## _cr08363

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### Introduction and Program Request
- Authorities requested follow-up Emergency Post-Conflict Assistance (EPCA) with an access of 12.5 percent of quota (SDR 25.375 million) to support their economic program for 2008–09 and continue benefiting from macroeconomic and financial discipline provided by Fund involvement.
- Program is part of the concerted international effort to provide financial assistance to Lebanon.

### Macroeconomic Outlook and Key Projections
- Real GDP (market price) growth:
  - 2007: 4.0
  - 2008 (Est.): 6.0
  - 2009 (Proj.): 5.0
  - 2010–2013 (Proj.): 4.5, 4.5, 5.0, 5.0
- Inflation and price indicators:
  - GDP deflator:
    - 2007: 4.1
    - 2008 (Est.): 10.1
    - 2009 (Proj.): 7.8
    - 2010–2013 (Proj.): 3.2, 3.4, 2.7, 2.2
  - Consumer prices (end-of-period):
    - 2007: 6.0
    - 2008 (Est.): 13.1
    - 2009 (Proj.): 2.7
- External balances:
  - Current account including official transfers (percent of GDP):
    - 2007: -7.2
    - 2008 (Est.): -10.9
    - 2009 (Proj.): -10.7
    - 2010–2013 (Proj.): -8.9, -8.7, -8.1, -7.3
- Growth drivers and near-term outlook:
  - Growth led by construction and tourism; real GDP growth likely at least 6 percent in 2008 and 5 percent in 2009.
  - Average consumer price inflation likely to reach 12 percent in 2008 and decline to 8 percent in 2009 (staff/authorities language preserved in source).

### Fiscal Policy, Measures, and Targets
- Central government fiscal outcomes (percent of GDP):
  - Revenue (including grants): 2007: 24.8; 2008 (Est.): 24.9; 2009 (Proj.): 23.1
  - Expenditure: 2007: 35.9; 2008 (Est.): 35.1; 2009 (Proj.): 33.6
  - Budget balance (including grants): 2007: -11.0; 2008 (Est.): -10.2; 2009 (Proj.): -10.4
  - Primary balance (including grants): 2007: 1.7; 2008 (Est.): 1.4; 2009 (Proj.): 1.1
  - Primary balance (excluding grants): 2007: 0.3; 2008 (Est.): 0.2; 2009 (Proj.): 0.6
- Key fiscal policy measures pledged for 2009 (selected):
  - Increase withholding tax on interest income from 5 to 7 percent.
  - Apply rental charges related to seashore real estate.
  - Eliminate the VAT law provision allowing refunds on some exempted activities.
  - Increase capital gains tax on revaluation of assets by companies from 1.5 to 2 percent.
  - Rationalize subsidies and reduce transfers to Electricité du Liban (EdL), mainly by adopting a new tariff structure.
  - Consider reforming regulated profit margins for fuel importers to allow an increase in the gasoline excise without affecting retail prices.
- EdL-related fiscal items:
  - Transfers in 2008 estimated at $1.5 billion or 5.2 percent of GDP.
  - Tariff revision expected to yield about $240 million.
  - Switching Beddawi plant production from oil to natural gas from January 2009 expected to lower fuel costs by $100 million.

### Public Debt and Debt Sustainability
- Total government debt (percent of GDP):
  - 2007: 171
  - 2008 (Est.): 162
  - 2009 (Proj.): 136
  - 2010–2013 (Proj.): 130, 125, 120, 115
- Public sector debt-to-GDP (baseline path):
  - 2007: 170.6
  - 2008: 161.6
  - 2009: 136.2
  - Debt-stabilizing primary balance: 0.8 (percent of GDP)
- DSA shock scenarios (preserved descriptions and outcomes):
  - Panel 1 (Baseline): continued implementation of Paris III reform measures; baseline debt ratio 115 (2013).
  - Panel 2 (Real interest rate shock): permanent increase in the real interest rate of 210 basis points; Shock:131 (versus Baseline:115).
  - Panel 3 (Growth shock): permanent decrease in real GDP growth of 1.2 percent; Shock:137 (versus Baseline:115).
  - Panel 4 (Primary balance shock): limited implementation halving reform yield during 2010–13 (primary surplus converges to about 3 percent of GDP in 2013, compared with 6 percent in baseline); Shock:137 (versus Baseline:115).
  - Panel 5 (No 2009 measures): failure to implement 2009 measures worsens primary balance by about 2.5 percent of GDP in 2009; leads to a 5 percentage point higher debt ratio in 2013 (No revenue or expenditure measure in 2009:120 or 125 noted in figure labels).
  - Panel 6 (No privatization): No privatization:125 (versus Baseline:115); scenario assumes no adverse dynamic impact of no privatization.
- Staff conclusion: decline in debt-to-GDP ratio is broadly stable under most shocks, but large debt overhang and fiscal/external imbalances leave Lebanon vulnerable to liquidity shocks for years.

