## _cr06201

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---

### Executive summary — background and recent developments
- GDP growth: "6 percent" in 2004; estimated "1 percent" in 2005.
- Inflation: "0.3 percent" in 2005.
- Deposit and market shocks in early 2005:
  - Deposit base shrank by "4 percent" in H1 2005.
  - "Some $2 billion" withdrawn and another "$5½ billion" converted into dollar deposits in the two months after the assassination.
- Confidence and market developments:
  - $750 million Eurobond (Oct 2005) heavily oversubscribed.
  - Eurobond spreads declined to "180 basis points" by mid-March 2006.
  - Stock index "150 percent" above end-2004 by March 2006; total capitalization remains "20 percent of GDP", Solidere accounting for over "60 percent".
- Fiscal outcomes 2005:
  - Primary fiscal surplus dipped to "2½ percent of GDP" (from "3½ percent" in 2004).
  - Government debt rose to "175 percent of GDP".
  - Overall fiscal deficit declined to "8 percent" in 2005.
  - Contributing pressures: one-time transfer "0.3 percent of GDP" to social security funds; EdL subsidies/losses estimated at "3.2 percent of GDP" (operational losses "1.9 percent of GDP"); revenue shortfalls from gasoline price cap.
  - 2005 budget approved ex-post in February 2006; most expenditure categories effectively frozen in nominal terms in 2005.
- Banque du Liban (BdL) and reserves:
  - BdL balance sheet: grew from "$13 billion" (end-2002) to "$29 billion" (end-2005).
  - Operations contributed to growing central bank losses but did not compromise monetary control.
  - Current account deficit narrowed to an estimated "12.7 percent of GDP" in 2005.
  - Real effective exchange rate depreciated by "5 percent" in 2005.
- Banking sector (2005):
  - Profitability rose by about "13 percent".
  - Capital adequacy ratio "22 percent" as of mid-2005 (reflecting low risk weighting on government paper).
  - Claims on government and central bank > "50 percent" of bank assets.
  - Net liquid to total asset ratio "45 percent"; banks hold nearly "$10½ billion" in liquid assets abroad.
  - Lending stagnated; non-performing loans to total loans ratio "10 percent" (net of provisions).

### Outlook, vulnerabilities, and authorities’ strategy
- Overall assessment:
  - Vulnerabilities described as "very high"; short-term liquidity favorable but large fiscal financing needs could pressure reserves absent adjustment.
  - High concentration of government debt in banks' balance sheets heightens systemic risks.
- Authorities’ favored strategy: "soft exit out of the debt overhang" via fiscal adjustment, privatization and structural reforms; cabinet approval delayed by political instability.
- Staff illustrative adjustment scenario:
  - Fiscal measures equivalent to "7 percent of GDP", together with privatization, would reduce debt ratio to "133 percent" by 2011.
  - Scenario excludes exchange rate changes and debt restructuring.
  - Concessional financial assistance needed to reduce debt ratio further toward sustainable levels.
  - Authorities concurred with overall size of fiscal adjustment but left phasing open.

### Staff appraisal and policy recommendations (summary)
- Fiscal strategy and debt management:
  - Given sustained high debt, staff recommend locking in a "large upfront fiscal adjustment" backed by vigorous privatization and reform rather than gradual-only adjustment.
- Monetary and exchange rate policy:
  - The exchange rate peg remains the appropriate anchor.
  - Peg support requires:
    - A flexible interest rate policy;
    - A strengthened central bank balance sheet;
    - Close fiscal-monetary policy coordination.
- Financial sector stability:
  - Financial stability depends critically on depositor confidence.
  - Continued close supervision of the banking sector and legal protection for supervisors recommended.

### Medium-term scenarios and debt sustainability
- Baseline (unchanged policies):
  - Staff baseline projects debt ratio rising steadily to "over 210 percent of GDP" by 2011.
- Illustrative adjustment scenario:
  - Debt ratio falls to "133 percent of GDP" by 2011 with:
    - Fiscal effort of about "7 percent of GDP" (front-loaded).
    - Partial privatization of telecom in 2006–07 yielding receipts of "19 percent of GDP".
    - Excludes exchange rate adjustment, debt restructuring, concessional financing.
  - Staff assume interest rates roughly unchanged and further narrowing of spreads by "110 basis points" for LL deposits and "60 basis points" for dollar deposits.
- Donor assistance impact:
  - For every "$1 billion" of grant-equivalent assistance in 2006, the debt ratio would be reduced by an additional "5.6 percentage points of GDP" by 2011.
  - Authorities approached banks for voluntary contribution akin to Paris II ("$3.6 billion" in zero-interest loans for three years).

### Staff’s projected primary fiscal effort (2005–11) — adjustment scenario (percent of GDP)
- Primary fiscal effort (Net Gain):
  - 2005–06: "1.4"
  - 2006–07: "2.7"
  - 2007–11: "2.8"
- Revenue (Net Gain):
  - 2005–06: "1.1"
  - 2006–07: "1.8"
  - 2007–11: "1.4"
  - Key revenue measures:
    - VAT rate increase from "10 to 15 percent": 2005–06: "0.9"; 2006–07: "1.5"; 2007–11: "0.0".
    - Other revenue measures: 2005–06: "0.2"; 2006–07: "0.3"; 2007–11: "1.4".
    - Increase in withholding tax on interest from "5 to 7 percent" would generate "0.4 percent GDP".
- Expenditure (Net Gain):
  - 2005–06: "0.3"
  - 2006–07: "0.9"
  - 2007–11: "1.3"
  - Key expenditure measures:
    - Pension reforms: 2005–06: "0.3"; 2006–07: "0.1"; 2007–11: "0.4".
    - Wages (within fixed nominal envelope): 2005–06: "0.2"; 2006–07: "0.3"; 2007–11: "0.5".
    - Reduction in EdL losses: 2005–06: "0.5"; 2006–07: "0.4"; 2007–11: "0.5".
    - Other (includes increase in capital expenditures from low 2005 base and nominal freeze in other current expenditures): 2005–06: "-0.6"; 2006–07: "0.2"; 2007–11: "-0.2".
- Offsetting factors:
  - Revenue loss due to privatization: 2005–06: "-0.4"; 2006–07: "-1.3"; 2007–11: "-0.3".
  - Higher transfer to EdL due to higher oil price: 2005–06: "-0.6"; 2006–07: "0.0"; 2007–11: "0.0".
  - One-off 2005 expenditures (transfer to social security): 2005–06: "0.3".
- Net improvement in primary surplus:
  - 2005–06: "0.7"
  - 2006–07: "1.5"
  - 2007–11: "2.5"

### Fiscal policy, public financial management, and electricity sector
- Interim fiscal measures and management:
  - Cash management system introduced; audit of NSSF health fund; audit and settlement of arrears initiated.
  - Draft laws pending: Treasury single account, independent public debt directorate, modernized public procurement, annual external audits for public institutions.
- Expenditure priorities:
  - Fiscal sustainability depends on expenditure reforms, elimination of open-ended subsidies, pension reform (in collaboration with World Bank), and strengthening NSSF health financial management.
  - Maintain nominal wage freeze and rely on attrition; civil service reform needed.
- Electricity sector (EdL):
  - No audited accounts since 2001; non-technical losses reduced from "29 percent" in 2001 to "17 percent" in 2005.
  - Breakeven oil price in electricity production about "$25 dollars per barrel".
  - EdL measures considered: governance reforms, partial privatization, tariff increases (tariffs unchanged since 1996), investments to reduce inefficiencies.
- Debt management:
  - Plans to set up a Public Debt Directorate and expand financing instruments to attract longer-term investors.

### Monetary policy, central bank balance sheet, and coordination
- Exchange rate policy:
  - Authorities view the peg as key to stability given high dollarization and balance-sheet risks from exchange rate movements.
- Central bank financial position and coordination:
  - Convergence on reserve level, commitment by MOF not to resort to central bank financing and to repay maturing loans; agreed coordination on bunching of maturities in 2006.
  - Central bank losses to decline rapidly only after "2009" based on existing obligations.
  - Measures already taken: fees on operations; lowered remuneration of commercial bank deposits; realized gains from sale of a bank.
  - Considered measures: sale of Middle East Airlines and other real assets.
  - Policy recommendations:
    - Re-center BdL operations on monetary and liquidity management;
    - Unburden central bank balance sheet of real assets;
    - Institutionalize explicit constraints on central bank financing of the government and formalize policy coordination;
    - Timely actions to strengthen the central bank balance sheet should be integral to the adjustment strategy.

### Banking sector vulnerabilities and reform agenda
- Structural linkage and systemic risk:
  - Banks’ access to regional savings financed large fiscal/external imbalances; mutual dependency of government and banks heightens shock transmission.
  - Main systemic risk: possibility of large-scale deposit withdrawals that could trigger banking, balance of payments, and debt crises.
- Liquidity and capital adequacy:
  - Liquid foreign assets of commercial banks and BdL combined provide cover for "35 percent" of total deposits.
  - Transition to Basle II considered (possibly starting 2008); moving to 100 percent risk-weighting for FX government debt would lower average capital adequacy ratio to "about 10 percent".
  - Banking sector capital expected to increase from "around $4 billion" in 2004 to "around $5½ billion" by end-2006.
- Market structure and supervision:
  - Concern that Lebanon may be "overbanked"; medium-term consolidation expected with smaller banks exiting.
  - Need for strengthened supervision, legal protection for supervisors, well-functioning deposit guarantee scheme, and an independent securities regulator.

