500 LBP to the dollar since October 2019).
  - Recovering stolen and smuggled money.
- Suggested that a Deposit Recovery Fund could be considered in future if state asset management contracts are awarded to the private sector, reforms are successful, public debt reaches a level lower than program targets, and benchmarks against similar countries are met; aim to secure recovery of deposits exceeding USD100,000 over time.

### Policy discussions and reform priorities
- Discussions focused on policies under the reform scenario to turn the economy around:
  - (i) revamping the health and viability of the financial sector;
  - (ii) restoring debt sustainability while safeguarding social and development spending;
  - (iii) unifying the official exchange rates and finding a new monetary anchor;
  - (iv) advancing structural reforms;
  - (v) strengthening public institutions, financial sector oversight, and the AML/CFT framework.

A. Banking Sector Restructuring Strategy
- Sources of large financial system losses: exchange rate depreciation; non-performing private sector loans; restructuring of public debt; central bank operations (including financial engineering operations and quasi-fiscal operations).
- BdL and commercial banks incurred large losses; BdL oversized liabilities to banks would need to be written down as the state cannot recapitalize BdL.
- Proposed broader objectives for rehabilitation:
  - Restore banks’ profitability and solvency; ensure compliance with prudential requirements.
  - Roadmap options could include:
    - Writing off capital, subordinated debt instruments, and related-party deposits.
    - Internal recapitalization through reducing overall deposits via a combination of: (i) write-offs; (ii) conversion into equity or long-term bonds in banks; and (iii) lirafication of deposits at non-market rates.
    - Protection of small FX depositors up to a certain amount in viable banks that will undergo restructuring and recapitalization based on forward-looking business plans.
    - Fresh capital from current and/or new shareholders for viable banks under credible and time-bound plans.
    - Exit of unviable banks (liquidation or mergers).
- Bank-by-bank assessment required, which requires lifting bank secrecy:
  - Assessment must evaluate each bank’s deposit structure and loss exposures to BdL, NPLs, and FX positions.
  - Shortcomings in the new Banking Secrecy Law adopted in October 2022 should be remedied to allow BdL, BCC, and NDGI and third parties to access client-level transaction and deposit data.
- Any use of public resources should be limited and consistent with debt sustainability:
  - Staff cautioned against allocating state assets to benefit a small group of depositors or sizable injections to recapitalize banks, due to debt sustainability and moral hazard concerns.
  - Staff open to limited use of public resources to improve BdL’s capital position, subject to strict governance preconditions.
- Governance reforms needed for BdL and banking authorities:
  - Align BdL’s mandate with best practices by prohibiting development function, significant quasi-fiscal operations, and participations in public utility companies or mixed national companies.
  - Enhance BdL accountability through public and internal oversight by the Central Council; introduce Audit Committee, internal audit and external audit in line with best practices.
  - Ensure effective collegial decision-making of executive management; review internal delegation procedures.
  - Strengthen appointment and dismissal requirements and procedures, including legal protections.
  - Enhance BdL’s institutional, operational, and financial autonomy; eliminate Government representation on the Central Council and ensure majority independent non-executive Directors.
  - Introduce policies and procedures to mitigate conflicts of interest; discontinue BdL’s role in the Special Investigation Committee (SIC); eliminate monetary financing; enhance BCC’s autonomy.

B. Monetary Policy, Exchange Rate Unification, Rebuilding Credibility
- Finding a credible nominal anchor is critical to restore confidence and arrest inflation and exchange rate depreciation; decision on a new monetary regime should follow major transitional processes and some stabilization.
- Interim priority: unifying the exchange rate for permitted transactions and eliminating BdL circulars that created multiple exchange rates.
- Exchange rate unification should be centered on:
  - a) A proper trading platform (either building on Sayrafa or otherwise) for price discovery and large-sized trading for permitted transactions.
  - b) Approval and implementation of an appropriate CFMs and deposit withdrawal limits law:
    - Temporary withdrawal restrictions needed for both FX and LL accounts to limit FX market pressures, minimize impact on official reserves, and preserve bank deposits during restructuring.
    - Rules should include repatriation requirements for exporters and money transfer companies to ensure adequate FX supply.
    - Removal of CFMs should be contingent on economic developments; deposit withdrawal limits set flexibly depending on financial sector liquidity.
  - c) FX intervention policy: interventions should be limited to disorderly market conditions and should not suppress underlying trends implied by fundamentals.

_Italic: Source: IMF staff estimates, projections, and analysis as presented in the provided content._

### 24.       The exchange rate unification would need to be supported by tight monetary policy

### 24.       The exchange rate unification would need to be supported by tight monetary policy

### Monetary policy and exchange rate unification
- Recommendation: Tight monetary policy is required to steadily reduce inflation and support exchange rate unification.
- Implementation elements:
  - Make use of all available monetary policy tools.
  - Strict prohibition of budget financing by the central bank (BdL).
  - Strengthen BdL’s decision-making structure.
- Risks and operational considerations:
  - Authorities warned that maintaining BdL budget deficit financing and quasi-fiscal operations would undermine the strategy and could prevent achieving expected results.
  - BdL highlighted potential risks from exchange rate unification to financial system stability and liquidity.
  - BdL has started transforming the Sayrafa platform into a trading platform and expects to accelerate this process with IMF technical assistance.
- Contextual note (from staff): The exchange restriction arises from central bank rationing of FX through limited and subsidized FX allocations at rates not reflective of market conditions; this leads to FX rationing, FX shortages, channeling of demand to the parallel market, and extra costs. Multiple currency practices (MCPs) arise from a larger than 2 percent deviation between: (i) official rate of 1,500 LBP/USD used for current account payments for priority imports where shipments were made before February 1, 2023; (ii) official rate of 15,000 LBP/USD for government transactions and medical priority imports; (iii) the Sayrafa exchange rate; and (iv) the market rate used by FX bureaus.

### Authorities’ views on monetary and exchange rate measures
- Authorities’ stance:
  - Agreed that the current monetary regime is no longer sustainable and that unification of the multiple official exchange rates is needed.
  - Would have preferred unification in a more favorable environment to avoid overshooting, but vulnerabilities from the current system require no further delays.
  - Emphasized that the decision needs to be taken jointly with the Ministry of Finance (MoF) and government.
  - Noted potential difficulties eliminating BdL’s financing quickly because of social unrest concerns and the political economy of wage adjustments.
- Operational actions taken/planned:
  - BdL initiated transformation of the Sayrafa platform into a trading platform.
  - Authorities plan to use the Sayrafa rate (or the market rate once unified) for budget items in the 2023 budget.

### Fiscal policy, debt sustainability, and complementary reforms
- Fiscal strategy objectives:
  - Restore debt sustainability and public service provision while opening space for social and investment spending.
  - Gradual fiscal consolidation to bring the primary balance to a surplus of 1 percent of GDP by 2027.
  - Combined with a debt restructuring operation, reduce government debt to around 80 percent of GDP by 2027 and place it on a downward path thereafter.
- Debt restructuring and financing targets:
  - Authorities plan to engage in good faith negotiations with private creditors, supported by financial and legal advisors.
  - Current illustrative scenario aims to calibrate restructuring to deliver an 80 percent debt to GDP ratio by 2027, and gross financing needs averaging no more than 9 percent per year in the 2024–27 period.
  - Staff note: Calculations of GFN in 2024 are distorted by the assumed BdL recapitalization.
- Immediate fiscal steps for stabilization:
  - Adopt promptly a credible 2023 budget incorporating an appropriate exchange rate for the computation of all taxes and inflation adjustments to specific taxes and excises (gasoline, alcohol, tobacco, sugary drinks, private use vehicles).
  - Tax administration to prioritize industries less impacted by the crisis and new emerging industries.
  - Revenue mobilization measures to allow for a notable increase in the wage bill with safeguards (productivity bonuses, targeted transportation allowances); avoid general wage indexation to inflation or exchange rate under current circumstances.
- Medium-term revenue and expenditure reforms:
  - Tax policy reforms: streamline exemptions, restore specific excises, close loopholes, modernize the CIT, introduce simplified tax regime for small taxpayers, improve property valuation.
  - Tax administration reforms: recover tax arrears via tailored payment installments, establish a large debtor unit, re-launch the large taxpayer office (LTO), merge VAT for large taxpayers with LTO, operationalize broad Tax Administration access to banking secrecy information, integrate VAT and Revenue Directorate.
  - Customs reforms: develop robust customs for Port of Beirut, implement an Authorized Economic Operator Program and a Single Window program.
  - Expenditure measures: gradual reduction of electricity subsidies underpinned by energy sector reforms; phase out transfers to loss-making SOEs, particularly EdL.
  - Public administration reforms: conduct functional reviews and a census of all government and public enterprise positions to remove ghost workers and adjust workforce and salaries.
  - Medium-term spending reviews across education, electricity, and infrastructure to reduce low priority or inefficient spending.
- Public Financial Management (PFM) reforms:
  - Introduce a new, modern PFM Law and a comprehensive PFM roadmap: broaden budget coverage, formulate medium-term fiscal framework, restrict treasury advances, establish integrated treasury single account, enhance SOE oversight.
  - Distinguish responsibilities between MoF external control and Court of Audit; extend internal control coverage of Central Inspection; strengthen independence of budget control bodies.
  - Implement procurement law and e-procurement platform; quantify and audit expenditure arrears and prepare a strategic clearance plan.
- Social protection and pensions:
  - Expand social safety net via the Emergency Social Safety Net (ESSN) to increase coverage from 43,000 households to 150,000 households through targeted cash transfers and education services; leverage the IMPACT electronic registration platform and develop an integrated social registry.
  - Pension system reforms: transition the NSSF pension branch from EOSI to a pay-as-you-go system is being discussed; complement with public sector pension reform.