### Monetary Policy, Reserves, and Financial Sector
- Exchange rate and reserves:
  - Exchange rate peg viewed as effective nominal anchor.
  - Gross international reserves (excluding gold) reached $16.7 billion in August 2008 (source Box 4).
  - Reserve projections (end-year, excl. gold, millions of U.S. dollars):
    - 2004: 9,575; 2005: 9,611; 2006: 11,353; 2007: 11,494; 2008 (Est.): 17,115; 2009 (Proj.): 21,446; 2010–2013 (Proj.): 24,437; 25,789; 27,768; 30,171
  - BdL gross reserves reported in Attachment I projections (millions of U.S. dollars): Mar: 24,718; Jun: 24,867; Sept: 25,436; Dec (Prog): 27,818; 2009 (Prog): 29,049
- Reserve adequacy estimates (Box 5):
  - Using 2008 data, reserve adequacy estimates range from $18 billion to $27 billion.
  - Composite threshold yields minimum reserve level of $20 billion.
  - Alternative threshold yields $18 billion.
  - Jeanne and Ranciere (2006) calibrated model: optimal level $22 billion under standard parameters; $27 billion with more conservative parameters.
  - Policy implication: Lebanon should continue to gradually strengthen its reserve position.
- Banking sector composition and soundness:
  - Deposits account for 82 percent of banks’ liabilities; assets: about 51 percent in government and BdL instruments, 23 percent lending to private sector, 13 percent liquid foreign assets.
  - Capital adequacy ratio: 2003: 22.3; 2007: 24.0
  - Net problem loans/net total loans: 2003: 12.8; 2007: 4.8
  - Provisions against problem loans/problem loans: 2003: 46.3; 2007: 56.6
  - Share of foreign currency deposits in total private sector deposits: 2003: 66.2; 2007: 77.4
  - Broad money (M5) growth (year-on-year): 2007: 10.9; 2008 (Proj.): 14.0; 2009 (Proj.): 13.0
- BdL and supervision:
  - BdL directives prevented exposure to structured products; BCC stepped up supervision; BdL tightened mortgage lending regulations in 2008.
  - Commercial banks hold $12 billion in liquid foreign assets as a buffer.

### Impact of Recent Global Financial Turbulence (Box 4)
- Direct exposure and channels:
  - Lebanese banks had few direct links to foreign counterparties affected and no exposure to structured products under BdL directives.
  - Indirect channels: weaker tourism, subdued FDI, slower remittances could widen current account; a sharp slowdown in deposit inflows combined with rising current account deficit could pressure reserves and interest rates.
- Donor support and external financing:
  - Only $930 million of Paris III pledges received through June 2008.
  - Disbursements during remainder of 2008 and 2009 could reach $910 million.
  - $325 million in in-kind support received or under preparation by end-June 2008.
  - Private sector support totaling $1.27 billion was signed.
  - Malaysia agreed to a debt exchange in 2007 lengthening maturities and lowering interest costs.
  - Foreign currency financing needs for 2009 likely to reach $6 billion (of which around $1.3 billion are on behalf of EdL).
  - Government plans to meet 2009 foreign currency requirements from Eurobond market, expected donor financing, and government's foreign currency revenues; expected privatization receipts to be used to retire government debt.
- IMF access and role:
  - Authorities indicated they would seek access to Fund resources of 12.5 percent of quota (SDR 25.375 million, $37.6 million).
  - Staff considers access justified; exceptional financing for 2008–09 projected at close to $1.5 billion.

### Structural Reforms, Privatization, and Energy
- Telecom:
  - Aim to re-launch sale of two mobile phone licenses via auction in April 2009; issue Request for Application by End-March 2009 and complete sale by June 2009.
  - Corporatize Telecom du Liban and auction broadband licenses.
  - Mobile company sale projected yield 2.1 percent of GDP; privatization expected to cause a revenue loss of 1.2 percent of GDP in non-tax revenues.
- Energy:
  - Revise electricity tariff structure to reduce budgetary transfers to EdL (5.2 percent of GDP in 2008).
  - Planned switch to less expensive gas at one power plant would yield additional savings; switching Beddawi plant from oil to natural gas from January 2009 expected to lower fuel costs by $100 million.
  - Government finalizing energy sector reform plan with World Bank to enhance generation capacity and restore EdL’s financial health.
- Central bank governance and technical assistance:
  - BdL developing roadmap toward full implementation of IFRS; adopt formal policies for selection, appointment, rotation of external auditors; formal guidelines for foreign reserve management; establish investment committee.
  - Authorities intend to seek further technical assistance from the Fund in consumer price statistics, national accounts, balance of payments, revenue administration, and public finance management.