### Structural reforms, privatization, and growth agenda
- Public sector reform measures (2004–06 highlights):
  - Large taxpayer’s office established (May 2005); VAT directorate law passed (Aug 2005); draft tax procedure code to cabinet; registration of private sector employees virtually completed (May 2005); draft TSA and debt directorate laws pending in parliament.
- Capital markets and legislation:
  - Securitization and investment fund laws enacted (December 2005); capital market development draft law pending; insider trading, insurance regulatory commission, and dematerialization laws pending.
- Privatization priorities:
  - Telecom sector privatization targeted in 2006–07; Liban Telecom and additional mobile licenses slated for 2007–09; EdL privatization to proceed after regulatory steps.
  - BdL considering sale of shares it holds; BLC sale to Gulf investors brought close to "US$1 billion" inflow to BSE.
- Structural impediments and priorities:
  - Government intervention, red tape, corruption; World Bank estimate that monopoly rents may account for "as much as 15 percent of GDP".
  - Growth priorities: telecom liberalization/privatization, competition policy, administrative streamlining, improving efficiency of government spending, WTO membership targeted for end-2006.
- Social policy:
  - Medium-term social strategy to be finalized in 2006; establish Interministerial Committee for Social Development Policy; pension reform with World Bank assistance; strengthen social safety nets and health and education affordability and quality.

### Technical assistance, statistics, and capacity building
- IMF technical assistance and missions (selected dates preserved):
  - Extensive missions 2000–2005 across STA, FAD, MFD, MAE, LEG and BTS on balance of payments, income tax, price statistics, VAT, public expenditure management, payments systems, liquidity forecasting, early warning systems, and public financial management.
  - Follow-up missions in January and August 2005 on payments system and early warning systems; December 2005 mission on liquidity management.
- Statistical gaps and recommendations:
  - No official PPI and CPI data for national coverage; incomplete balance of payments reporting historically.
  - Recommendations: extend inter-agency agreement (BdL and Central Authority for Statistics), develop new data sources, adopt official reserve definition per guidelines, improve quarterly dissemination of BOP data.
  - Improvements: Implementation of International Transactions Reporting System in 2003; BdL provided STA with 2002–04 data and methodological notes in July 2005.
  - Monetary statistics generally reliable and timely; Lebanon participates in IMF Coordinated Compilation Exercise for FSIs.

### Selected baseline and adjustment scenario indicators (highlights)
- Baseline — Real GDP (annual %): "2.9", "5.0", "6.0", "1.0", "3.0", "2.0", "2.0", "2.0", "2.0", "2.0" (2002–11).
- Baseline — Gross government debt (percent of GDP): "166.4"; "167.8"; "164.7"; "174.6"; "176.8"; "182.3"; "188.0"; "194.4"; "201.9"; "211.0" (2002–11).
- Adjustment scenario — Real GDP (annual %): "2.9", "5.0", "6.0", "1.0", "3.0", "3.4", "3.7", "4.0", "4.0", "4.0" (2002–11).
- Adjustment scenario — Gross government debt (percent of GDP): "166.4"; "167.8"; "164.7"; "174.6"; "160.6"; "153.2"; "149.9"; "144.4"; "138.6"; "132.8" (2002–11).
- Adjustment scenario — Gross official reserves (US$ millions): "5,094"; "10,213"; "9,513"; "9,852"; "10,647"; "11,504"; "11,674"; "12,467"; "13,749"; "14,409".
- Banking soundness (selected 2000–2005 H1):
  - Total banking assets (US$ millions): "47,505"; "49,858"; "54,587"; "62,151"; "70,978"; "68,921".
  - Capital adequacy ratio (percent): "16.9"; "18.0"; "19.4"; "22.3"; "21.2"; "21.6".
  - Net problem loans/net total loans (percent): "7.8"; "10.0"; "12.4"; "12.8"; "10.1"; "9.9".
- External sector (selected):
  - Current account balance (US$ millions, baseline 2002–11 sample): "-2,842"; "-3,026"; "-3,969"; "-2,792"; "-2,995"; "-2,964"; "-3,027"; "-3,113"; "-3,226"; "-3,352".
  - Exports f.o.b. (US$ millions): "1,018"; "1,444"; "1,598"; "1,821"; "2,030"; "2,208"; "2,398"; "2,602"; "2,827"; "3,070".

### IMF relations, modalities, and follow-up
- Membership and quota: Joined "04/14/47"; quota "203.00" SDR million; Fund holdings of currency "184.17".
- Exchange arrangement: Lebanese pound is a conventional peg; since October 1999 BdL has intervened to keep the pound around "LL 1,507.5 per $1" with bid-ask spread "LL+/-6.5".
- Proposal: next Article IV consultation with Lebanon to take place on the standard "12-month" cycle.

*Source: IMF staff report content provided in the supplied document (_cr06201_).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background and recent developments
- Lebanon weathered the confidence shock from Mr. Hariri’s assassination in February 2005, but GDP growth slowed: GDP growth was 6 percent in 2004 and is estimated to have grown by 1 percent in 2005; inflation declined to 0.3 percent in 2005.
- Financial pressures in early 2005:
  - Deposit base shrank by 4 percent in the first half of the year.
  - Some $2 billion in deposits was withdrawn and another $5½ billion was converted into dollar deposits in the two months following the assassination.
- By mid-2005 confidence was partially restored through monetary policy interventions and a peaceful political exit; deposit inflows resumed and dedollarization was gradual.
- Market developments:
  - A $750 million Eurobond issue of October 2005 was heavily oversubscribed.
  - By mid-March 2006 Eurobond spreads had declined to a record low of 180 basis points.
  - The stock index was 150 percent above its end-2004 level by March 2006; total capitalization remains 20 percent of GDP, with Solidere accounting for over 60 percent of it.
- Fiscal and public finance developments:
  - In the absence of new policy initiatives, the primary fiscal surplus dipped to 2½ percent of GDP in 2005 from 3½ percent in 2004.
  - Government debt rose to 175 percent of GDP in 2005.
  - The overall fiscal deficit declined to 8 percent in 2005.
  - Contributing fiscal pressures in 2005 included: a one-time transfer of 0.3 percent of GDP to cover losses in social security funds; subsidies and losses at the state electricity company (EdL) estimated at 3.2 percent of GDP in 2005 (operational losses alone 1.9 percent of GDP); and revenue shortfalls linked to a gasoline price cap.
  - The 2005 budget was approved ex-post in February 2006, effectively freezing most expenditure categories in nominal terms during 2005.
- Central bank and balance sheet developments:
  - The Banque du Liban’s balance sheet grew from $13 billion at end-2002 to $29 billion by end-2005.
  - Expansion reflected below-market financing of the government, sterilization operations, and efforts to replenish international reserves; these operations contributed to growing central bank losses.
  - Central bank losses have not compromised monetary control.
- External and competitiveness indicators:
  - The current account deficit narrowed to an estimated 12.7 percent of GDP in 2005.
  - By end-2005 gross international reserves were back at their end-2004 level.
  - The real effective exchange rate depreciated by 5 percent in 2005.
  - From 2000 to 2005 Lebanon’s global market share rose from 1.1 to 2.1 percent; its regional (Middle East) market share grew from 18.4 to 36.1 percent.
- Banking sector:
  - Banks continued to record profits; profitability rose by about 13 percent in 2005.
  - Capital adequacy ratio was 22 percent as of mid-2005 (reflecting low risk weighting on government paper).
  - Claims on government and the central bank account for over 50 percent of bank assets.
  - Banks remain highly liquid, with a net liquid to total asset ratio of 45 percent, and hold nearly $10½ billion in liquid assets abroad.
  - Lending has stagnated; non-performing loans to total loans ratio is 10 percent (net of provisions).

### Outlook and policy discussions
- Overall vulnerability and risks:
  - Vulnerabilities remain very high; the events of 2005 weakened an already fragile financial situation.
  - The high concentration of government debt in banks’ balance sheets heightens systemic risks.
  - Short-term liquidity conditions remain favorable, helped by ample regional liquidity, but the large fiscal financing need could create new pressures on international reserves in the absence of adjustment.
- Authorities’ strategy:
  - Authorities favor a soft exit out of the debt overhang based on a program of fiscal adjustment, privatization and structural reforms; political instability has delayed cabinet approval of the program.
- Staff illustrative adjustment scenario:
  - Fiscal measures equivalent to 7 percent of GDP, together with privatization, would reduce the debt ratio to 133 percent by 2011.
  - The scenario does not envisage exchange rate changes or debt restructuring.
  - Concessional financial assistance would be needed to reduce the debt ratio further toward sustainable levels.
  - Authorities concurred with the overall size of the fiscal adjustment but left open the issue of its phasing over the medium term.

### Staff appraisal and policy recommendations
- Fiscal strategy and debt management:
  - Because Lebanon will continue to operate at very high levels of debt into the medium term, a strategy of gradual debt reduction through sustained fiscal adjustment carries risks.
  - Given high exposure to financial shocks and political uncertainty, the government program should lock in a large upfront fiscal adjustment backed by vigorous privatization and reform.
- Monetary and exchange rate policy:
  - The exchange rate peg remains the appropriate monetary anchor for Lebanon.
  - The peg needs to be supported by:
    - A flexible interest rate policy;
    - A strengthened central bank balance sheet;
    - Close policy coordination between fiscal and monetary authorities.
- Financial sector stability:
  - Financial stability relies crucially on depositor confidence.
  - Continued close supervision of the banking sector should be a key element of the strategy.