### Quantified fiscal consolidation measures (annual, % of GDP) — Fiscal Consolidation Under the Reform Scenario 2023–27
- Total Measures (change in primary balance, excluding BdL recapitalization): -0.7, 0.3, 2.0, 1.5, 0.5 (for 2023, 2024, 2025, 2026, 2027 respectively).
- Revenue-Enhancing Measures:
  - Customs (ER valuation): 0.6, 1.4, -0.3, 0.0, 0.0
  - Excises (restore specific excises): 0.0, 0.4, 0.1, 0.1, 0.0
  - VAT (import valuation, reducing exemptions): 0.8, 1.2, 0.3, 0.1, 0.0
  - CIT (ER valuation/reducing incentives): 0.0, 0.6, 0.2, 0.2, 0.1
  - PIT (ER valuation/streamlining deductions): 0.0, 0.4, 0.3, 0.0, 0.0
  - Property tax (ER valuation, streamline exemptions): 0.2, 0.4, 0.1, 0.1, 0.1
  - Administrative fees adjustment (restore to adjust for inflation): 0.3, 0.3, 0.2, 0.0, 0.0
  - Revenue administration: 0.1, 0.2, 0.1, 0.2, 0.1
  - Total revenue-enhancing sum by year: 2.0, 4.9, 0.9, 0.7, 0.4
- Expenditure Reducing Measures and Other Fiscal Components:
  - Electricity sector reform (expenditure reducing): -0.8, 0.5, 0.9, 0.5, 0.1
  - Personnel costs (expenditure increasing): -1.0, -0.6, -0.5, 0.0, 0.0
  - Social and reconstruction (expenditure increasing): -0.4, -1.3, 0.4, 0.2, 0.3
  - Capital spending (incl. CEDRE financed): -0.2, -3.1, 0.5, 0.1, -0.3
  - Macroeconomic factors (inflation) and One-offs: 1.5, 0.6, 0.0, -0.3, -0.2
  - Change in primary balance (excl. BdL recapitalization): 0.8, 0.9, 2.0, 1.2, 0.3
- Staff caveat: The parameters are sensitive to macroeconomic assumptions and therefore subject to high uncertainty.

### State-Owned Enterprises (SOEs) and electricity sector
- Findings on SOEs:
  - Lack of control and large financial losses exacerbated fiscal and economic imbalances pre-crisis.
  - Governance framework is weak: low professional requirements, unclear definition of ownership/oversight/policy functions, limited board tools, poor transparency and reporting.
  - Financial statements for many SOEs have not been audited for several years; Ministry of Finance oversight capacity weakened.
- SOE reform priorities:
  - Prepare a comprehensive inventory of all SOEs and publish annual financial statements.
  - Conduct financial audits by reputable international firms for large SOEs.
  - Approve an SOE ownership strategy by cabinet to set objectives, oversight, and management principles; carry out SOE triage (keep, privatize, liquidate).
  - Adopt a new SOE law aligned with the ownership strategy and international standards.
- Electricity sector reform:
  - Staff support authorities’ electricity sector reform strategy adopted in 2022 and call for timely implementation.
  - Immediate focus: improve EdL operational performance and financial sustainability, enhance transparency in EdL’s financial reporting and cash management (including audited financial statements), establish an independent Electricity Regulatory Authority (ERA).
  - Target: mobilize donor financing to increase electricity supply and achieve cost recovery by 2026.
  - November 2022 electricity tariff increase noted as an important first step; its impact depends on EdL’s capacity to enforce collection, reduce non-technical losses, and increase supply.
  - Consider introducing monthly tariff reviews through a pricing formula to reflect global oil price fluctuations.
- Authorities’ views on SOE reforms:
  - Agreed with the proposed reform plan and look forward to IMF governance diagnostic findings and EBRD support to review legal and governance framework.
  - Reported early positive results from tariff increases and campaigns to address non-technical losses, while noting billing difficulties amid a volatile exchange rate and progress on establishing the regulatory agency.

### Governance, anti-corruption, and AML/CFT
- Core issues:
  - Governance, corruption, and rule of law weaknesses underpin fragility and impede effective implementation of reforms.
  - Ongoing efforts (e.g., National Anticorruption Strategy) need adjustment to align with international good practices.
  - Legislative amendments to ensure public access to high-level public officials’ financial declarations would strengthen transparency and accountability.
  - A draft law for judicial independence remains pending in parliament, delaying needed reforms on judicial independence and integrity.
- IMF support:
  - At authorities’ request, the Fund is undertaking a governance diagnostic to prioritize and sequence recommendations to strengthen state functions relevant to economic activity (financial sector oversight, fiscal governance, anti-corruption, rule of law, AML/CFT).
  - The diagnostic will provide a roadmap for reforms, including enhancing judicial independence and integrity, improving accountability, and reducing impunity. Publication of the diagnostic is deemed crucial for authorities’ ownership and citizen trust.

*Source: IMF staff report excerpt.*

### 41.      Strengthening the effectiveness of the AML/CFT regime is fundamental to safeguard

### 41.      Strengthening the effectiveness of the AML/CFT regime is fundamental to safeguard

### AML/CFT findings and priorities
- The recent banking secrecy legislation reform is a step forward that should be leveraged to fight money laundering, illicit enrichment, tax evasion, corruption, and other financial crimes, and, ultimately, to recover ill-gotten assets.
- Other key AML/CFT efforts identified:
  - operational independence of the SIC;
  - enhanced AML/CFT risk-based supervision of banks;
  - targeted financial sanctions as per the United Nations Security Council Resolutions related to terrorism and proliferation financing;
  - monitoring unusual cross-border financial flows;
  - easy access to accurate beneficial ownership information of legal entities.
- To prevent listing by the Financial Action Task Force and pressure on correspondent banking relationships, the authorities should promptly address significant deficiencies identified by the ongoing MENAFATF15 assessment.

### Authorities’ views on governance and data (paragraphs 42, 44)
- The authorities agreed that governance weaknesses and corruption vulnerabilities have been a challenge to macro-economic stability (paragraph 42).
- The authorities noted that the findings of the IMF’s governance diagnostic assessment will be important to identify priorities and the sequence of reforms, and they reaffirmed their commitment to publish the report upon finalization (paragraph 42).
- The ability of the authorities to collect data has been weakened by the ongoing crisis; data provision has serious shortcomings that significantly hamper surveillance, particularly in national accounts and fiscal sector statistics (paragraph 43).
- The Fund has supported the authorities’ statistical efforts through recent capacity development on government finance statistics, national accounts, and price statistics, but further assistance in these areas is needed (paragraph 43).
- The authorities recognized weaknesses in data provision and highlighted that current low levels of staff attendance in most ministries and significant budget constraints faced by CAS hamper data collection; they expected that recent measures to support public employees would result in better data collection and provision (paragraph 44).

### Staff appraisal — risks, priorities, and policy recommendations (paragraphs 45–50)
- Overarching assessment:
  - Lebanon is at a dangerous crossroads; further delays in implementing reforms will keep the economy depressed with irreversible consequences, particularly for low-to-middle income households (paragraph 45).
  - High uncertainty will further weaken the external position, and BdL will continue to lose scarce international reserves; exchange rate depreciation and spiraling inflation will remain unabated, accelerating cash dollarization (paragraph 45).
  - Informality and illicit activities risk becoming entrenched; banks will be unable to provide meaningful credit; small depositors will continue to incur large losses on FX withdrawals, and medium-to-large deposits will remain indefinitely locked (paragraph 45).
  - Emigration, particularly of skilled workers, would accelerate, further undermining growth prospects (paragraph 45).

- Recommended comprehensive economic recovery plan centered on five key pillars (paragraph 46):
  - debt sustainability;
  - bank rehabilitation;
  - monetary and exchange rate policy credibility;
  - SOE restructuring;
  - institutional and governance reforms.
  - Addressing serious data shortcomings is important to inform policy decisions (paragraph 46).

- Fiscal strategy (paragraph 47):
  - Adopt the 2023 Budget that uses a unified market exchange rate for customs and tax purposes, adjusts specific taxes to inflation, and makes first steps toward restoring and reforming public administration.
  - Subsequent reforms: revenue mobilization focused on broadening the tax base, closing loopholes, and improving tax compliance through strengthened and modernized tax administration.
  - Support gradual scale up of priority social and development spending.
  - Eliminate SOE losses and phase out transfers from the budget, particularly to the energy sector; improve public administration; advance sustainable pension system reforms.
  - Gradual fiscal consolidation should complement debt restructuring to reduce public debt to a sustainable level over the medium term.

- Financial sector restructuring (paragraph 48):
  - Address upfront the large losses incurred by the central bank and commercial banks, respecting the hierarchy of claims, protecting small depositors to the extent possible, and limiting recourse to the public sector.
  - Restructure and recapitalize viable banks under credible and timebound plans; exit unviable banks.
  - Change the Banking Secrecy Law to address outstanding weaknesses.
  - Modernize the legal and institutional framework of the central bank and other banking authorities to strengthen governance and accountability.

- Monetary and exchange rate policy (paragraph 49):
  - Unification of the exchange rate and tight monetary policy are needed to rebuild credibility and improve the external position.
  - Unification would remove harmful distortions, eliminate rent-seeking opportunities, reduce pressures on central bank FX reserves, and pave the way for a market-determined exchange rate.
  - The process should be accompanied by temporary capital controls to help guard limited FX resources in the financial system needed to ensure an equitable solution for depositors.
  - Tight monetary policy should use all available tools; central bank financing to the government should be strictly prohibited.
  - Foreign exchange interventions should be very limited and only for disorderly market conditions.
  - Staff does not recommend temporary approval of the exchange restriction and MCPs maintained by Lebanon, as the criteria for approval are not met.

- Structural reforms (paragraph 50):
  - Strengthen the PFM framework and introduce a modern PFM law to enhance oversight, fiscal discipline, and transparency.
  - Reform SOEs focusing on good governance, transparency, financial and operational viability, better provision of services, and containing fiscal risks.
  - Swiftly implement cabinet-approved electricity sector reforms from March 2022.
  - Enhance governance, anti-corruption, and AML/CFT frameworks to regain public trust and promote inclusive growth.