### Program Conditionality, Monitoring, and Quantitative Targets
- Program conditionality and monitorable actions (December 2008–June 2009) (selected):
  - Submit Global Income Tax draft law to parliament — Target date: End-March 2009.
  - Establish a Treasury Single Account — Target date: End-June 2009.
  - BdL establish an investment committee and draft foreign reserve management guidelines — Target date: End-December 2008.
  - BdL adopt policies for selection, appointment, rotation of external auditors — Target date: End-June 2009.
  - Revise electricity tariff structure — Target date: End-December 2008.
  - Issue Request for Application for mobile licenses (MIC1 and MIC2) — Target date: End-March 2009.
- Indicative quantitative targets and definitions (selected):
  - Target 1 — Gross Reserves (floor, U.S. dollars): definition and adjustment rules preserved (includes BdL holdings, Eurobonds, gold; encumbered assets excluded).
  - Target 2 — Primary balance of government, before grants (floor): defined on modified cash basis; securitization proceeds excluded from above-the-line revenue; adjustment rules preserved.
  - Target 3 — Net government borrowing from the BdL (ceiling): defined and adjustment rules preserved.
  - Target 4 — New gross domestic arrears of the government (continuous ceiling): change in gross domestic arrears arising after September 30, 2008.
  - Target 5 — New external arrears of the government and the BdL (continuous ceiling): change in external arrears after September 30, 2008.
- Selected quantitative program indicators (from Attachment I):
  - Primary balance of the government, before grants (cumulative flows, in billions of Lebanese pounds): Mar: 79; Jun: -346; Sept: 314; Dec (Prog): 157; 2009 (Proj): 283
  - Government net borrowing from the Banque du Liban (stocks, in billions of Lebanese pounds): Mar: 5,905; Jun: 5,700; Sept: 5,700; Dec (Prog): 4,469; 2009 (Proj): 4,388
  - Outstanding letters of credit contracted by EdL (stock, millions of U.S. dollars): Mar: 1,046; Dec (Prog): 777
  - Disbursements of official grants and loans to government (cumulative flows, millions of U.S. dollars): Mar: 1,304; Dec (Prog): 822; 2009 (Proj): 1,431
  - Banque du Liban's holdings of Republic of Lebanon Eurobonds (stock, millions of U.S. dollars): 1,187

### Risks, Staff Appraisal, and Recommendations
- Main risks:
  - Deterioration in political and security situation.
  - Spillovers from the global financial crisis jeopardizing financing strategy and privatization schedule.
  - Vulnerability to macroeconomic shocks (growth shortfalls or higher real interest rates) and contingent liabilities (mainly from NSSF).
- Staff appraisal — achievements:
  - Growth remains strong; government debt-to-GDP ratio on downward trend; deposit inflows accelerated; BdL’s foreign reserve position strengthened.
- Staff appraisal — policy priorities:
  - Top priority: further lower public debt-to-GDP ratio toward sustainable levels.
  - Structural reforms needed to sustain medium-term growth, notably in energy and telecom.
  - Timely implementation of planned revenue measures and strict control on outlays, especially pre-election.
  - Implement well-targeted, cost-effective safety net to protect poor from food price increases.
  - Authorities should profit from decline in oil prices and gradually restore gasoline excises to 2004 levels.
- Recommendations for financial sector oversight:
  - BCC and BdL to be ready to step up supervision; close monitoring of loan portfolio quality as banks expand private-sector lending.
  - Continued scrutiny of deposit inflows and potential spillovers from Gulf slowdown.

### IMF Decision and Program Role
- IMF Executive Board approved SDR 25.375 million (about US$ 37.6 million) in EPCA to Lebanon on November 19, 2008.
- Staff considers criteria for EPCA met and recommends Board approval of the authorities’ request for a second drawing of SDR 25.375 million (12.5 percent of quota).
- Fund involvement intended to:
  - further reduce government debt-to-GDP ratio;
  - build international reserve buffer;
  - initiate privatization of telecom sector and broader energy reform.
- Exceptional financing for 2008–09 projected at close to $1.5 billion.
- Staff intends to update Executive Board regularly on progress under EPCA in short factual reports.