* _cr06201 - Executive Summary_*

### 2004. Most public sector reforms have been of an administrative nature, with a number of

### _cr06201 - 2004. Most public sector reforms have been of an administrative nature, with a number of

### Outlook and macro-financial vulnerabilities
- Underlying financial imbalances have grown; government debt ratio has edged up again.
- Some financial benefits of Paris II are ending, and the interest bill is expected to start rising.
- The central bank has absorbed many fiscal stabilization costs on its balance sheet, deteriorating the sovereign’s financial standing.
- Liquidity conditions improved markedly since mid-2005: international reserve coverage, commercial banks’ liquidity, and access to market financing strengthened.
- Lebanon remained positioned to capture some portfolio outflows from Gulf Cooperation Council countries (over $100 billion in 2005), but delays in fiscal adjustment would raise fiscal financing needs and could pressure international reserves.

### Structural reform initiatives (2004–06) — summary of measures in Box 1
- Public sector reforms:
  - Large taxpayer’s office established in May 2005 (not yet fully operational).
  - Law establishing a VAT directorate passed in August 2005.
  - Draft tax procedure code (based on IMF technical assistance) to be sent to cabinet.
  - Registration of all private sector employees virtually completed by May 2005 (deduction at source of tax on salaries).
  - Draft law establishing a Treasury single account (TSA) pending in parliament.
  - Draft law establishing an independent public debt directorate at the ministry of finance pending in parliament.
  - Draft law modernizing public procurement to be submitted to parliament.
  - Amendment to the 2001 budget law to require annual external audits of all public institutions (to be submitted to parliament).
- Capital markets and bank mergers:
  - Draft law on capital market development and regulatory commission pending in parliament.
  - Legislation allowing securitization of financial assets passed in December 2005.
  - Legislation giving legal status to investment funds passed in December 2005.
  - Draft insider trading legislation pending in parliament.
  - Draft insurance regulatory commission legislation under government review.
  - Amendment facilitating bank mergers approved by parliament in February 2005.
- Competition and domestic market reform:
  - Draft anti-dumping legislation pending in parliament.
  - Draft law on International Trade and Licensing pending in parliament.
  - Consumer protection legislation passed in February 2005.
  - E-commerce laws enacted covering e-signature, e-contracts, e-payments, and protection of personal rights.

### Medium-term scenarios and debt sustainability analysis
- Baseline (unchanged policies):
  - Staff’s baseline shows the debt ratio rising steadily to over 210 percent of GDP by 2011, assuming a vicious circle of growing debt, rising interest rate spreads, and weak growth.
- Illustrative adjustment scenario:
  - Debt ratio falls to 133 percent of GDP by 2011.
  - Assumptions:
    - Fiscal effort of about 7 percent of GDP (much front loaded in the first three years).
    - Partial privatization of the telecom sector in 2006–07 yielding receipts of 19 percent of GDP.
    - Excludes exchange rate adjustment, debt restructuring and concessional financing.
  - Staff’s adjustment scenario assumes interest rates roughly unchanged from present levels despite projected increase in LIBOR; further narrowing of spreads by 110 basis points for LL deposits and 60 basis points for dollar deposits.
  - Authorities expected stronger GDP rebound in 2006 than the staff’s projection of 3 percent growth.
- Risks and stochastic analysis:
  - Even under the adjustment scenario, debt remains high and exposed to liquidity shocks.
  - Stochastic debt sustainability analysis (Figures 7a–7b) shows confidence intervals for debt under the adjustment scenario based on observed shocks to interest rates and GDP growth.
  - Adverse growth and interest shocks, shortfalls in fiscal adjustment, and contingent liabilities (social security funds, electricity sector) pose significant risks.
- Donor assistance impact:
  - For every $1 billion of grant-equivalent assistance in 2006, the debt ratio would be reduced by an additional 5.6 percentage points of GDP by 2011.
  - Authorities approached commercial banks for a voluntary contribution akin to Paris II ($3.6 billion in loans at zero interest for three years).

### Staff’s projected primary fiscal effort (2005–11) — adjustment scenario (In percent of GDP)
- Primary fiscal effort (Net Gain):
  - 2005–06: 1.4
  - 2006–07: 2.7
  - 2007–11: 2.8
- Revenue (Net Gain):
  - 2005–06: 1.1
  - 2006–07: 1.8
  - 2007–11: 1.4
  - Key measures:
    - Increase in the VAT rate from 10 to 15 percent: 2005–06: 0.9; 2006–07: 1.5; 2007–11: 0.0.
    - Other revenue measures (see notes): 2005–06: 0.2; 2006–07: 0.3; 2007–11: 1.4.
- Expenditure (Net Gain):
  - 2005–06: 0.3
  - 2006–07: 0.9
  - 2007–11: 1.3
  - Key measures:
    - Pension reforms: 2005–06: 0.3; 2006–07: 0.1; 2007–11: 0.4.
    - Wages (reforms within a fixed nominal envelope): 2005–06: 0.2; 2006–07: 0.3; 2007–11: 0.5.
    - Reduction in EdL losses: 2005–06: 0.5; 2006–07: 0.4; 2007–11: 0.5.
    - Other (includes increase in capital expenditures from low 2005 base and nominal freeze in other current expenditures): 2005–06: -0.6; 2006–07: 0.2; 2007–11: -0.2.
- Offsetting factors:
  - Revenue loss due to privatization: 2005–06: -0.4; 2006–07: -1.3; 2007–11: -0.3.
  - Higher transfer to EdL due to higher oil price: 2005–06: -0.6; 2006–07: 0.0; 2007–11: 0.0.
  - One-off expenditures in 2005 (mainly exceptional transfer to social security system): 2005–06: 0.3; 2006–07: 0.0; 2007–11: 0.0.
- Net improvement in primary surplus:
  - 2005–06: 0.7
  - 2006–07: 1.5
  - 2007–11: 2.5

Notes in source:
- “Other” revenue measures include eliminating cap on domestic gasoline retail prices and gradually increasing gasoline excises to pre-capping level; increasing tax rate on interest income from 5 to 7 percent; introducing a global income tax; eliminating various inefficient fees.
- Increase in withholding tax on interest from 5 to 7 percent would generate additional revenues equivalent to 0.4 percent GDP.
- Figures may not add up due to rounding; net gains refer to incremental changes.

### Fiscal policy, debt management, and public financial management
- Authorities postponed the 2006 budget to integrate it with a medium-term program; introduced administrative measures meanwhile:
  - Cash management system to avoid overruns and strengthen fiscal reporting.
  - Audit of social security funds (NSSF), notably the health fund, to assess contingent liabilities.
  - Audit of arrears and begun settling arrears to the private sector (mostly related to expropriations).
- Authorities broadly agreed with the size of fiscal adjustment but sought careful calibration on timing and composition to support political and economic renewal and not derail recovery.
- Agreed instruments and reforms:
  - Increase VAT rate (potentially different magnitude/timing than staff suggested).
  - Reform of income tax system; plans for a Global Income Tax to replace the schedular system (based on FAD technical assistance).
  - Gradual increase of gasoline taxation back to 2003 level.
  - Scope for increasing withholding tax on interest (presently at 5 percent).
- Expenditure-side imperatives:
  - Fiscal sustainability depends critically on expenditure reforms, elimination of open-ended subsidies, and protection from contingent liabilities.
  - Pension reform in collaboration with the World Bank to consolidate private and public systems.
  - Strengthening financial management of NSSF health system.
  - Maintain nominal wage freeze and rely on attrition, but recognize need for proper civil service reform.
- Electricity sector (EdL):
  - EdL issues: no audited accounts since 2001, organizational inefficiencies, governance problems, high technical losses, theft and non-payment.
  - Non-technical losses reduced from 29 percent in 2001 to 17 percent in 2005.
  - Breakeven price of oil in electricity production about $25 dollars per barrel.
  - Measures considered: governance reforms, partial privatization, tariff increases (unchanged since 1996), investments to reduce inefficiencies.
- Public financial management weaknesses noted: hard budget constraints not always applied; cash rationing remains the only effective constraint. Authorities developing an action plan with FAD assistance and considering a Fiscal Accountability Law. Ministry of finance reorganizing toward modern function-based administrative structure.
- Debt management:
  - Authorities emphasized proactive debt management to reduce interest costs and rollover risk; built a significant liquidity buffer in the central bank.
  - Plans to set up a Public Debt Directorate and expand the range of financing instruments to attract longer-term investors.

### Monetary and exchange rate policies
- Authorities view the exchange rate peg as key to financial system stability given high dollarization; balance-sheet exposure risks from exchange rate movements are judged to outweigh adjustment benefits.
- Given strong capital inflows and recovery of international reserves, authorities did not see a need to match recent increases in international interest rates.
- Gross international reserves (GIR) are the market’s primary indicator; ministry of finance and central bank differences on reserve targets have at times caused policy coordination tensions.
- Staff found a convergence that GIR is presently at an appropriate level; despite low reserve coverage of short-term foreign currency liabilities by emerging market standards, authorities believed current reserve buffer sufficient to withstand a shock similar to 2005 until fiscal and other measures are implemented.

*Italic: IMF Country Report content provided in the supplied PDF excerpt.*

### 28.      Coordination between the central bank and the ministry of finance has

### Coordination between the central bank and the ministry of finance has

### Coordination and central bank financial position
- Recent convergence of views on the level of reserves, a commitment by the ministry not to resort to central bank financing (and to repay maturing loans), and an agreement to coordinate the bunching of central bank and government maturities coming due in 2006 have markedly improved coordination.
- Improved collaboration also reflects the current benign economic environment.
- The central bank recognized the need to eliminate central bank losses over time, noting that incurred losses so far have had no monetary impact because:
  - associated liquidity injection has been absorbed by growing money demand, or
  - mopped up by the issuance of long-term central bank paper.
- Loss-making operations were entered into as a matter of necessity rather than choice, and authorities hope to unwind them as the financial situation settles.
- Based on existing obligations, central bank (cash) losses should decline rapidly only after 2009.
- Measures already taken to improve the central bank’s financial situation:
  - introduced fees on many of its operations;
  - lowered remuneration of commercial bank deposits;
  - realized gains from the sale of a bank in its portfolio.
- Considered measures:
  - sale of Middle East Airlines (owned by the central bank) and other real assets.
- Assessment: these measures can only cover a fraction of the losses; additional measures would be necessary to close the financial gap at a faster rate.
- Policy recommendations:
  - recenter central bank operations on monetary and liquidity management;
  - unburden the central bank balance sheet of real assets;
  - institutionalize explicit constraints on central bank financing of the government and formalize policy coordination to achieve a better distribution of the fiscal costs of financial stabilization;
  - timely actions to strengthen the central bank balance sheet should be integral to the adjustment strategy.