*Source: 1lbnea2023002 - 41.      Strengthening the effectiveness of the AML/CFT regime is fundamental to safeguard*

### 51.      It is expected that the next Article IV consultation with Lebanon will be held on the

### It is expected that the next Article IV consultation with Lebanon will be held on the standard 12-month cycle.

### High-frequency indicators and real activity
- Coincident Indicator (NSA, 1993=100): series shown Dec-17 through Aug-22 (chart).
- Purchasing Managers Index (PMI): series shown Dec-17 through Dec-22 (chart).
- Freight incoming at the Port of Beirut (NSA, Tons): series shown Dec-17 through Aug-22 (chart).
- Cement deliveries (NSA, Tons): series shown Dec-17 through Aug-22 (chart).
- Electricity production (NSA, Mil.KWh): series shown Dec-17 through Aug-22 (chart).
- Visitor arrivals & departures (NSA, Number): series shown Dec-17 through Aug-22 (chart) with separate Visitor Arrivals and Visitor Departures lines.
- Imports of petroleum derivatives (NSA, Metric Tons): series shown Dec-17 through Aug-22 (chart).
- Workers remittances (NSA, Mil.US$): series shown Dec-17 through Aug-22 (chart).
- Sources for charts: National Authorities; and IMF staff calculations.

### Fiscal indicators and public finances
- Tax revenues collapsed during the crisis, driving significant cuts in spending (figures and charts through 2022 shown).
- Eurobond default and no interest payments contributed to a surplus in 2021 (chart annotation).
- Budget financing became very limited following the default (chart).
- Large real depreciation pushed public debt up in 2021, with some reversal in 2022 (chart).
- Domestic financing composition shifted from commercial banks to BdL and other public entities (NSSF) (chart).
- Selected figures from Table 1 (Act./Est./Proj.):
  - Real GDP (market prices): 2018 -1.9; 2019 -6.9; 2020 -25.9; 2021 -10.0; 2022 0.0; 2023 -0.5; 2024 3.9; 2025 4.5; 2026 3.2; 2027 3.0
  - GDP deflator: 2018 5.5; 2019 4.1; 2020 61.1; 2021 40.8; 2022 165.0; 2023 290.0; 2024 143.0; 2025 70.0; 2026 30.0; 2027 10.0
  - Consumer prices (end-of-period): 2018 5.6; 2019 7.0; 2020 145.8; 2021 224.4; 2022 233.6; 2023 222.4; 2024 111.9; 2025 54.3; 2026 33.6; 2027 12.1
  - Central government revenue (including grants, percent of GDP): 2018 21.0; 2019 20.8; 2020 16.0; 2021 9.8; 2022 6.3; 2023 9.5; 2024 15.2; 2025 16.1; 2026 16.3; 2027 16.2
  - Expenditure (percent of GDP): 2018 32.0; 2019 31.4; 2020 20.1; 2021 9.1; 2022 11.5; 2023 16.4; 2024 35.0; 2025 19.6; 2026 18.4; 2027 18.0
  - Overall balance (including grants, percent of GDP): 2018 -11.0; 2019 -10.6; 2020 -4.1; 2021 1.2; 2022 -5.2; 2023 -6.9; 2024 -19.9; 2025 -3.5; 2026 -2.0; 2027 -1.7
  - Primary balance (including grants, percent of GDP): 2018 -1.2; 2019 -0.5; 2020 -1.0; 2021 2.4; 2022 -4.3; 2023 -3.5; 2024 -16.3; 2025 -0.6; 2026 0.7; 2027 0.9
  - Total government debt (percent of GDP): 2018 155.1; 2019 172.3; 2020 150.6; 2021 349.9; 2022 282.3; 2023 509.3; 2024 110.0; 2025 91.5; 2026 83.6; 2027 80.9

- Table 2 highlights composition of revenue and expenditure (percent of GDP) across 2018–2027, including:
  - Tax revenue series: 2018 15.4; 2019 15.6; 2020 10.9; 2021 7.3; 2022 4.7; 2023 6.5; 2024 11.4; 2025 12.0; 2026 12.5; 2027 12.8
  - Interest payments (percent of GDP): 2018 9.9; 2019 10.1; 2020 3.0; 2021 1.3; 2022 0.8; 2023 3.4; 2024 3.6; 2025 3.0; 2026 2.7; 2027 2.6
  - Overall balance and primary balance as above.
  - Underlying Primary balance (exclusions specified in table notes): 2018 -1.2; 2019 -0.5; 2020 -1.0; 2021 2.4; 2022 -3.6; 2023 -1.9; 2024 3.1; 2025 3.8; 2026 3.9; 2027 3.7

### Monetary indicators and banking sector
- Inflation increased dramatically, especially for food prices (Headline and Food YoY percentage changes shown Jan-19 through Jan-23).
- Parallel market depreciation of the LBP accompanied CPI increases (Parallel Market Exchange Rate, LBP/US$ vs CPI chart Jan-19–Jan-23).
- BdL gross reserves declined (Gross Reserves vs. FX Required Reserves in Billions of USD chart).
- Currency in circulation increased sharply; M2 composition charts show currency in circulation, demand deposits, term deposits (Trillions of LBP) Jan-19–Jan-23.
- Banks’ FX assets concentrated in claims on BdL and the government (Banks' FX assets by type and selected FX positions charts Jan-19–Jan-23).
- The stock of FX loans decreased sharply while FX deposits are multiples of GDP (chart annotations).

### External sector: current account, trade, reserves, and external debt
- Current account narrowed from pre-crisis levels but remained wide (Current account and components charts 2011–2021).
- Exports began recovering, aided by post-COVID tourism reopening (Exports growth and contributions charts).
- Imports have picked up strongly (Imports growth and contributions charts).
- Reserves drawdown was an important source of current account financing; reserves adequacy metrics declined (Financing and International Reserves Metrics charts).
- External debt remained high (External Debt charts).

- Selected figures from Table 3a (in millions of USD) and Table 3b (percent of GDP) illustrative scenario:
  - Current account (ex. official transfers, millions USD): 2018 -15,670; 2019 -14,247; 2020 -3,832; 2021 -3,539; 2022 -6,479; 2023 -2,159; 2024 -2,427; 2025 -2,952; 2026 -2,596; 2027 -1,687
  - Goods (net, millions USD): 2018 -15,060; 2019 -13,378; 2020 -6,499; 2021 -8,226; 2022 -13,677; 2023 -9,107; 2024 -9,224; 2025 -10,270; 2026 -10,310; 2027 -10,547
  - Exports, f.o.b. (millions USD): 2018 3,847; 2019 4,839; 2020 4,097; 2021 4,594; 2022 4,373; 2023 5,333; 2024 5,665; 2025 5,779; 2026 6,133; 2027 6,418
  - Imports, f.o.b. (millions USD): 2018 -18,907; 2019 -18,218; 2020 -10,596; 2021 -12,821; 2022 -18,051; 2023 -14,440; 2024 -14,889; 2025 -16,049; 2026 -16,443; 2027 -16,966
  - Tourism (net, memo, millions USD): 2018 2,146; 2019 2,255; 2020 682; 2021 1,319; 2022 2,118; 2023 2,449; 2024 2,740; 2025 3,171; 2026 3,456; 2027 3,957
  - Gross reserves (excl. gold, year-end, millions USD, memo): 2018 31,447; 2019 24,521; 2020 17,650; 2021 13,614; 2022 10,624; 2023 9,531; 2024 11,680; 2025 13,339; 2026 14,030; 2027 15,470
  - External debt (percent of GDP, memo): 2018 193.6; 2019 200.6; 2020 349.1; 2021 391.7; 2022 391.2; 2023 205.3; 2024 204.2; 2025 167.8; 2026 164.8; 2027 165.0
  - GDP (millions USD, memo): 2018 54,901; 2019 50,880; 2020 24,494; 2021 20,476; 2022 21,780; 2023 16,168; 2024 18,209; 2025 24,677; 2026 26,749; 2027 27,874

### Tables and projections overview
- Table 1: Selected Economic Indicators, 2018–27 — illustrative scenario subject to timely implementation of the reform package (numerical projections for output, prices, fiscal accounts, external sector, reserves metrics, and memorandum items).
- Table 2: Central Government Overall Deficit and Financing, 2018–27 — details on revenue composition, expenditure composition, interest payments, capital expenditure, social protection and reconstruction spending, overall and primary balances, net financing, and memorandum total government gross debt.
- Table 3a/3b: Balance of Payments, 2018–27 — levels (millions USD) and percent-of-GDP presentation of current account, goods, services, income, current transfers, capital and financial accounts, errors and omissions, overall balance, financing, and memorandum items including reserves and external debt.
- Table 4: Money and Banking, 2018–27 — referenced (tables and charts present monetary aggregates, banking sector positions, and FX-related statistics).

*Sources: National Authorities; and IMF staff calculations.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### External Risks
- Intensification of regional conflict(s).
  - Likelihood: High
  - Possible Impact: High. "The impact would be mainly through high food and fuel prices, pushing inflation further up and hurting the most vulnerable households, while making pressures on already low foreign reserves."
  - Policy Recommendation:
    - "Strengthen revenue mobilization to create space for well targeted social spending."
    - "Refrain from general subsidies through differentiated exchange rate."
    - "Establish a credible monetary and exchange rate system and conduct tight monetary policy."
    - "Re-build grain silos to ensure food security."
    - "Conduct a comprehensive reform policy that would unlock donors’ financial support."

- Commodity price volatility.
  - Likelihood: Medium
  - Possible Impact: High. "Lebanon is highly dependent on food and energy import, and higher prices would have a significant negative impact, as explained above, further adding to economic instability."
  - (No separate policy recommendations listed in this row in the supplied content.)

- Abrupt global slowdown or recession.
  - Likelihood: Medium
  - Possible Impact: Medium. "It could lead to lower tourism activity and lower inflow of remittances, adding pressures to external balances and exchange rate. On the other hand, downward pressures on some commodity prices may provide an offset to the adverse effects."
  - Policy Recommendation:
    - "Preserve international reserves and maintain greater exchange rate flexibility to absorb external shocks."
    - "Reprioritize spending and mobilize donor support."

### Domestic Risks
- Lack of progress on reforms.
  - Likelihood: High
  - Possible Impact: High. "It would lead to increased uncertainty and higher emigration rates, accelerate informality, illicit flows, depreciation and inflation, deplete the FX reserves, and depress the economy even further. Fiscal risks from EdL and other SOEs would start to materialize with additional pressure on budget spending."
  - Policy Recommendation:
    - "Pursue implementation of a comprehensive set of reforms (as agreed under the SLA)."

- Widespread social discontent and political instability.
  - Likelihood: High
  - Possible Impact: Medium. "It could disrupt economic activity and further weaken confidence, amplify exchange rate pressures, and accelerate the FX reserves decline."
  - Policy Recommendation:
    - "Accelerate implementation of a comprehensive set of reforms to arrest the ongoing crisis and allow economy to recover (as agreed under the SLA)."

### RAM Methodology Note
- "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff)."
- Likelihood interpretation: "‘low’ is meant to indicate a probability below 10 percent, ‘medium’ a probability between 10 and 30 percent, and ‘high’ a probability between 30 and 50 percent."
- "The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly."

*Source: Fund staff.*

### Annex II. Public Debt Sustainability Analysis — Summary Findings and Projections

### Overall assessment and baseline assumptions
- Final assessment: High overall risk.
- Key baseline assumptions:
  - "The baseline internalizes that the authorities will complete their debt restructuring strategy to deliver debt sustainability."
  - Debt restructuring is "for illustrative purposes assumed to be completed in 2024."
  - Authorities’ measures underpinning baseline include: "fiscal adjustment, debt restructuring, a unified exchange system, banking system restructuring, repairing the BdL’s balance sheet, and other structural reforms (including in the energy sector)."
- Conditional outcome:
  - "Prompt and full implementation of this reform agenda would deliver a significant near-term reduction of debt, a downward debt trajectory over the medium term, and manageable financing needs."
  - "If implemented as assumed, the debt stabilization and acceptable rollover risk conditions under the Fund’s definition of debt sustainability would be expected to be met, which would allow for an assessment that debt is sustainable but not with high probability."
  - "However, if the status quo were to persist, then debt would remain unsustainable."

### Risk characterization
- "The crisis in Lebanon is without precedent and resolving it will require comprehensive and fundamental reforms on multiple fronts, with sustained momentum over multiple years. Given the extremely delicate state of the economy, high domestic and global volatility, and risks of reform slippages, the overall risk is high."
- "Given the unprecedented nature of the current crisis, the expected reforms will produce impacts that complicate the interpretation of the standard tools. Nevertheless, staff agrees with the mechanical signal of high risk."

### Sovereign stress status
- "A sovereign stress event was triggered by the loss of market access in 2019. With sovereign default that began in 2020 remaining unresolved, Lebanon is still in sovereign stress and the near-term risk assessment is not applicable."
- Upside potential: "Offshore natural gas reserves are at an early stage of exploration. A determination of their viability for investment constitutes a potential upside risk."

### DSA Perimeter and Coverage
- DSA perimeter: "The DSA perimeter is the central government, with the inclusion of expected BOP support, which while being on the central bank's balance sheet, is ultimately the liability of the government."
- "State-owned enterprises are only reflected through direct transfers to EdL, certain transfers to SOEs for salaries (both on the spending side), and through non-tax revenues transferred from SOEs to the budget."
- Framework assumptions: "The framework assumes clearance of accumulated arrears of which the largest part is related to NSSF."

### Public debt structure — qualitative summary
- "The drastic exchange rate depreciation that coincided with the onset of the crisis has led to an explosion of debt from valuation effects of the government's foreign currency liabilities (particularly Eurobonds). As a result, public debt is mainly in foreign currency, held by foreign creditors, and subject to foreign law."
- Over the forecast horizon, "debt will be largely composed of concessional borrowing and the (non-market) BdL recap bond, which will tilt debt toward non-marketable and longer-term instruments."

### Key projection table (selected lines preserved exactly as in source)
- Public debt (percent of GDP), Actual and Projections:
  - 2012: 349.92
  - 2014: 282.35
  - 2016: 509.31
  - 2018: 110.09
  - 2020: 1.58
  - 2022: 3.68
  - 2023: 0.97
  - 2024: 9.77
  - 2025: 9.27
  - 2026: 7.57
  - 2027: 7.07
  - 2028: 5.8
- Change in public debt:
  - 2012: 199.3
  - 2014: -67.5
  - 2016: 227.0
  - 2018: (blank in supplied)
  - 2020: -399.3
  - 2022: -18.5
  - 2023: -7.9
  - 2024: -2.7
  - 2025: -1.2
  - 2026: -0.6
  - 2027: -1.7
  - 2028: -0.6
  - 2029: -1.1
- Contribution of identified flows (percent of GDP):
  - 2012: -39.6
  - 2014: -38.5
  - 2016: -14.1
  - 2018: -6.9
  - 2020: -3.4
  - 2022: -1.30
  - 2023: 0.4
  - 2024: -1.8
  - 2025: -2.2
  - 2026: -2.4
  - 2027: -2.0
  - 2028: -1.8
- Primary deficit (percent of GDP):
  - 2012: -1.9
  - 2014: 4.3
  - 2016: 3.5
  - 2018: 16.3
  - 2020: 0.6
  - 2022: -0.7
  - 2023: -0.9
  - 2024: -0.4
  - 2025: -0.6
  - 2026: -0.6
  - 2027: -0.3
  - 2028: -0.4
- Noninterest revenues (percent of GDP):
  - 2012: 9.8
  - 2014: 6.3
  - 2016: 9.5
  - 2018: 15.1
  - 2020: 16.0
  - 2022: 16.3
  - 2023: 16.4
  - 2024–2032: 16.5 (repeated) and 16.6 in later years as shown in table
- Noninterest expenditures (percent of GDP):
  - 2012: 7.9
  - 2014: 10.7
  - 2016: 13.0
  - 2018: 31.4
  - 2020: 16.6
  - 2022: 15.7
  - 2023: 15.4
  - 2024: 16.1
  - 2025: 15.9
  - 2026: 15.9
  - 2027: 16.2
- Automatic debt dynamics (percent of GDP):
  - 2012: -37.7
  - 2014: -39.5
  - 2016: -16.5
  - 2018: -32.6
  - 2020: -10.7
  - 2022: -4.0
  - 2023: -1.9
  - 2024: -1.5
  - 2025: -1.6
  - 2026: -1.8
  - 2027: -1.6
  - 2028: -1.4
- Real interest rate and relative inflation (percent of GDP contribution lines, selected):
  - Real interest rate and relative inflation: -61.9, -39.5, -17.9, -13.6, -6.0, -1.20, 0.60, 0.90, 0.70, 0.60, 0.70, 0.8 (by year as in table)
  - Real interest rate: -96.6, -217.0, (blanks), -207.6, (blanks), -284.9, -40.4, -17.8, -4.80, 0.20, 0.1, -0.10, 0.00, 0.2 (as shown)
  - Relative inflation: 34.7, 177.5, 189.8, 271.4, 34.4, 16.6, 5.3, 0.7, 0.7, 0.7, 0.7, 0.7 (by year)
- Real growth rate contribution: 16.7, 0.0, 1.4, -19.0, -4.7, -2.8, -2.5, (dash) , -2.4, -2.3, -2.3, -2.3, -2.3
- Other identified flows / Other transactions / Contingent liabilities: values in series include 0.0, -3.3, -1.2, 9.4, 6.8, 3.3, 3.2, 0.0, etc.
- Contribution of residual (percent of GDP): 238.9, -29.1, 241.1, -392.5, -15.1, -6.6, -3.1, 0.6, 1.6, 0.8, 1.4, 0.7
- Gross financing needs (GFN, percent of GDP): 6.1, 7.7, 9.8, 21.9, 4.9, 3.2, 2.8, 6.5, 6.6, 5.3, 5.6, 5.7
  - of which: debt service: 7.9, 3.4, 6.3, 5.6, 4.3, 3.9, 3.7, 6.8, 7.1, 5.9, 5.9, 6.1
  - Local currency: 7.8, 2.6, 3.5, 2.5, 1.4, 1.0, 0.9, 0.9, 0.8, 0.3, 0.2, 0.4
  - Foreign currency: 0.2, 0.8, 2.8, 3.1, 2.9, 2.9, 2.8, 5.9, 6.4, 5.6, 5.7, 5.7

### Macroeconomic memo lines (selected, preserved exactly)
- Real GDP growth (percent): -10.0, 0.0, -0.5, 3.9, 4.5, 3.2, 3.0, 3.0, 3.0, 3.0, 3.0, 3.0
- Inflation (GDP deflator; percent): 140.8, 165.0, 290.0, 143.0, 70.0, 30.0, 10.0, 2.0, 2.9, 2.9, 2.9, 2.9
- Nominal GDP growth (percent): 116.7, 165.0, 288.0, 152.4, 77.7, 34.2, 13.4, 6.0, 6.0, 6.0, 6.0, 6.1
- Effective interest rate (percent): 1.8, 0.6, 4.6, 1.8, 4.8, 3.9, 3.5, 3.2, 3.0, 2.7, 2.9, 3.2

### Medium-term assessment, indices, and risk signals
- Debt fanchart and risk signal:
  - "The mechanical signal for the medium term assessment is high."
  - Value indicators:
    - Fanchart width: 106.5, 1.5 (as shown)
    - Probability of debt non-stabilizaiton (percent): 4.30, 0.0
    - Terminal debt-to-GDP x: 71.4, 1.6
    - Debt fanchart index (DFI): 3.1
    - Risk signal: High
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 8.4, 2.9 (percent of GDP)
  - GFN financeability index (GFI): 7.5
  - Risk signal: Low
- Medium-term index (MTI) and final assessment:
  - "Final assessment: Prob. of missed crisis, 2022-2027, if stress not predicted: 54.5 pct."
  - "Prob. of false alarms, 2022-2027, if stress predicted: 8.0 pct."
  - The mechanical signal is high largely due to the debt fanchart being "heavily distorted by the crisis and the expected debt restructuring."
  - Adjustments applied:
    - "Debt fanchart's historical sample ends in 2019 as subsequent observations are contaminated by the default, restructuring process, and structural break induced by the collapse of the pegged exchange rate regime."
    - "An exit clause is activated for the adjusted fanchart as sharp drop in public debt is induced by the deep debt restructuring to meet sustainability objectives."
    - In the GFN module, "the change in bank claims is calculated on a measure of bank assets that decreases as a percent of GDP, in line with the expected evolution of the banking sector."
- Risk signal interpretation thresholds (as given):
  - DFI: "low risk if the DFI is below 1.13; high risk if the DFI is above 2.08; and otherwise, it is moderate risk."
  - GFI: "low risk if the GFI is below 7.6; high risk if the DFI is above 17.9; and otherwise, it is moderate risk."
  - MTI: "low risk if the GFI is below 0.26; high risk if the DFI is above 0.40; and otherwise, it is moderate risk."