### Financial sector vulnerabilities
- Structural linkage: ability of banks to tap regional savings enabled financing of large fiscal and external imbalances over the last 15 years, but mutual dependency of government and commercial banks heightens transmission of shocks between fiscal and financial sectors.
- Main systemic risk: possibility of large-scale deposit withdrawals, possibly triggered by concerns over sovereign solvency; because of high dollarization, such withdrawals could lead to banking, balance of payments, and debt crises.
- Despite high exposure of banks to sovereign debt, weaknesses in fiscal fundamentals have had limited effects on depositor confidence to date, attributed to:
  - strong reputation of domestic banks;
  - authorities’ demonstrated ability to honor financial obligations;
  - banking sector’s ample liquidity buffer in foreign exchange.
- Liquidity buffer statistic: the liquid foreign assets of commercial banks and the central bank combined provide cover for 35 percent of total deposits.
- Basel II transition:
  - authorities and banks keen to phase in Basle II standards, possibly starting in 2008.
  - move to 100 percent risk weighting for foreign currency government debt under Basle II would still leave the banking sector adequately capitalized—the average capital adequacy ratio would fall to about 10 percent.
- Exchange rate and balance sheet risks:
  - no currency mismatch in banks’ balance sheets, but significant indirect exchange rate risk related to domestic dollar lending—particularly to households and non-exporting firms; considered systemic and not fully internalized by individual banks.
- Capital and market developments:
  - banking sector capital expected to increase from around $4 billion in 2004 to around $5½ billion by end-2006.
  - capital increases intended to meet Basle II requirements and finance regional expansion (Algeria, Egypt, Iraq, Jordan, Sudan, Syria).
  - concerns that Lebanon may be overbanked given an overleveraged private sector and a financially strained public sector; need for medium-term banking sector consolidation.
  - authorities and banks expect some smaller banks to exit the market; larger banks positioned to develop alternative activities.
- Capital market constraints:
  - underdeveloped capital market impedes risk diversification and private investment;
  - absence of an independent stock market regulator and of a law against insider trading raised doubts about stock market foundations;
  - authorities noted legislation addressing these issues was pending in parliament.

### Structural policies and social priorities
- Structural impediments to private sector development:
  - government intervention, red tape, corruption, and special interest influence on subsidy, tax, and competition policies;
  - World Bank estimate: monopoly rents may account for as much as 15 percent of GDP.
- Government growth agenda priorities:
  - liberalization and privatization of the telecom sector and sale of other government assets;
  - a new competition policy backed by a newly created competition authority;
  - streamlining administrative impediments in collaboration with the business community;
  - improved efficiency of government spending;
  - membership in the WTO (targeted for end-2006).
- Telecom privatization timeline and actions:
  - secretary general of the telecom regulatory authority appointed in February 2006;
  - appointment of the board being finalized ahead of privatization of the two mobile telephone companies, slated for 2006;
  - privatization of the fixed telephone line and a third mobile license should follow in 2007.
- Social safety net:
  - establishment of a modern and well-functioning social safety net is a high government priority;
  - income distribution remains very uneven; vulnerable segments protected mainly through generalized subsidies;
  - social indicators have improved in recent years but still fall short of expectations.

### Staff appraisal: risks, strategy, and policy mix
- Key vulnerabilities exposed in 2005: very heavy public debt overhang, high degree of dollarization, large fiscal and current account deficits, reliance on short-term deposit inflows.
- Mitigating factors: benign external environment, ample regional liquidity, relative depositor stability, banks’ liquid foreign holdings, and authorities’ handling of 2005 pressures.
- Policy window: restored market confidence and political transformation create opportunity for fundamental reforms to reduce financial crisis risk and raise growth potential.
- Recommended strategy:
  - gradual debt reduction through sustained fiscal adjustment considered most promising; upfront debt restructuring seen as too risky.
  - aim for a large upfront adjustment based on strong fiscal effort in the first year of the program; with additional measures in 2007–08 and vigorous privatization, the debt-to-GDP ratio would be placed on a clear downward path.
  - concessional financial assistance from abroad and contributions from domestic creditors, commensurate with their financial strength, would be required to accelerate convergence.
- Fiscal policy measures:
  - magnitude of required fiscal adjustment calls for both revenue and expenditure measures plus institutional reforms to strengthen budgetary control.
  - revenue measures should be part of the initial package given slow yields from expenditure reforms.
  - suggested revenue reforms: align the VAT rate to that of other countries in the region; introduce a more efficient and more progressive income tax system; revisit taxation of gasoline.
  - expenditure reforms: reduce non-productive outlays such as subsidies and poorly targeted capital and current spending; restore financial viability of the electricity sector as a core element of adjustment; urgent pension reform.
  - improve statistical framework to strengthen policy formulation and implementation.
- Monetary and exchange rate policy:
  - exchange rate peg remains the appropriate monetary anchor and needs support from a flexible interest rate policy and a comfortable international reserve buffer.
  - until fundamentals are stronger, the peg is key to financial stability; present level of international reserves appears to balance minimizing reserve holding costs and maintaining sufficient liquidity.
- Central bank role and coordination:
  - central bank’s balance sheet can no longer carry full cost of sterilization or finance the public sector.
  - strong policy coordination between fiscal and monetary authorities, backed by enhanced institutional arrangements, is required.
  - constraints on central bank financing of the government, institutionalized policy coordination, and better distribution of fiscal costs of stabilization are important.
- Banking sector stability and supervision:
  - preserving depositor confidence is crucial and linked to program credibility, central bank financial management, and perceptions of banking soundness.
  - staff encouraged by proactive banking supervision; legal protection for supervisors recommended.
  - regulatory measures cannot fundamentally eliminate commercial banks’ exposure to government, but a strong supervisory framework can mitigate market and credit risk exposure.
  - anticipated banking sector consolidation should be prepared with safeguards, including a well functioning deposit guarantee scheme, to ensure orderly market-based consolidation.
  - adoption of an independent and strong securities regulator with adequate legal protection is urgent to build market confidence.
- Growth and reform complementarities:
  - short-run costs of adjustment should be counterbalanced by an explicit growth agenda to realize productivity gains.
  - priorities include: enhancing quality of government services, raising productivity of government capital spending, reducing red tape; reactivating telecom liberalization and privatization; improving business climate and competition by lowering entry/exit costs, strengthening contract enforcement, eliminating monopolistic practices, and decisively addressing corruption.
- Institutional and political considerations:
  - considerable convergence exists between authorities and staff on needed reforms, but protracted delays are unaffordable.
  - vulnerabilities and risks remain very high; an incremental approach to reform would remain exposed to political risks.
  - authorities should seize the opportunity offered by political transformation and international interest to make sizeable upfront progress in reform and adjustment.

*Source: IMF staff report content provided in the supplied document.*

### 46.      It is proposed that the next Article IV consultation with Lebanon take place on the

### It is proposed that the next Article IV consultation with Lebanon take place on the standard 12-month cycle.

### Scheduling
- Proposal: next Article IV consultation with Lebanon to take place on the standard 12-month cycle.

### Baseline Scenario — Selected Indicators (2002–11)
- Real GDP: 2.9, 5.0, 6.0, 1.0, 3.0, 2.0, 2.0, 2.0, 2.0, 2.0 (2002–11 annual percentage changes)
- Consumer price index (annual average): 1.8, 1.3, 3.0, 0.3, 2.0, 2.0, 2.0, 2.0, 2.0, 2.0
- Nominal GDP (annual percent changes): 8.2, 7.8, 9.4, 1.3, 5.1, 4.0, 4.0, 4.0, 4.0, 4.0
- Nominal GDP (LL billions): 27,832; 29,991; 32,815; 33,243; 34,925; 36,336; 37,804; 39,331; 40,920; 42,573
- Nominal GDP (US$ millions): 18,462; 19,895; 21,768; 22,052; 23,167; 24,103; 25,077; 26,090; 27,144; 28,241
- Per capita GDP (US$): 5,049; 5,370; 5,799; 5,799; 6,014; 6,177; 6,344; 6,516; 6,692; 6,873
- Broad money (annual % change): 6.4, 15.4, 12.3, 3.5, 4.5, 3.0, 3.0, 3.0, 3.0, 3.0
- Broad money (percent of GDP): 237.7, 254.6, 261.3, 266.9, 265.4, 262.8, 260.3, 257.8, 255.3, 252.8
- Deposit dollarization (percent of total deposits): 69.4, 66.2, 70.1, 73.2, 70.0, 70.0, 70.0, 70.0, 70.0, 70.0
- Government revenue and grants (percent of GDP): 21.0 (2002) through 22.2 (2011)
- Expenditure (percent of GDP): 35.1, 35.2, 31.3, 30.2, 32.5, 34.2, 34.8, 35.7, 36.9, 39.0
- Overall balance (percent of GDP, checks-issued basis): -14.1, -13.2, -8.5, -7.9, -10.4, -12.2, -12.6, -13.6, -14.8, -16.8
- Primary balance (percent of GDP): 2.8, 3.2, 3.4, 2.4, 1.4, 1.6, 2.0, 2.0, 2.0, 2.0
- Gross government debt (percent of GDP): 166.4, 167.8, 164.7, 174.6, 176.8, 182.3, 188.0, 194.4, 201.9, 211.0
- Gross government debt (US$ millions): 30,727; 33,381; 35,861; 38,507; 40,954; 43,938; 47,144; 50,732; 54,806; 59,591
- Gross official reserves (excl. gold, US$ millions): 5,094; 10,213; 9,513; 9,852; 8,742; 8,401; 8,170; 7,690; 6,619; 4,700
- Net official foreign currency liquidity (defined): -2,006; 4,217; 4,422; 5,895 (later years not shown)
- Average Lebanese pound deposit rate: 10.3, 7.8, 6.8, 7.7, 7.8, 8.3, 9.0, 9.7, 10.3, 11.0
- Average dollar deposit rate: 4.2, 3.6, 3.6, 4.0, 5.3, 5.7, 6.0, 6.3, 6.7, 7.0
- Marginal interest rate on 2-year T-bill in LL: 14.1, 7.8, 8.3, 8.5, 9.2, 9.8, 10.5, 11.2, 11.8, 12.5
- Marginal interest rate on 5-year Eurobonds: 7.9, 7.0, 7.5, 8.0, 8.3, 8.7, 9.0, 9.3, 9.7, 10.0
- Population (millions): 3.7, 3.7, 3.8, 3.8, 3.9, 3.9, 4.0, 4.0, 4.1, 4.1
- Exchange rate (LL per US$): 1,508 (reported 2002–2005)