*Source: Fund staff.*

### Annex III. External Sector Assessment

### Annex III. External Sector Assessment

### Overall assessment
- The unprecedented nature of the ongoing crisis complicates analysis of the external position of Lebanon in 2022.
- Market-based measures of the exchange rate show sharp nominal depreciation; staff estimate that real depreciation has occurred over the past two years.
- Lebanon’s external debt continues being unsustainable, amid an ongoing sovereign default, which along with the severe stress in the banking system has led to abnormal financial account flows.
- The current account deficit continues to be wide, but has shown some limited evidence of external adjustment as of 2022.
- Reserves are well short of adequate levels.
- Overall assessment: the external position of Lebanon in 2022 is assessed as weaker than warranted by fundamentals and desirable policies.

### Potential policy responses
- Move to a credible and transparent exchange rate system.
- Fiscal adjustment and decisive restoration of debt sustainability.
- Restructuring the banking system to return it to health.
- Broader reforms to boost the economy, including in the energy sector, to contribute to external adjustment.

### Foreign assets and liabilities: position and trajectory
- Lebanon does not produce official statistics on the international investment position (IIP); staff estimate using international databases.
- Staff estimate net IIP close to -$72 billion or about -350 percent of GDP in 2021, worsening from -$54 billion or 101 percent of GDP in 2017.
- Lebanon has very high indebtedness: gross liabilities nearly $150 billion or about 730 percent of GDP.
- External debt amounted to 392 percent of GDP; slightly more than three quarters were banking sector liabilities, and about 20 percent was owed by the public sector.
- Foreign assets have plunged largely due to the steep drop in BdL’s international reserves (gross assets estimated at $77 billion or 378 percent of GDP).
- Assessment: Risks from unsustainable external debt burden and insufficient reserves have crystallized and exacerbated the crisis. The government is in default on sovereign Eurobonds and has accumulated arrears with several official creditors.
- Resolving the situation requires following through on reform program elements: exchange rate regime, fiscal reforms and external debt restructuring proposal, and banking sector restructuring.

Key 2021 estimates (percent of GDP):
- NIIP: -352
- Gross Assets: 378
- Debt Assets: 125
- Gross Liab.: 730
- Debt Liab.: 392

### Current account
- Background: current account deficit estimated at 15.9 percent of GDP in 2021.
- Narrowing from deficits averaging nearly 24 percent of GDP over the last 5 years, but still very wide.
- Large deficits reflect very high levels of imports, partly financed through remittances (which have risen).
- Tourism sector has started to partially recover after COVID-19 shutdowns and the Port of Beirut explosion in 2020.
- Balance-of-payments data not yet available for 2022; staff estimate a deficit of 29 percent of GDP in 2022, as imports remained high, likely reflecting opportunistic transactions to take advantage of favorable (official) exchange rate valuations for taxation purposes.

Assessment using EBA-Lite current account model:
- After cyclical adjustments, cyclically adjusted current account = -31 percent of GDP.
- CA Norm (from model) = -23.3 percent of GDP.
- CA Gap = -7.7 percent of GDP (implies REER gap of about 17 percent).
- The gap indicates an external position substantially weaker than implied by fundamentals and desirable policies.
- Contribution to the gap attributable to policy deviations is notable, reflecting sizable deviations of the fiscal balance and change in reserves from desirable levels.

EBA-Lite model components and adjustments (as presented):
- CA-Actual-29.0
- Cyclical contributions (from model) (-)2.6
- COVID-19 adjustors (-)3/ -0.7
- Additional temporary/statistical factors (-)0.0
- Natural disasters and conflicts (-)0.1
- Adjusted CA -31.0
- CA Norm (from model) -23.3
- Adjusted CA Norm -23.3
- CA Gap -7.7
- o/w Relative policy gap 1.0
- Elasticity -0.5
- REER Gap (in percent) 17.1

### Real exchange rate
- Analysis complicated by multiple nominal exchange rates.
- BdL official exchange rate posted at 1,507.5 LBP per dollar (significantly below other rates).
- Sayrafa rate (for authorized transactions) averaged about 35,625 LBP per dollar in 2022 and depreciated about 35 percent from 2021.
- Daily average parallel rate depreciated almost 48 percent in 2022, to almost 47,700 LBP per dollar.
- Different nominal rates imply different REERs:
  - INS index (uses BdL’s rate): average REER appreciated 144 percent in 2021 and a further 152 percent in 2022.
  - REER with parallel rate: real depreciation of about 7 percent in 2021, followed by appreciation of 7.8 percent in 2022.
- Exchange rate dynamics in 2023: official rate rose to 15,000 LBP per dollar in February 2023; parallel and Sayrafa rates showed sharp depreciations in March, partially reversed, partly reflecting BdL efforts.

Assessment:
- EBA-Lite REER model applied to both INS and parallel REER indices yields divergent results:
  - INS REER measure: REER gap of 221 percent in 2022 → implies current account gap of about -100 percent of GDP → external position substantially weaker than fundamentals.
  - Parallel market REER: REER gap about -63 percent → implies current account gap of 28½ percent of GDP → position stronger than warranted by fundamentals.
- Staff view: REER computed with official exchange rate is not a reliable measure because only a limited set of transactions occur at that rate.
- Measuring international transactions amid the crisis is extremely difficult; results subject to considerable uncertainty.
- REER model using staff’s estimate of the average REER reflects some adjustment that has already taken place but remains uncertain.

### Capital and financial accounts: flows and policy measures
- Large net outflows observed in 2020 appeared to have reduced in 2021 and eased further in H1 2022.
- International bond issuance halted given government’s unsustainable debt burden and ongoing default.
- Lebanese banks’ non-resident deposit and non-deposit liabilities have decreased at slower rates in the context of withdrawal limits.
- Outside government and banks, economic activity remains depressed, limiting sizable investment flows.

Assessment and policy implications:
- Return to normal capital flows requires decisive action on unifying the exchange rate system, achieving public debt sustainability, and restoring banking system health.
- Early implementation phases of reforms may require formal capital controls, expected to be temporary.
- Relaxation of controls alongside broader reforms—including energy sector reforms—should strengthen Lebanon’s attractiveness and allow inward and outward capital flows to pick up in a more stable economy.

### FX intervention and reserves level
- Usable international reserves peaked at $36.8 billion in October 2017 (69 percent of GDP).
- Usable international reserves dropped to $10.4 billion as of December 2022 (44 percent of GDP) or about 6.3 months of projected 2023 imports.
- Gold reserves amounted to an additional $15 billion (use requires parliamentary approval).
- Reserve plunge reflects BdL efforts to support the exchange rate peg as crisis unfolded, triggering deposit and capital outflows.
- Pegged regime gave way to multiplicity of exchange rates including official ad hoc facilities, Sayrafa, and parallel rates; BdL also supported subsidies for certain imports.
- Reserve loss continued though the pace in 2022 appears less than in recent years.

Assessment:
- Current level of reserves amounts to about 37 percent of the Assessing Reserve Adequacy (ARA) metric for floating rate regimes—well below recommended 100–150 percent range.
- Reserves are below 100 percent of commercial banks’ foreign currency reserve requirements.
- Authorities’ comprehensive reforms—particularly on the exchange system—would lead to significant external adjustment and relieve reserve pressures.
- Prospective new official financing coinciding with reform program could contribute to re-accumulation of reserves.

### Annex IV. Financial sector restructuring — The losses and the central bank
- Loss sources for commercial banks and BdL:
  1. Exchange rate depreciation.
  2. Expected restructuring of public debt (Eurobond holdings and LBP-denominated debt whose value collapsed).
  3. Non-performing loans held by commercial banks.
  4. Losses incurred by BdL.
- Precise loss estimation requires an asset quality review and debt restructuring parameters.
- Approximate calculations (assuming Eurobond haircut of 75 percent) suggest BdL will end up with negative equity of some US$60bn and a net open FX position of similar magnitude.
- Eliminating BdL’s losses and bringing BdL to zero net worth requires writing off a similar amount of commercial banks’ claims against BdL (out of total of US$86 billion of deposits and CDs banks hold at BdL), as the sovereign cannot recapitalize BdL at that scale.

Selected assets and liabilities (as of January 2023) — values reported at the official rate of 1,507.5:
- Government (T-bills and Eurobonds): LBP trln -59.1; US$ bn -4.2; GBdL -12.7 - (table fragmented in source)
- Banque du Liban (deposits, CDs, overdraft): LBP trln 43.2; US$ bn 14.6; Banks -32.0 -86.2-
- Banks (deposits): LBP trln 7.5; US$ bn --45.8; --95.8
- Private Sector (loans): LBP trln --; US$ bn 13.8; --8.6
(Sources: BdL and IMF staff calculations.)

Implication:
- Large transfer of BdL losses to banks implies banks become severely undercapitalized.
- Current shareholders or other investors are unlikely to inject needed capital; rehabilitation will require internal recapitalization mechanisms.

### The banks and the deposits
- Banks hold almost US$100 bn worth of FX deposit accounts.
- Preliminary illustrative calculations suggest it might be feasible to fully protect deposits up to US$100,000 despite the size of the write-off.
- Table: FX deposits by tranches as of December 31, 2022 (solo basis)
  - Less than US$100,000: Number of Accounts 1,246,741; Deposit Values, US$ mn 16,761; Percent of Accounts 88%; Percent of Deposits 18%; Cost of protecting up to 100K, US$ mn 16,761
  - US$100,000 to US$1 mn: Number of Accounts 152,527; Deposit Values, US$ mn 40,795; Percent of Accounts 11%; Percent of Deposits 44%; Cost of protecting up to 100K, US$ mn 15,253
  - US$1 mn to US$10 mn: Number of Accounts 10,790; Deposit Values, US$ mn 24,416; Percent of Accounts 1%; Percent of Deposits 26%; Cost of protecting up to 100K, US$ mn 1,079
  - More than US$10 mn: Number of Accounts 443; Deposit Values, US$ mn 10,234; Percent of Accounts 0.03%; Percent of Deposits 11%; Cost of protecting up to 100K, US$ mn 44
  - Total: Number of Accounts 1,410,501; Deposit Values, US$ mn 92,206; Cost of protecting up to 100K, US$ mn 33,136.7

- There may be other large depositors warranting protection due to social relevance (pension funds, insurers, public interest institutions); expanding protection lowers the threshold for others.
- Evaluating impact infeasible now because ownership structure of many deposits is unclear due to bank secrecy law.

### Modifications to find political consensus (proposed mitigations)
- “Eligible” vs “non-eligible” deposits:
  - Allegation that well-connected large depositors converted LBP holdings into US$ at official rate after divergence and were offered top-ups to “lollar” deposits for fresh dollar deposits.
  - Popular support exists for higher haircuts or lirafication at non-market rates for such “ineligible” deposits.
  - Some estimates suggest share of such deposits could be about 25 percent of total FX deposits; exact amount requires granular, time-consuming transaction analysis since October 2019 and is hard to verify under bank secrecy law.
- Treating “excess” interest differently:
  - Interest rates on deposits were excessively high during financial engineering years; depositors could be asked to forego interest earnings while leaving principal untouched.
  - Staff estimate interest amount over LIBOR during 2015–21 could be about US$15 bn, while total interest earnings during that period about US$26 bn.
  - Additional aggregated figures cited: 2008‑21: US$38 bn of interest earnings; US$26 bn of "excess" interest. 2015‑21: US$25 bn of interest earnings; US$15 bn of "excess".
- Recapitalizing BdL:
  - Under proposed SLA banking sector restructuring, government would issue a marketable bond to recapitalize BdL and reduce write-off of BdL’s FX liabilities to commercial banks; banks would reduce write-off of customers’ FX deposits.
  - BdL recapitalization would benefit all depositors equitably, but bond size and terms must not jeopardize debt sustainability.
  - Requires strict preconditions for BdL’s governance and internal controls.
- Use of state assets:
  - Selling state assets or redirecting part of their income could help compensate depositors but pricing assets accurately is near impossible now; selling is undesirable under current governance and transparency practices.
  - Using revenue streams from reformed state assets to recapitalize BdL could reduce losses to banks/depositors if done with strict preconditions on BdL governance and consistent with debt sustainability objectives.
- Protecting per depositor per system vs per depositor per bank:
  - Argument for protection ceiling per depositor throughout system (systemic crisis rationale) versus treating depositors differently by bank prudence.
  - Operationally difficult to evaluate multiple accounts per depositor under bank secrecy law; complex implications for bank viability and recovery rates.
- Minimum deposit protection threshold for everyone:
  - If crisis is systemic, all small depositors could be protected fully regardless of bank, but unclear who bears top-up cost and whether it would jeopardize debt sustainability.
- Recourse to future budget surpluses:
  - Suggestion to use part of future budget surpluses to compensate depositors if conditions met (e.g., growth rates and primary surpluses above those agreed within IMF program framework). (Text ends mid-sentence in source.)

*Source: Annex III. External Sector Assessment (selected content), 1lbnea2023002.*

### introduction of state contingent payouts could complicate discussions with external creditors,

### 1lbnea2023002 - introduction of state contingent payouts could complicate discussions with external creditors,

### Deposit-related measures and risks
- Introduction of state-contingent payouts could complicate discussions with external creditors and "such benchmarks could be easily manipulated."
- Linking deposit recovery to budget surpluses could incentivize policymakers to scale back social and infrastructure spending to “deliver” higher surpluses.
- This implies a transfer of wealth from Lebanese citizens (current and future generations) to a relatively small group of depositors (potentially including non-residents and non-citizens).
- Deposit recovery fund proposal:
  - Rationale: give depositors “hope” of upside recovery over time via a dedicated fund funded from proceeds from operating and privatizing state assets, recovery of stolen assets, future oil and gas revenues, etc.
  - Risks: a fund that explicitly or implicitly guarantees depositors constitutes a contingent claim on government resources, undermining debt sustainability objectives and constraining fiscal policy.
  - Credibility concerns: many proposed funding sources are questionable, while large competing demands for social and development needs cannot be ignored.

### A. The origins of the crisis — key findings
- Over the past two decades, Lebanon built unsustainable fiscal and external imbalances: large fiscal and current account deficits, high dollarization, an increasingly overvalued exchange rate, and lack of structural reforms led to very high public debt and financing needs.
- Large external borrowing needs were met through deposit inflows and Eurobonds; deposit inflows increased during 2008–10 but slowed after the start of the Syrian war, prompting BdL to provide government financing.
- Share of government debt held by BdL increased from 23 percent of total debt in 2012 to 52 percent in 2019, with a mirror decline in the share held by banks.
- From 2015, BdL offered unsustainable high interest rates on BdL deposits (“financial engineering”), leading banks to increase foreign currency exposure to BdL and eventual unprecedented losses to the central bank.
- A sudden stop amid weakening confidence, amplified by sovereign-bank linkages and the Eurobond default in March 2020, led to an economic collapse of historical proportions:
  - Deposit inflows reversed in 2018.
  - Liquidity crunch in 2019 led to large capital outflows, breaking the local currency peg to the U.S. dollar, and large-scale social protests in October 2019.
  - Banks’ large FX exposure to the central bank made them unable to service clients’ FX deposits.
- The crisis was prolonged and amplified by inadequate policies, the COVID pandemic, and the August 2020 Beirut port blast.
  - COVID pandemic resulted in nearly 11,000 deaths so far (as stated in the source).
  - Political distrust and vested interests negatively impacted policy decisions including capital controls law, budget timelines, and banking sector restructuring.

### B. Lebanon’s growth prospects
- Medium-term growth outlook is likely subdued given current economic and political climate and economic structure; staff foresee even in the reform scenario medium-term growth of around 3 percent.
- Historical growth: average growth of about 3.5 percent between 1980 and 2017 with large deviations (reaching at times ±40 percent).
- Economic structure:
  - Heavy dependence on services; real estate & financial services alone accounting for as much as 25 percent of GDP.
  - Agriculture and industry have minimal presence.
- Potential upside factors:
  - Competitiveness gains from sizable real depreciation and a highly skilled and entrepreneurial population and diaspora.
  - Growth of 3 percent is in line with comparable peers per the October 2022 WEO database.
- Structural constraints: poor infrastructure, unfriendly business environment, sub-par judicial system, weakened primary and secondary education.
- Sectors with potential:
  - Agriculture: potential to become a major regional supplier if modern methods and technologies adopted.
  - Industry: sub-segments like food processing, high-end design, and pharmaceuticals have high potential with infrastructure and regulatory improvements; improved competitiveness and reliable, price-efficient energy are prerequisites.
  - Tourism: pre-crisis share of GDP was estimated to be just in low single percentage points; meeting and incentives travel is a promising sub-segment.
  - Knowledge economy: software development and IT services were emerging pre-crisis.

### C. Currencies and exchange rates
- Post-crisis capital controls and withdrawal limits created distinction between “fresh dollars” and “lollars”:
  - “Fresh dollars” = post-October 17, 2019 FX deposits and international transfers, not subject to same restrictions as “lollars.”
  - “Lollars” (Lebanese dollars) = FX deposits that existed prior to cut-off date or emerged after as LBP deposits converted into FX.
- Parallel market dynamics:
  - Parallel market for bank checks and premium for cash payments emerged; checks traded around 90 cents on the dollar at start of crisis and declined to around 16 cents.
  - LBP cash withdrawal restrictions created a premium for LBP banknotes over electronic transactions (“bira”); many retailers restrict LBP card payments to 50 percent or less of bill amount or refuse card payments.
- Multiple LBP/US$ exchange rates exist alongside the official peg:
  - Parallel FX market, transaction-specific rates, BdL-run Sayrafa platform, and a “custom dollar” for tax valuation.
  - Sayrafa intended to draw trading away from the parallel market and provide an official reference for the “depreciated” LBP; gap between Sayrafa and parallel market has been as low as 10 percent but recently increased to 35 percent.
  - Sayrafa rate functions as an untargeted FX subsidy creating rent-seeking opportunities and large accounting losses for BdL.
  - Custom dollar for import valuation: set at 1,500 LBP/US$ till December 2022, at 15,000 till March 2023, at 45,000 till mid-April, and 60,000 LBP/US$ since April 19.
- BdL circulars governing uses of currencies, exchange rates, and withdrawals (selected):
  - Circular 148 (April–October, 2020): allowed small depositors with total net deposits ≤ LBP 5 million and/or US$3,000 to withdraw entire amount in LBP banknotes at official rate.
  - Circular 150 (April 9, 2020): allows “fresh dollar” accounts for cross-border transactions, card payments, or withdrawals without limits and exempts them from mandatory reserves at BdL.
  - Circular 151 (April 21, 2020): allows FX account holders to withdraw US$1,600 per month in LBP and up to US$3,000 per month in LBP initially at a rate of 3,900, later changed to 8,000 and now 15,000.
  - Circular 158 (June 8, 2021): allows depositors with FX accounts before October 31, 2019 to withdraw up to US$800 per month (US$400 in USD, US$200 in LBP at rate of 12,000 (later 15,000), and US$200 through card payments). Participation in Circular 158 is voluntary but precludes participation in Circular 151.
  - Circular 161 (December 16, 2021): permits banks to sell US$ to clients at the Sayrafa rate, subject to monthly quotas (around US$300 per month per account).
- Exchange rate unification:
  - Unification alone is unlikely to prevent further nominal depreciation, which reflects mistrust in the financial system, FX hoarding, current account deficit, and limited external financing until financial sector restructuring and broader reforms progress.
  - Unification may reduce pace of nominal depreciation and loss of FX reserves by eliminating currency speculation, reducing excessive imports, and could be strengthened by formal capital controls, deposit withdrawal limits, improvements in fiscal/monetary policy mix, and implementation of structural reforms.