### Adjustment Scenario — Selected Indicators (2002–11)
- Real GDP (annual % changes): 2.9, 5.0, 6.0, 1.0, 3.0, 3.4, 3.7, 4.0, 4.0, 4.0
- Consumer price index (annual average): 1.8, 1.3, 3.0, 0.3, 2.5, 2.0, 2.0, 2.0, 2.0, 2.0
- Nominal GDP (annual % changes): 8.2, 7.8, 9.4, 1.3, 5.6, 5.5, 5.8, 6.1, 6.1, 6.1
- Nominal GDP (LL billions): 27,832; 29,991; 32,815; 33,243; 35,096; 37,015; 39,152; 41,532; 44,057; 46,736
- Nominal GDP (US$ millions): 18,462; 19,895; 21,768; 22,052; 23,281; 24,554; 25,971; 27,550; 29,225; 31,002
- Per capita GDP (US$): 5,049; 5,370; 5,799; 5,799; 6,044; 6,292; 6,570; 6,880; 7,205; 7,545
- Broad money (annual % change): 6.4, 15.4, 12.3, 3.5, 5.0, 5.0, 5.0, 5.0, 5.0, 5.0
- Broad money (percent of GDP): 237.7; 254.6; 261.3; 266.9; 265.4; 264.1; 262.1; 259.4; 256.7; 254.0
- Government revenue and grants (percent of GDP): 21.0 (2002) rising to 23.9 (2011) with path 21.0, 22.0, 22.8, 22.3, 22.8, 23.0, 23.5, 24.1, 24.0, 23.9
- Expenditure (percent of GDP): 35.1, 35.2, 31.3, 30.2, 31.0, 30.0, 28.5, 27.2, 26.4, 26.0
- Overall balance (percent of GDP, checks-issued basis): -14.1, -13.2, -8.5, -7.9, -8.2, -7.0, -5.0, -3.1, -2.4, -2.1
- Primary balance (percent of GDP): 2.8, 3.2, 3.4, 2.4, 3.0, 4.5, 5.7, 7.0, 7.0, 7.0
- Gross government debt (percent of GDP): 166.4, 167.8, 164.7, 174.6, 160.6, 153.2, 149.9, 144.4, 138.6, 132.8
- Gross official reserves (excl. gold, US$ millions): 5,094; 10,213; 9,513; 9,852; 10,647; 11,504; 11,674; 12,467; 13,749; 14,409
- Privatization receipts (LL billions, Adjustment Scenario): 0; 0; 0; 0; 3,000; 1,500; 0; 0; 0; 0
- Paris II budgetary support (US$ millions in table): 300; 2,090; 0; 0; 0; 0; 0; 0; 0; 0

### Central Government Fiscal Aggregates and Primary Balance (2006–11; levels and percent of GDP)
- Primary balance (LL billions): 782; 975; 1,126; 782; 1,057; 1,658; 2,222; 2,890; 3,103; 3,285 (2006–11)
- Revenue and grants (LL billions): 5,848; 6,597; 7,483; 7,405; 7,999; 8,530; 9,218; 10,015; 10,553; 11,148
- Tax revenue (LL billions): 4,015; 4,527; 5,169; 4,867; 5,446; 6,321; 7,008; 7,680; 8,086; 8,542
- VAT revenues (LL billions): 1,013; 1,386; 1,763; 1,693; 2,105; 2,778; 2,974; 3,158; 3,361; 3,570
- Primary expenditure (LL billions): 5,066; 5,622; 6,356; 6,623; 6,941; 6,872; 6,996; 7,125; 7,450; 7,864
- Current primary expenditure (LL billions): 4,485; 4,708; 5,304; 5,939; 5,998; 5,940; 5,961; 5,937; 6,141; 6,431
- Wages, salaries and pensions (LL billions): 3,008; 3,078; 3,094; 3,193; 3,197; 3,214; 3,258; 3,240; 3,436; 3,641
- Capital expenditure (LL billions): 581; 914; 1,052; 684; 943; 932; 1,036; 1,188; 1,309; 1,432

- Primary balance (percent of GDP, Adjustment Scenario): 2.8, 3.2, 3.4, 2.4, 3.0, 4.5, 5.7, 7.0, 7.0, 7.0
- Revenue and grants (percent of GDP): 21.0, 22.0, 22.8, 22.3, 22.8, 23.0, 23.5, 24.1, 24.0, 23.9
- Primary expenditure (percent of GDP): 18.2, 18.7, 19.4, 19.9, 19.8, 18.6, 17.9, 17.2, 16.9, 16.8
- Current primary expenditure (percent of GDP): 16.1, 15.7, 16.2, 17.9, 17.1, 16.0, 15.2, 14.3, 13.9, 13.8
- Wages, salaries and pensions (percent of GDP): 10.8, 10.3, 9.4, 9.6, 9.1, 8.7, 8.3, 7.8, 7.8, 7.8

### Overall Fiscal Deficit, Financing, and Gross Financing Requirement
- Interest bill (LL billions): 4,712; 4,942; 3,921; 3,410; 3,928; 4,248; 4,165; 4,178; 4,178; 4,285 (2002–11)
- Overall balance (checks-issued basis, LL billions): -3,930; -3,968; -2,795; -2,628; -2,871; -2,591; -1,943; -1,288; -1,075; -1,000
- Net financing (LL billions): 4,450; 3,753; 3,037; 2,927; 2,871; 2,591; 1,943; 1,288; 1,076; 1,000
- Gross financing requirement (LL billions, 2004–07): 23,191; 21,717; 17,876; 11,129 (2004–07)
- Principal payments (LL billions, 2004–07): 20,396; 19,089; 15,005; 8,538
- Exceptional financing (LL billions): 3,152; 2,999; 517; 0 (2004–07)
- Privatization receipts (LL billions): 0; 0; 0; 4,523; 2,261; 0; 0; 0; 0; 0 (Adjustment Scenario)

### Government Debt Profile and Memoranda
- Gross debt (US$ millions, Adjustment Scenario): 30,727; 33,381; 35,861; 38,507; 37,395; 37,616; 38,928; 39,791; 40,511; 41,180 (2002–11)
- Domestic currency debt (US$ millions): 16,784; 17,806; 17,493; 19,609; 18,731; 18,829; 20,083; 20,541; 20,911; 21,239
- Foreign currency debt (US$ millions): 13,943; 15,575; 18,368; 18,899; 18,665; 18,787; 18,845; 19,250; 19,599; 19,940
- Debt to Banque du Liban (US$ millions): 2,351; 7,937; 9,052; 9,606; 6,303; 5,199; 3,459; 3,258; 3,042; 2,847
- Net debt (US$ millions): 28,760; 31,379; 32,970; 34,799; 33,687; 33,908; 35,219; 36,082; 36,803; 37,471
- Central government deposits (US$ millions): 1,966; 2,002; 2,892; 3,708; 3,708; 3,708; 3,708; 3,708; 3,708; 3,708
- Gross debt held by the market (US$ millions): 24,448; 19,550; 21,018; 23,073; 23,349; 24,925; 29,211; 30,291; 31,294; 32,197

### Monetary Survey and Banque du Liban Balance Sheet
- Broad money / M5 (LL billions): 66,158; 76,357; 85,733; 88,720; 93,133; 97,760; 102,622; 107,731; 113,096; 118,729
- Deposits in foreign currency (LL billions): 44,981; 48,900; 58,306; 63,217; 63,346; 66,575; 69,972; 73,456; 77,114; 80,955
- Net foreign assets (LL billions): 24,832; 33,587; 36,880; 38,663; 41,023; 43,662; 44,700; 47,020; 50,116; 52,471
- Banque du Liban: net foreign assets (LL billions): 12,365; 21,048; 20,262; 21,909; 23,106; 24,398; 24,654; 25,850; 27,782; 28,778
- Banque du Liban base money (LL billions): 4,655; 6,407; 8,123; 7,364; 7,771; 8,146; 8,539; 8,975; 9,433; 9,914
- Gross international reserves excluding gold (US$ millions): 5,094; 10,213; 9,513; 9,852; 10,647; 11,504; 11,674; 12,467; 13,749; 14,409
- Lebanese pound money multiplier: 4.5; 4.3; 3.4; 3.5; 3.8; 3.8; 3.8; 3.8; 3.8; 3.8

### Commercial Banks — Selected Balance Sheet and Soundness Indicators
- Commercial banks: net foreign assets (LL billions): 12,467; 12,539; 16,618; 16,754; 17,916; 19,264; 20,046; 21,169; 22,334; 23,693
- Claims on private sector (LL billions): 22,758; 22,836; 24,020; 24,467; 26,914; 28,528; 30,240; 32,054; 33,978; 36,016
- Liabilities to private sector (LL billions): 64,431; 73,513; 82,841; 85,994; 90,168; 94,712; 99,487; 104,499; 109,762; 115,289
- Total foreign currency assets (US$ billions): 34.2; 36.7; 44.2; 47.9; 48.4; 49.4; 50.2; 52.1; 54.5; 57.1
- Exposure to the government (percent of total assets): 33.6; 23.2; 23.6; 25.3; 26.7; 26.8; 27.8; 27.6; 26.5; 26.2
- Banking-sector financial soundness indicators (selected):
  - Capital adequacy ratio: 16.9; 18.0; 19.4; 22.3; 21.2; 21.6 (2000–2005 series)
  - Net problem loans/net total loans: 7.8; 10.0; 12.4; 12.8; 10.1; 9.9 (2000–2005 H1)
  - Provisions against problem loans/problem loans: 64.6; 62.6; 62.3; 64.6; 68.4; 68.4 (2000–2005 H1)

### External Sector, Balance of Payments, and Vulnerability Indicators
- Current account balance (US$ millions): -2,842; -3,026; -3,969; -2,792; -2,995; -2,964; -3,027; -3,113; -3,226; -3,352 (2002–11)
- Goods (net, US$ millions): -4,956; -5,221; -7,105; -6,861; -7,275; -7,695; -8,138; -8,663; -9,229; -9,830
- Exports f.o.b. (US$ millions): 1,018; 1,444; 1,598; 1,821; 2,030; 2,208; 2,398; 2,602; 2,827; 3,070
- Imports f.o.b. (US$ millions): -5,974; -6,665; -8,704; -8,682; -9,304; -9,903; -10,535; -11,266; -12,056; -12,900
- Services receipts (US$ millions): 6,484; 7,009; 8,411; 8,981; 9,665; 10,382; 11,132; 11,941; 12,807; 13,719
- Income (net, US$ millions): -1,002; -1,237; -1,432; -830; -1,309; -1,462; -1,600; -1,686; -1,821; -1,929
- Current transfers (net, US$ millions): 2,220; 2,449; 2,902; 2,105; 2,505; 2,804; 3,038; 3,272; 3,526; 3,766
- Capital and financial account (US$ millions): 2,415; 5,792; 3,257; 3,397; 3,789; 3,821; 3,197; 3,907; 4,508; 4,013
- Direct investment (net, US$ millions): 1,385; 1,558; 1,478; 1,682; 2,600; 2,180; 1,380; 1,600; 1,820; 1,895
- Gross official reserves (excl. gold) (US$ millions, end-year): 5,094; 10,213; 9,513; 9,852; 10,647; 11,504; 11,674; 12,467; 13,749; 14,409
- Gross official reserves in months of next year's g&s imports: 4.8; 7.9; 7.7; 7.4; 7.6; 7.7; 7.3; 7.3; 7.5; 7.4
- External debt (end-year, percent of GDP): 149.7; 173.9; 184.5; 188.6; 187.1; 187.7; 186.5; 186.9; 188.0; 186.9
- Public external debt (percent of GDP): 30.3; 37.5; 34.0; 34.7; 34.8; 33.7; 32.5; 31.9; 31.2; 29.3

### Public Debt Sustainability Framework and Stress Tests (Adjustment Scenario)
- Public sector debt (percent of GDP): 165.9 (2001); 166.4; 167.8; 164.7; 174.6; 160.6; 153.2; 149.9; 144.4; 138.6; 132.8 (2001–11)
- Debt-stabilizing primary balance (percent of GDP): 1.2 (2001) noted in framework
- Change in public sector debt (percent of GDP): 14.8; 0.5; 1.4; -3.0; 9.9; -14.0; -7.4; -3.3; -5.5; -5.8; -5.8
- Identified debt-creating flows (percent of GDP): 15.0; 1.6; 1.2; -5.1; 5.8; -1.0; -13.5; -9.2; -5.5; -5.8; -5.8
- Automatic debt dynamics contribution (percent of GDP): 13.3; 4.4; 4.5; -2.5; 8.1; 2.0; 3.2; 2.3; 1.5; 1.2; 1.2
- Key macro assumptions (averages / selected):
  - Real GDP growth (percent): -0.6 (2001); 2.9; 5.0; 6.0; 1.0; 2.7; 2.3; 3.0; 3.4; 3.7; 4.0; 4.0; 4.0
  - Average nominal interest rate on public debt (percent): 11.3; 11.0; 10.7; 7.8; 6.3; 12.3; 3.8; 6.8; 7.5; 7.3; 7.1; 7.0; 7.0; 7.1
  - Inflation rate (GDP deflator, percent): 3.0; 5.1; 2.6; 3.2; 0.3; 3.6; 3.0; 2.5; 2.0; 2.0; 2.0; 2.0; 2.0; 2.1
  - Primary deficit (percent of GDP): 1.7; -2.8; -3.2; -3.4; -2.4; 1.9; 5.1; -3.0; -4.5; -5.7; -7.0; -7.0; -7.0
- Alternative and stress scenarios (selected outcomes for public sector debt percent of GDP):
  - A1. Unchanged policies: results shown (e.g., 160.6; 154.7; 154.0; 152.6; 150.9; 149.2)
  - A2. Fiscal adjustment and unchanged nominal interest rates from 2005 onwards: (e.g., 158.7; 147.3; 140.6; 132.0; 123.2; 114.3)
  - B1–B6: range of stress-test outcomes showing higher debt ratios under adverse shocks (detailed table entries preserved in source)

### Indicators of Financial and External Vulnerability (2002–05)
- Broad money, M5 (annual % change): 6.4; 15.4; 12.3; 3.5 (2002–05)
- Private-sector credit (annual % change): 2.5; 0.3; 5.2; 1.9
- Gross public debt (US$ millions): 30,727; 33,381; 35,861; 38,507
- Gross public debt (percent of GDP): 166.4; 167.8; 164.7; 174.6
- Gross public debt held by the market (US$ millions): 24,448; 19,550; 21,018; 23,073
- External current account balance (US$ millions): -2,842; -3,026; -3,969; -2,792
- Gross official reserves (US$ millions): 5,094; 10,213; 9,513; 9,852
- Gross official reserves (percent of short-term external debt): 22.0; 35.4; 27.0; 28.1

### Banking Sector Financial Soundness Indicators (2000–2005 H1)
- Total banking assets (US$ millions): 47,505; 49,858; 54,587; 62,151; 70,978; 68,921
- Capital adequacy ratio (percent): 16.9; 18.0; 19.4; 22.3; 21.2; 21.6
- Net problem loans/net total loans (percent): 7.8; 10.0; 12.4; 12.8; 10.1; 9.9
- Provisions against problem loans/problem loans (percent): 64.6; 62.6; 62.3; 64.6; 68.4; 68.4
- Return on assets (post tax, annualized): 0.7; 0.5; 0.6; 0.7; 0.6; 0.7
- FC deposits share of total deposits (percent): 66.0; 71.9; 68.7; 65.0; 70.7; 77.8

### IMF Relations, Technical Assistance, and Assessments
- Membership: Joined 04/14/47; Article VIII (07/01/93).
- Quota (SDR million): 203.00; Fund holdings of currency: 184.17 (90.72 percent of quota); Reserve position: 18.83 (9.28 percent).
- SDR Department holdings: Net cumulative allocation 4.39; Holdings 21.77 (495.63 percent of allocation).
- Outstanding Purchases and Loans: None.
- Financial Arrangements: None.
- Projected Obligations to Fund: None.
- Exchange arrangement: Lebanese pound is a conventional peg; since October 1999 BdL has intervened to keep the pound around LL 1,507.5 per $1 with bid-ask spread LL+/-6.5.
- Article IV: 2004 Article IV consultation concluded by Executive Board on May 7, 2004.
- FSAP/FSSA: Participated in FSAP in 1999; FSSA update conducted in 2001; related reports presented to Executive Board at Article IV consultations.
- Technical assistance (2000–05):
  - Fiscal area (FAD): advice on introducing the VAT, reforming customs tariffs and income taxes, strengthening tax and customs administrations, improving public expenditure management, consolidating fiscal accounts; 2004 missions on treasury and budget reforms, revenue administration reforms, and tax policy; 2005 missions on consolidation of fiscal accounts and public liquidity management; fiscal ROSC mission visited Beirut in September 2004 and report published in May 2005.
  - Financial sector (MFD): assistance on payments system and vulnerability indicators; assessment of compliance with Core Principles for Systemically Important Payments Systems; advice to improve efficiency and liquidity management in public sector payments and receipts; assisted in framework for macro-prudential indicators; March mission provided technical assistance in financial sector indicators and payments systems.