### D. Refugee crisis — impacts and vulnerabilities
- Half of the population in Lebanon is vulnerable according to the UN; 1.5 million Lebanese citizens are now considered vulnerable.
- Lebanon hosts large refugee populations including 1.5 million Syrians (814,715 registered as refugees) and 257,000 Palestinians.
- Refugee living conditions:
  - Most refugees lack legal residency and access to basic rights and services; many work informal jobs with low pay and little job security.
  - Average household income for refugees is less than US$2.5 per day (excluding humanitarian assistance).
  - Two-thirds of refugee households are severely or moderately food insecure; half unable to pay rent on time.
  - Average household debt is equivalent to over six months of expenditure.
  - Women have limited access to reproductive health; 40 percent of children aged 6 to 14 do not attend school due to transportation costs, lack of materials, or pressure to work.
- Economic impact of the Syrian conflict:
  - World Bank estimated that during 2012–14 the conflict decreased GDP growth by 2.9 percentage points per year while doubling the unemployment rate to 20 percent.
  - Refugee influx increased pressure on infrastructure and government services and created direct fiscal and reserve costs due to untargeted subsidies.
  - Donor response: over US$12 billion disbursed through the Lebanon Crisis Response Plan since 2013.
- Public perceptions:
  - UN survey: more than 80 percent of Lebanese believe there is aid bias towards Syrian refugees and that their presence strains Lebanon’s resources.
  - As of February 2023, 46 percent felt relations between Lebanese and Syrians were negative (was 37 percent in August 2022), with 60 percent citing competition for jobs as a reason.

### E. Energy sector — diagnosis and policy actions
- Electricity sector challenges: chronic mismanagement, weak governance, and inadequate regulatory framework.
- Pre-crisis government subsidies to the sector averaged US$1.7 billion (around 3.6 percent of GDP) per year, reflecting limited collection, distribution losses, underinvestment, and low tariffs (deteriorated to below US$0.01 per kWh until last year due to currency depreciation).
- Current service: Electricité du Liban (EdL) provides less than 3–4 hours of electricity a day to most clients.
- Private generation costs:
  - Government guideline retail pricing of 45–50 U.S. cents per kWh, above world average of 16 cents per kWh, reflects high cost of small-scale generation.
  - High costs and low reliability restrict access, raise business costs, and disrupt public services (e.g., shutdown of water treatment facilities contributed to 2022 cholera outbreak—the first since 1993).
- Solar adoption: estimated installed capacity rose from 79MW in 2019 to 690MW in 2022; deployment at scale constrained by high capital costs, financing constraints, and incomplete regulatory framework.
- Cabinet’s April 2022 strategy rests on four pillars:
  1. Increasing generation and raising supply hours.
  2. Improving network performance, reducing losses, and enhancing collection.
  3. Strengthening regulatory and legislative framework.
  4. Updating electricity tariffs.
- Tariff reform implemented in November:
  - New tariffs: US$0.10 per kWh for the first 100 kWh and US$0.27 per kWh thereafter, plus fixed monthly tariff of US$0.21 per Amp.
  - Tariffs are priced in US$ but collected in local currency at Sayrafa rate.
  - Impact on EdL revenue depends on ability to enforce collection, increase electricity supply, and hedge exchange rate risk from timing differences between fuel purchases and tariff collection.
- Budget support: budget continued to finance EdL by US$0.5 billion in 2022, partly financed by SDR allocation Lebanon received in August 2021 and includes a July 2021 agreement with Iraq to purchase one million tons of fuel partly in exchange for health care, education and other services (exact terms unclear). The deal was extended in February 2023 to cover an additional 40,000 tons of diesel per month.

### F. Annex VI — Recommendations of the 2017 FSAP (excerpt)
- Financial Sector Supervision:
  - 1. Develop and implement integrated risk profiles for all banks; ensure that banks’ capital planning is fully aligned with their risk profile, corporate governance and risk management.
  - Timeframe indicated: Near term (1 year).

*1lbnea2023002 - introduction of state contingent payouts could complicate discussions with external creditors,*

### 2. Strengthen supervisory autonomy and capacity by (i) introducing legal protection for

### 1lbnea2023002 - 2. Strengthen supervisory autonomy and capacity by (i) introducing legal protection for

### Strengthen supervisory autonomy and capacity
- Recommendations:
  - Introduce legal protection for staff of supervisory authorities.
  - Review the adequacy of supervisory resources.
  - Reconsider the practice of the Association of Banks of proposing one of the board members of the BCC and HBC.
- Timeline: Near term

### Enhance the regulatory framework for banks
- Recommendations:
  - Align the regulatory treatment of restructured loans with international good practice.
  - Formalize the LCR as a mandatory standard for liquidity risk management.
  - Adjust the risk weight on foreign currency denominated BdL instruments in accordance with the Basel Capital Accord, as financing needs and risks abate.
- Timeline: Near term

### Stress testing and recovery planning
- Recommendations:
  - Develop capability for undertaking top-down stress tests and require banks to periodically submit bottom-up multi-factor stress tests.
  - Introduce recovery planning requirements for banks.
- Timeline:
  - Stress testing: Medium term (2–3 years)
  - Recovery planning: Medium term

### Improve nonbank regulation
- Recommendations:
  - Finalize and implement new capital market regulations.
  - Modernize the insurance law.
  - Develop a unified regulatory framework for the microfinance sector.
- Timeline: Medium term

### Financial integrity (AML/CFT)
- Recommendations:
  - Ensure that the ML offense includes all elements in the international standard, including acquisition, possession or use of illicit funds.
  - Establish a comprehensive mechanism to implement United Nations Security Council resolutions’ TF-related targeted financial sanctions.
  - Adjust the allocation of AML/CFT supervisory resources and action in line with actual ML/TF risks.
- Timeline: Near term

### Macroprudential policy
- Recommendation:
  - Create, or build on current structures to form, a financial stability advisory committee, including external members and a formal mandate and procedures.
- Timeline: Medium term

### Crisis management and preparedness
- Recommendations:
  - Develop plans to enable the orderly resolution of systemically important banks; discontinue policy measures that [rely on regulatory forbearance and BdL financial assistance to] support mergers between sound banks.
  - Consider reforms, as macro financial conditions improve, to better align the bank resolution regime and deposit insurance scheme with international best practice.
- Timeline: Medium term

### Financial development and access to finance
- Recommendations:
  - Collect data and analyze the implications of withdrawal of correspondent banking services on Lebanese banks and end-users of financial services, and take mitigating actions as needed.
  - Develop a National Access to Finance Strategy.
- Timeline:
  - Correspondent banking analysis: Near term
  - National Access to Finance Strategy: Medium term

### Annex VII — Past Article IV Recommendations (summary)
- Context:
  - Last Article IV consultation: August of 2019.
  - Staff assessment: very difficult economic position with very low growth, high public debt, and large twin deficits.
  - Deposit inflows had started to slow, reducing authorities’ room for maneuver.
- Staff recommended:
  - Medium-term fiscal adjustment targeting a primary surplus of 4–5 percent of GDP.
  - Significant revenue measures (e.g., a higher and broader VAT) and expenditure measures (e.g., elimination of electricity subsidies).
  - Structural reforms to unlock growth, improve external position, governance, and reduce corruption.
  - Increase banks’ capital buffers; gradually reduce BdL support to the government; strengthen BdL balance sheet.
  - Strong donor support as committed under the CEDRE conference.
- Outcome: These reforms did not materialize as the crisis unfolded a few months later.

### Annex VIII — Key Objectives of the 2022 Staff-Level Agreement (SLA)
- Purpose: Comprehensive economic policies to be supported by an Extended Fund Facility (EFF) aimed at rebuilding the economy, restoring financial and fiscal sustainability, strengthening governance and transparency, removing impediments to growth, and increasing social and reconstruction spending.
- Main pillars:
  - Restructuring the financial sector to restore banks’ viability.
  - Implementing fiscal reforms coupled with restructuring of external public debt to ensure debt sustainability.
  - Reforming state-owned enterprises, particularly in the energy sector.
  - Strengthening governance, anti-corruption, and AML/CFT frameworks, including modernizing the central bank legal framework and governance arrangements.
  - Establishing a credible and transparent monetary and exchange rate system.
- Prior actions required for program approval:
  1. Cabinet approval of the appropriate bank restructuring strategy that recognizes and addresses upfront the large losses in the sector, while protecting small depositors and limiting recourse to public resources;
  2. Parliamentary adoption of the emergency bank resolution legislation to be able to implement the bank restructuring strategy;
  3. Parliamentary adoption of the reform to the bank secrecy law in line with international standards;
  4. Completion and sharing with the Fund of the first phase of BdL special audit (focusing on the net international reserves) as of end-2021;
  5. Initiation of bank-by-bank assessment, by signing agreed ToRs for the largest 14 banks with reputable international firms;
  6. Cabinet approval of the medium-term fiscal and debt sustainability strategy;
  7. Parliament approval of the 2022 budget;
  8. Unification of the exchange rates;
  9. Parliamentary approval of the capital controls and deposit withdrawal limits law;
  10. Cabinet approval of the energy strategy.