*Source: Lebanese authorities; and Fund staff estimates and projections (extracted from the IMF staff report tables and Appendix).*

### 2004. Follow up missions in January and August 2005 provided further technical assistance

### _cr06201 - 2004. Follow up missions in January and August 2005 provided further technical assistance

### Technical assistance and missions (payments system, early warning, liquidity)
- Follow-up missions in January and August 2005 provided technical assistance on the payment system and development of an early warning system, including a bank-level “watch list” based on, among other indicators, an econometric model to forecast bank performance.
- A technical mission in December 2005 examined issues concerning liquidity management in the monetary system.
- Selected recent IMF technical assistance missions and topics (dates preserved exactly as in source):
  - Feb. 28–Mar. 10, 2000 STA — Balance of payments statistics
  - July 3–10, 2000 FAD — Income tax administration
  - Oct. 23–Nov. 3, 2000 STA — Price statistics
  - August 3–10, 2000 FAD — Public expenditure management
  - August 9–21, 2000 FAD — Tariff reform
  - March 27–April 10, 2001 FAD — Tax policy and administration
  - June 11–22, 2001 STA — Portfolio investment and capital flows
  - June 20–July 3, 2001 FAD — Tax policy and administration
  - June 27–July 6, 2001 FAD — Public expenditure management
  - July 2–12, 2001 MAE — Development of macro-prudential indicators
  - July 9–23, 2001 MAE — Payments system development
  - Oct. 29–Nov. 13, 2001 FAD — Tariff and VAT
  - March 25–April 5, 2002 STA — Multisector statistics/GDDS
  - April 15–26, 2002 BTS — Database at Banque du Liban
  - August 6–20, 2002 FAD — VAT and customs administration
  - Sept. 9–23, 2002 FAD — Income tax reform
  - Jan. 27–31, 2003 MAE — Payment systems
  - July 29–23, 2003 FAD — Revenue administration
  - July 26–August 10, 2003 FAD — Public expenditure management
  - Aug. 27–Sept. 8, 2003 FAD — Tax policy
  - September 24–29, 2003 LEG — Income Tax Law
  - March 18–29, 2004 MFD — Payments and Settlement Systems and Developing Early Warning Systems
  - September 6–17, 2004 FAD — Fiscal transparency ROSC
  - October 2004 IMF — Creation of METAC
  - December 8–22, 2004 FAD — Tax policy
  - January 11–15, 2005 MFD — Payments and Settlement Systems and Developing Early Warning Systems
  - February 1–11, 2005 MFD — Liquidity Forecasting, Monetary Operations and the Interbank Money Market
  - May 22–June 6, 2005 FAD — Consolidation of Fiscal Accounts
  - June 24–July 2, 2005 LEG — Income Tax Law
  - August 25–31, 2005 MFD — Follow-up on Early Warning Systems
  - November 14–22, 2005 FAD — Public Financial Management
  - December 5–9, 2005 MFD — Liquidity Management

### Statistical capacity, gaps, and recommendations
- Technical assistance provided by the Statistics Department (STA) and other IMF departments:
  - Assistance on development of price and balance of payments statistics (limited progress so far).
  - A multisector statistics/GDDS mission in early 2002 updated the status of data and prepared action plans.
  - BdL is compiling financial soundness indicators (FSIs) as part of the Coordinated Compilation Exercise, in accordance with the IMF’s Compilation Guide on Financial Soundness Indicators.
  - Technology and General Services Department provided technical assistance for creating a time-series database at the BdL.
- Persistent gaps and limitations:
  - No official producer price index (PPI) and consumer price index (CPI) data available.
  - Balance of payments data remain incomplete; Lebanon still does not report balance of payments data to the Statistics Department (prior to improvements noted later).
  - Little progress in several statistical areas; substantial technical assistance needs remain particularly in national accounts, price statistics, and balance of payments.
- Specific findings and recommendations from a November 2005 technical assistance mission on balance of payments:
  - (i) BdL and the Central Authority for Statistics need to give high priority to extending the existing inter-agency agreement on the share of work in data collection and compilation for balance of payments, and to include responsibilities, work plans, resource allocation, and dissemination.
  - (ii) New data sources need to be developed.
  - (iii) The definition for official reserve assets as set out in the international guidelines should be adopted.
  - (iv) The periodicity of dissemination of detailed balance of payments data should be improved to a quarterly frequency.
- Improvements achieved:
  - Implementation in 2003 of the International Transactions Reporting System with STA assistance.
  - In July 2005, Lebanon provided STA for the first time with data for 2002–04 and with methodological notes; these data are published in the IFS and the Balance of Payments Statistics Yearbook.
- Additional statistical notes:
  - The Ministry of Economy and Trade (MoET) received technical assistance from the French National Institute of Statistics and Economic Studies; the first set of national accounts estimates for 1997 (the base year) was published in 2003, and estimates for 1998–2003 were published in July 2005.
  - Consumer price indices are prepared by MoET and private organizations for the greater Beirut metropolitan area; quarterly price indices for 1999 were compiled with STA assistance and released in 2000.
  - Published monthly central government budgetary data are not comprehensive (omit certain transfers, foreign-financed capital expenditure, arrears; certain treasury spending identified ex-post; economic classification disseminated with a lag). No monthly consolidated central government data are available that cover social security funds. No sub-annual fiscal data are reported for publication in International Financial Statistics (IFS).
  - Cash-based annual government finance statistics (budgetary central government) are published in the Government Finance Statistics Yearbook (GFSY); latest data received were for 2004.
  - Monetary statistics are generally reliable and usually provided to the Fund on a timely basis; STA has at times obtained missing data from the Banque du Liban (BdL) website.
  - Lebanon participates in the IMF’s Coordinated Compilation Exercise for FSIs.

### IMF Article IV assessment — economic developments, vulnerabilities, and policy recommendations
- Recent developments and outcomes:
  - GDP growth: 6 percent in 2004; estimated 1 percent in 2005.
  - Inflation (change in consumer prices, period average for Beirut and suburbs): 3.0 in 2004; 0.3 in 2005.
  - International reserves: declined by about $2 billion in the first quarter of 2005 following Prime Minister Hariri’s assassination; by end-2005 gross international reserves were back at their end-2004 level.
  - Current account deficit: narrowed to an estimated 13 percent of GDP in 2005.
  - Fiscal outcomes: overall fiscal deficit declined slightly to 8 percent of GDP in 2005; government debt rose to 175 percent of GDP in 2005.
  - Central bank role: part of the cost of financial stabilization absorbed by the central bank; Directors called for stricter constraints on central bank financing of the government and sharing more evenly the fiscal cost of financial stabilization.
- Vulnerabilities highlighted by Executive Directors:
  - Large and growing public debt overhang.
  - High degree of dollarization.
  - Large fiscal and current account deficits.
  - Reliance on short-term inflows to finance deficits; continued capital inflows dependent on depositor confidence.
- Policy recommendations and agreed priorities:
  - Support authorities’ strategy of debt reduction through sustained fiscal adjustment; many Directors favored a gradual, sustained fiscal consolidation, while some considered a more rapid pace warranted given the imbalances.
  - Fiscal measures recommended:
    - Strong revenue and expenditure measures, backed by institutional reforms to strengthen budgetary control.
    - Possible revenue measures included increase in the Value Added Tax rate, introduction of a more efficient and progressive income tax system, and return of taxation of gasoline to its 2003 level.
    - Expenditure-side measures included reducing non-productive and poorly targeted outlays and restoring the financial viability of the state electricity company.
    - Correct looming imbalances in pensions and the social security system.
  - Complementary measures to accelerate debt reduction:
    - Vigorous privatization effort, generous external concessional assistance, and a voluntary contribution of domestic creditors commensurate with their financial strength.
  - Monetary and financial sector measures:
    - Maintain the exchange rate peg as the appropriate monetary anchor.
    - Establish stricter constraints on central bank financing of the government and re-center central bank operations on monetary and liquidity management; unburden the central bank balance sheet of real assets.
    - Strengthen banking supervision, provide legal protection to supervisors, and put in place a well-functioning deposit guarantee scheme to ensure orderly, market-based consolidation of the banking system.
    - Adopt an independent and strong securities regulator with adequate legal protection.
  - Structural reforms to strengthen private sector environment:
    - Enhance productivity of government spending, reduce red tape and corruption, reactivate liberalization and privatization of the telecom sector, lower high costs of entry and exit, and strengthen contract enforcement.
    - Reinvigorate the Paris II structural reform agenda in formulating the program.

### Key economic indicators (selected, as presented)
- Real GDP growth: 1999 -1.2; 2000 1.2; 2001 4.2; 2002 2.9; 2003 5.0; 2004 6.0; 2005 1.0.
- Change in consumer prices (period average, Beirut and suburbs): 1999 0.2; 2000 -0.4; 2001 -0.4; 2002 1.8; 2003 1.3; 2004 3.0; 2005 0.3.
- Exports, f.o.b. (billions of U.S. dollars): 1999 0.7; 2000 0.7; 2001 0.9; 2002 1.0; 2003 1.4; 2004 1.6; 2005 1.8.
- Imports, f.o.b. (billions of U.S. dollars): 1999 5.8; 2000 5.8; 2001 6.8; 2002 6.0; 2003 6.7; 2004 8.7; 2005 8.7.
- Current account balance (billions of U.S. dollars): 1999 -3.2; 2000 -2.9; 2001 -3.3; 2002 -2.8; 2003 -3.0; 2004 -4.0; 2005 -2.8.
- Current account balance (percent of GDP): 1999 -18.8; 2000 -17.1; 2001 -19.2; 2002 -15.4; 2003 -15.2; 2004 -18.2; 2005 -12.7.
- Capital and financial account balance (billions of U.S. dollars): 1999 4.2; 2000 0.7; 2001 1.6; 2002 2.4; 2003 5.8; 2004 3.3; 2005 3.4.
- Overall balance (billions of U.S. dollars): 1999 1.3; 2000 -1.7; 2001 -1.5; 2002 0.3; 2003 3.0; 2004 -0.7; 2005 0.3.
- Gross official reserves (excluding gold, billions of U.S. dollars): 1999 7.7; 2000 5.9; 2001 4.4; 2002 5.1; 2003 10.2; 2004 9.5; 2005 9.9.
- Change in real effective exchange rate (percent): 1999 0.9; 2000 5.6; 2001 1.9; 2002 -2.8; 2003 -10.7; 2004 -7.5; 2005 -5.0.
- Central government fiscal balance (percent of GDP, overall balance after grants, on a checks-issued basis): 1999 -15.7; 2000 -24.2; 2001 -18.5; 2002 -14.1; 2003 -13.2; 2004 -8.5; 2005 -7.9.
- Gross government debt (percent of GDP): 1999 131.5; 2000 151.1; 2001 165.9; 2002 166.4; 2003 167.8; 2004 164.7; 2005 174.6.
- Gross government debt in foreign currency (percent of GDP): 1999 34.3; 2000 46.5; 2001 60.1; 2002 75.5; 2003 78.3; 2004 84.4; 2005 85.7.
- Change in broad money (percent, end-of-period): 1999 10.6; 2000 10.6; 2001 6.4; 2002 6.4; 2003 15.4; 2004 12.3; 2005 3.5.
- Yield on 24-month Lebanese pound treasury bills (primary market rate, percent, end-of-period): 1999 14.1; 2000 14.1; 2001 14.0; 2002 14.1; 2003 7.8; 2004 8.3; 2005 8.5.