### Fund relations, statistical issues, and data dissemination (selected points)
- Fund relations:
  - Membership: Joined April 14, 1947; Article VIII.
  - Quota: 633.50 SDR Million; Percent Quota: 100.00.
  - IMF’s Holdings of Currency (Holdings Rate): 507.04 SDR Million; 80.04 percent.
  - Reserve Tranche Position: 126.46 SDR Million; 19.96 percent.
  - Net cumulative SDR allocation: 800.47 SDR Million; 100.00 percent.
  - Holdings: 19.23 SDR Million; 2.40 percent.
  - Lebanon has no outstanding credit from/obligations to the IMF. Latest Financial Arrangements: None.
  - Last safeguards assessment: August 2009.
  - The de jure exchange rate arrangement: free floating; de facto: stabilized. In February 2023, the official exchange rate was set at LL 15,000 per $1.
  - Last Article IV Consultation concluded by the Executive Board on September 11, 2019.
  - The IMF resident representative in Lebanon since July 2022.
- Capacity Development (since October 2021): Multiple missions and technical assistance listed across Fiscal Affairs Department/METAC, Legal Department, Monetary and Capital Markets Department/METAC, and Statistics Department (missions include October–November 2021; April 2022; August 2022; January–February 2023; April 2022; February 2023; March 2022; February 2023; September 2022; November 2022; February 2023; May 2023; February 2023; April 2023).
- Statistical issues (as of April 20, 2023):
  - General: Data provision has serious shortcomings that significantly hamper surveillance, further impacted by the ongoing crisis, particularly in national accounts and fiscal sector statistics.
  - National accounts: Annual data available till 2020; VAT data not consistently received; CAS has only three staff in the national accounts team.
  - Price statistics: CPI uses weights based on 2012 expenditure data; weights are severely outdated; CPI continuity prioritized; PPI development delayed due to resources.
  - Government finance statistics: Significant delays; coverage not comprehensive; monthly central government budgetary accounts omit certain items; GFS on a modified cash basis for revenue and budgetary expenditure data.
  - Monetary and financial statistics: BDL sends provisional MFS based on IMF SRFs; data issues in institutional sectorization and classification of financial instruments.
  - Financial sector surveillance: FSI reporting stopped in 2020; BdL reports some Financial Access Survey series.
  - Balance of payments: Efforts to improve BoP statistics; quarterly data still compiled on a BPM5 basis; a preliminary IIP statement compiled but not yet submitted for dissemination.
- Table of Common Indicators Required for Surveillance (As of April 5, 2023): latest observation and frequencies include:
  - Exchange Rates: Date of Latest Observation 04/5/23; Date Received 04/5/23; 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 01/31/23; Date Received 03/03/23; Frequency M/M/M.
  - Reserve/Base Money: 03/30/23; 03/30/23; W/M W/M M.
  - Broad Money: 03/30/23; 03/30/23; W/M W/M M.
  - Central Bank Balance Sheet: 01/31/23; 03/03/23; M M M.
  - Consolidated Balance Sheet of the Banking System: 01/31/23; 03/03/23; M M M.
  - Interest Rates: 03/30/23; 03/30/23; W/M W/M W/M.
  - Consumer Price Index: 02/28/2023; 03/21/23; M M M.
  - Revenue, Expenditure, Balance and Composition of Financing — Central Government: 02/28/22; 11/31/2022; 09/18/22; M M M.
  - Stocks of Central Government and Central Government-Guaranteed Debt: 11/31/2022; 03/23/2023; M M M.
  - External Current Account Balance: 09/30/2022; 03/16/2023; Q Q Q.
  - Exports and Imports of Goods and Services: 09/30/2022; 03/16/2023; Q Q Q.
  - GDP/GNP: 12/31/2020; 04/04/22; A A A.
  - Gross External Debt: 11/31/2022; 03/23/23; M M M.
  - International Investment Position: N/A; N/A; N/A.
  - Footnotes clarify reporting items, periodicity codes, and scope.

*Prepared by Middle East and Central Asia Department (In consultation with other departments); May 18, 2023. Source: STAFF REPORT FOR THE 2023 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX*

### 1.      On behalf of the Lebanese authorities, we thank the Fund’s Executive Board,

### On behalf of the Lebanese authorities, we thank the Fund’s Executive Board, management, and staff for the continued constructive engagement and much-appreciated policy advice and capacity development support.

### Background
- Lebanon faces an unprecedented and multifaceted economic, financial, social, and health crisis that is likely to rank among the top ten most severe crises globally since the mid-nineteenth century, according to the World Bank.
- Pre-crisis vulnerabilities: unsustainable public debt, considerable exposure of the banking sector to the sovereign, and low growth rates over the previous decade.
- Key crisis outcomes since October 2019:
  - Economy contracted considerably since October 2019.
  - Lebanese pound lost over 98 percent of its value.
  - Inflation is one of the highest globally.
  - Financial system collapsed; banking system losses are more than triple the size of the economy.
  - Unemployment and poverty increased sharply; poverty estimated at about three-quarters of the population (UN ESCWA).
  - Massive brain drain of the young and skilled; rapid erosion of human capital.
  - Public sector institutions failing and basic services drastically cut.
- Additional shocks compounding the crisis:
  - COVID-19 pandemic.
  - Devastating explosion on August 4, 2020, which demolished a third of downtown Beirut.
  - Impact of the conflict in Ukraine: sharp increase in food and fuel prices; Lebanon imports about 85 percent of its food.
  - Lebanon was disappointed not to benefit from the Fund’s food shock window despite eligibility.
- Refugee situation:
  - Lebanon hosts the largest number of refugees per capita—more than 25 percent of the population—and per square kilometer in the world (UNHCR).
  - Includes 1.5 million Syrians and 257,000 Palestinians.
  - Refugee presence added considerable pressure to infrastructure, natural resources, and government services; disparities increased due to competition for jobs and U.S.$-denominated international support to refugees.
  - Donor support through the Lebanon Crisis Response Plan since 2013 covered only a fraction of the cost to Lebanon.
  - Authorities requested an updated IMF assessment of the economic costs of hosting refugees and assistance mobilizing international support.
- Program and political context:
  - A comprehensive economic reform program was formulated in 2022 with IMF support to rebuild the economy, restore financial stability, strengthen governance and transparency, remove impediments to job-creating growth, and increase social and infrastructure spending.
  - A staff-level agreement (SLA) on comprehensive economic policies to be supported by a 46-month Extended Fund Arrangement (EFF) with requested access of SDR 2,173.9 million was reached on April 7, 2022.
  - Political environment: President Michel Aoun’s term expired end-October 2022; government operated with limited caretaker capacity; divided parliament after May 2022 elections slowed approval of SLA laws.
  - Authorities agree with staff’s assessment of outlook under status quo and reform scenarios and note upside from October 27, 2022 maritime demarcation with Israel enabling offshore resource exploration.
- Progress on SLA prior actions (half of agreed-upon prior actions completed):
  - Financial sector rehabilitation strategy approved by Cabinet.
  - Banking secrecy law adopted by parliament (not fully addressing banking sector restructuring and financial gap).
  - 2022 Budget was approved (at end-September).
  - Energy sector strategy approved (implementation delayed).
  - Special purpose audit of the Central Bank completed.
  - Considerable progress with IMF technical assistance on emergency bank resolution legislation and terms of reference for bank-by-bank net asset valuation prepared.

### Policy Discussions
- Banking sector restructuring strategy:
  - Authorities agree on the need to strengthen Banque du Liban’s (BdL) governance and rehabilitate the financial sector; timely implementation is critical.
  - Authorities emphasize the systemic nature of banking losses and political difficulty of large depositor write-offs.
  - Authorities urged staff to consider arguments to improve depositor recovery rates:
    - Modifications such as clawing back excess interest earnings, reversing some LBP-to-FX transactions, distinguishing “eligible” and “non-eligible” deposits (including deposits converted into dollars at the official exchange rate of 1,500 LBP to the dollar since October 2019), and recovering stolen and smuggled money.
    - Conditional use of state assets: consider earmarking some future revenues to a Deposit Recovery Fund to secure recovery of deposits exceeding USD100,000 over time, subject to (i) successful rollout of the government’s economic and financial reform program, (ii) public debt reaching a level lower than the program target to maintain debt sustainability, and (iii) maintenance of a decent level of social and infrastructure spending.
    - Favor awarding state asset management contracts (real estate, ports, SOEs, Electricité du Liban, telecommunications sector, etc.) to the private sector.
    - Without a political decision on final banking strategy (including rectifying shortcomings in the banking secrecy law), related legislation—such as the draft resolution law and bank-by-bank assessments—cannot be advanced and completed.
- Monetary policy, exchange rate unification, rebuilding credibility:
  - Authorities concur that the current monetary regime is no longer sustainable and that unification of the exchange rate is needed.
  - Authorities would have preferred unification in a more favorable environment to avoid overshooting, but vulnerabilities call for no further delays.
  - BdL stated decisions need to be taken jointly with the Ministry of Finance and the government and warned of risks to financial stability and liquidity.
  - Authorities cautioned the strategy may fail if BdL is forced to maintain budget deficit financing and quasi-fiscal operations.
- Fiscal policy and debt sustainability:
  - Authorities concur with staff’s estimate of the fiscal adjustment path needed to restore debt sustainability but call for better prioritization and sequencing of reforms.
  - Ministry of Finance initiated gradual adjustments in the exchange rate on customs and taxes in the 2022 budget, intending to use the Sayrafa rate (or the market rate once exchange rate is unified) on all budget items.
  - Authorities indicated refraining from BdL financing in the short term may be difficult and stressed urgency of addressing low pay of civil servants.
  - Authorities noted that implementation of the customs dollar and collection of cash revenues in U.S.$ has decreased reliance on monetary financing.
  - Options under exploration include salary indexation as a temporary measure while awaiting permanent salary scale reform; targeted wage increases to core employees may be politically difficult.
  - Preparation of the 2023 Budget has started along suggested reform pillars despite high uncertainty and limited human resources and IT capabilities.
  - Donor support from the Lebanese Finance Facility (set up after the Beirut Port explosion) has been agreed to support Ministry of Finance functioning.
- Structural reforms: State-Owned Enterprises (SOEs):
  - Authorities share staff’s views on the proposed SOE reform plan and requested an IMF governance diagnostic to identify and sequence reforms.
  - Plans to complement IMF work with EBRD support to review legal and governance frameworks of SOEs benchmarked against OECD guidelines.
  - Electricity sector: In November 2022, Électricité du Liban (EdL) increased the tariff per kilowatt hour billed to households and businesses, along with additional charges per ampere subscription, to start addressing financial imbalances; a campaign to address non-technical losses launched; early indications are positive though assessment is premature.
  - Authorities noted billing difficulties in a very volatile exchange rate environment; expect the regulatory agency to be established soon as applications for candidates are under review.
- Governance, anticorruption, and AML/CFT:
  - Authorities recognize governance weaknesses and corruption vulnerabilities have challenged macroeconomic stability.
  - They expect the IMF governance diagnostic to identify priorities and sequencing for needed reforms.

### Conclusion
- Authorities value the strong partnership with the Fund for policy advice and capacity development in difficult circumstances.
- Despite slower-than-expected reform implementation, authorities urge the Fund to intensify engagement with Lebanon, including outreach to members of parliament, influential private sector groups, and NGOs to help advance the reform agenda.
- Authorities urge the Fund to remain pragmatic given the unprecedented scale and nature of Lebanon’s crises and call on the international community to step up efforts to address social and humanitarian needs and the cost of hosting refugees.
- Authorities remain committed to reforms in the SLA and stand ready to move ahead with an IMF-supported program the moment a President is elected and a government with full powers is in place.

*Source: 1lbnea2023002 - IMF PDF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1lbnea2023002.pdf_