*Source: _cr06201 - 2004. Follow up missions in January and August 2005 provided further technical assistance (IMF PDF).*

### 1.      This year's consultation comes at a time where Lebanon has witnessed events of

### _cr06201 - 1.      This year's consultation comes at a time where Lebanon has witnessed events of

### Developments in 2005
- Lebanon experienced events of "unprecedented proportions" in 2005 that fundamentally changed the political and economic landscape.
- Key shock: assassination of Prime Minister Hariri in February 2005; severe economic and financial ramifications, especially during the first half of 2005.
- Market reaction and policy response:
  - Surge in capital outflows and dollarization put pressure on the Lebanese pound and international reserves.
  - Authorities increased domestic interest rates and intervened in the foreign exchange market to defend the currency.
  - By July 2005 capital inflows resumed after formation of a new government; balance of payments’ surplus of US$747 million by the end of the year.
  - Interest rates on foreign currency denominated debt declined to record lows; international participation in longer-dated Eurobond issuances reached 50 percent.
  - Process of de-dollarization of deposits was renewed.
- Fiscal developments in 2005:
  - Primary expenditures increased by 6.8 percent during January-July 2005 (year-on-year) and declined by 4.6 percent in Aug-Dec 2005.
  - Revenues improved by 2 percent during the last five months of 2005, partially reversing a 4 percent decline earlier in the year.
  - Primary surplus ended at 2.4 percent despite weak economic activity, reduction in gasoline tax, and a surge in transfers to the national electricity company (EDL).
- Debt management and financing:
  - MOF pre-funding decision improved market confidence.
  - As of end April 2006, MOF financed two-third of the domestic currency principal payments due for the year and exchanged 70 percent of the Eurobond principal payments for 2006.
  - 2006 noted as one of the most difficult years for financing, especially January-April 2006.

### Major Elements of the Reform Program
- Overall objective: address key vulnerabilities (notably worsening debt dynamics) and promote growth; targets include raising the growth rate to 5-6 percent, promoting job creation, reducing poverty, and improving social indicators.
- Program prepared by a high-level economic team with broad domestic and international consultations; to be presented to international donors at an upcoming Beirut conference.

A. Fiscal Policy
- Broad agreement with staff on magnitude of needed adjustment in primary surplus over the medium term; differences are in timing and sequencing.
- Core revenue measures (2006–2008):
  - VAT increase of 2 to 3 percentage points in 2006 reaching the overall rate of 15 percent (from the present 10 percent level) by 2008.
  - Increase in the tax on interest income.
  - Introduction of a global income tax.
  - Lifting of the cap on gasoline prices.
  - Gradual increase in the excise tax to pre-cap levels.
  - Structural measures to substantially reform tax administration.
- Expenditure-side measures:
  - Rationalization of current expenditures, including reduction in transfers to public sector entities.
  - Containment of the wage bill: limit government hiring, freeze wages in real terms, review salary and benefit structures, reduce waste, close the Fund for the displaced and the Council of the South.
  - Strengthen public expenditure management, transparency, and accountability; MOF developed an action plan for public financial management reform with time-bound measures.
  - Adopt a Fiscal Accountability Act and a new Public Procurement Law; strengthen financial control of state-owned enterprises.
- EDL reform:
  - Short-term initiatives: negotiate fuel and gas supply contracts, improve metering, crack down on illegal networks, increase collection rates, consider selected tariff increases.
  - EDL plan implementation estimated to generate savings in the order of 2 to 3 percent of GDP over the medium term.
- Coordination between BDL and MOF:
  - MOF agreed to refrain from central bank borrowing and to repay maturing obligations rather than roll them over.
  - MOF repaid US$2.9 billion worth of LL TBs to the BDL for the period of June 2005 till March 2006, reducing BDL’s portfolio by 33 percent.
  - Convergence of views on the appropriate level of international reserves and better coordination on timing and maturities of debt instruments; regular senior-level meetings under the Prime Minister.

B. Privatization
- Objectives: strengthen public finances, reduce debt, improve efficiency, reduce cost of doing business, improve competitiveness, and foster growth.
- Targets include privatization in telecommunication and energy sectors, and assets under BDL control.
- Telecom actions:
  - Finalizing appointment of Board of the new Telecommunication Regulatory Authority ahead of privatization of two existing mobile licenses at the end of the year.
  - Hiring a financial advisor to specify pre-qualification criteria and request expressions of interest.
  - Liban Telecom expected to follow in 2007; a third mobile license expected to be sold in 2008-09.
- EDL privatization to proceed after regulatory and preparatory steps and appointment of the regulatory agency.
- Central bank asset sales:
  - BLC sold to Gulf investors; inflow of close to US$1 billion to the Beirut Stock Exchange (BSE), primarily into banks’ shares.
  - BDL considering sale of shares it holds, including Middle East Airlines and Intra Investment Company.

C. Capital Markets
- Financial sector reforms prioritized to diversify beyond the banking sector and deepen capital markets.
- Key legislative and market developments:
  - Issuance of Lebanon’s first longer dated bond—5 years in Lebanese Pounds—as a new benchmark instrument.
  - Securitization Law enacted on December 9, 2005.
  - Investment Fund law enacted in December 2005.
  - Capital Market Law approved by Cabinet in March 2006 and awaiting Parliament ratification; would establish the Capital Market Council.
- Remaining priorities and pending draft legislation awaiting Parliament approval:
  - Law on Dematerialization of Securities.
  - Securities Lending law.
  - Insider Trading law.
  - Improvements to the Bank Mergers law.
  - Insurance Regulatory Commission law.
- Need to develop a secondary market for fixed-income instruments and remove obstacles to the development of the insurance sector and other institutional investors.

D. Growth and Competitiveness
- Private sector remains the backbone and main engine of growth.
- Competitiveness could improve through business environment reforms:
  - Simplification of the tax code, streamlining administrative procedures, easing restrictions on entry and exit.
  - Legislative reforms: consumer protection law ratified; WTO-compatible anti-dumping law and a basket of E-commerce laws awaiting ratification; modern competition law being finalized.
  - Support for SMEs: SME unit and a guarantee fund established to facilitate access to credit.
  - Trade liberalization and advancement toward WTO membership; commitment to the European Neighborhood policy.

E. Social Sector
- Authorities are developing a comprehensive medium term social strategy to be finalized in 2006.
- Institutional actions:
  - Establish an Interministerial Committee for Social Development Policy to monitor, coordinate and implement the strategy and reduce overlap in social service provision.
  - Pension system reform with World Bank assistance; recent special cabinet session to discuss reform of the National Social Security Fund (NSSF).
- Objectives of reforms: preserve acquired rights, relieve fiscal burdens, promote equity and social protection, and enable a more flexible labor market.
- Strengthen and expand social safety nets; enhance health and education sectors to insure affordability, improve quality, and ultimately achieve universal coverage.

### International Support
- Authorities intend to request concessional financial support from the international community in the context of an international conference to be held in Beirut.
- Rationale:
  - Despite strong fiscal adjustment and structural reforms, debt dynamics will remain fragile and vulnerabilities high.
  - Need to bring debt to GDP ratio significantly below the staff adjustment scenario level of 133 percent in 2011.
- Historical adjustment and reserves:
  - Primary balance shifted from a deficit of 7.6 percent of GDP in 2000 to a surplus of 3.4 percent in 2004 (an adjustment of about 11 percent of GDP).
  - BDL gross reserves increased from US$5.9 billion at end-2000 to US$9.5 billion at end-2004.
- Impact of concessional assistance:
  - Staff calculations: for every US$1 billion of grant-equivalent support in 2006, the debt ratio would be reduced by about 5.7 percentage points by 2011.
  - Staff note that a one percentage point increase in the growth rate would reduce the debt-to-GDP ratio by about 1.7 percentage point.
  - A one percentage point decline in the interest rate would lead to an equal decline in the debt ratio.
  - Donor support would also generate positive confidence effects observed after the Paris-II conference in November 2002.
- Preparations underway for a Beirut conference to solicit such support.

### Conclusion
- Lebanese authorities undertook significant adjustment efforts in recent years, allowing avoidance of crises despite major shocks.
- Authorities appreciate IMF support and recognize remaining key vulnerabilities.
- They have embarked on a major adjustment effort to address vulnerabilities decisively, seeking support from the international community.

*Source: _cr06201 - IMF staff report.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06201.pdf_