*Source: Executive Summary and selected excerpts, _cr08363 (IMF staff report and informational annex).*

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

### Executive Summary

### Introduction and Program Request
- The authorities requested follow-up Emergency Post-Conflict Assistance (EPCA) with an access of 12.5 percent of quota (SDR 25.375 million) to support their economic program for 2008–09 and continue benefiting from the macroeconomic and financial discipline provided by Fund involvement.
- The program is part of the concerted international effort to provide financial assistance to Lebanon.

### Background and Recent Developments
- Political context:
  - The 2006 war with Israel led to political stalemate and repeated outbreaks of domestic fighting until the formation of a national unity government in July 2008.
  - The security situation remains tense.
- Macroeconomic performance:
  - Real GDP growth is likely to reach at least 6 percent in 2008 and 5 percent in 2009, led by construction and tourism.
  - Average consumer price inflation is likely to reach 12 percent in 2008, and decline to 8 percent in 2009.
  - The external current account deficit is projected at around 10–11 percent of GDP in 2008 and 2009 (partly because of delayed reconstruction spending).
- Financial markets and reserves:
  - Eurobond spreads declined after the Doha agreement and have increased less than in other emerging markets during the recent turmoil.
  - Annual broad money growth accelerated to 15 percent reflecting deposit inflows.
  - Gross international reserves (excluding gold) reached $16.7 billion in August.
  - Dollarization has declined in response to lower dollar interest rates and broadly unchanged returns in Lebanese pounds.
  - There have been no noticeable direct effects of the recent global financial turbulence on Lebanon to date.
- Inflation drivers (Box 2):
  - Food import prices in Lebanon rose by around 31 percent year-on-year in July 2008; net food imports account for 2.9 percent of annual GDP.
  - The food and beverage component of the CPI increased by 21 percent year-on-year in July, contributing about 50 percent to headline inflation; food and beverages have a weight of 35 percent in the CPI.
  - The CPI component for transportation and communications increased by 16 percent year-on-year in July 2008, explaining another 17 percent of headline inflation; transportation and communication have a weight of 14 percent in the CPI.
  - With the recent decline in oil prices, inflationary pressures should subside.
  - Government measures: reduced customs duties on selected food items (May); increased cash transfers for public school students starting in September.
- Wage developments (Box 3):
  - September 2008: private sector minimum wage increased by 67 percent to $333 per month (previously $200 since 1996); estimated increase in average wage around 15 percent.
  - Public sector wages and pensions rose by a flat $110–130 per month; estimated increase in average public sector wage around 17 percent; more than half of the retroactive component will be paid out in 2008, remainder in first two months of 2009.
  - The annual cost of the wage increase is estimated at 1.4 percent of GDP.
  - Despite the increase, the public sector wage bill is projected to remain constant in percent of GDP owing to the ongoing hiring freeze and strong nominal GDP growth.
  - Authorities estimate the wage increase will temporarily raise inflation by around three percentage points.

### Box: The Authorities’ 2007 Program Supported by EPCA
- Program access: 25 percent of quota (SDR 50.75 million).
- Achievements:
  - Maintained confidence in the domestic banking system and the exchange rate peg, accelerating deposit growth and increasing international reserves.
  - Achieved a primary fiscal surplus (excluding grants), contributing to a reduction in the debt-to-GDP ratio.
  - Advanced preparations for the privatization of two mobile phone operators to near completion.
  - Prepared audit plans for the National Social Security Fund (NSSF) and Electricité du Liban (EdL).
- Shortcomings:
  - Did not introduce a floor on gasoline excises as envisaged.
  - Did not fully restore administrative and institutional capacity because of continuing political and security issues.

### Outlook and Policy Discussions
- Fiscal policy and financing:
  - Despite difficult circumstances, the government intends to pursue fiscal consolidation and further debt reduction.
  - Key Paris III measures to be implemented include privatization of the mobile phone companies and an adjustment in electricity tariffs.
  - Authorities plan to meet their financing needs from the market and use expected privatization receipts to retire government debt.
- Reserve and banking policy:
  - Authorities intend to strengthen international reserves to create a buffer against the ongoing global crisis.
  - Authorities are closely monitoring the position of commercial banks and possible effects of the global financial crisis on Lebanon.
- Main risks:
  - Worsening of the political and security situation, which could delay reforms.
  - Fallout from the global financial crisis, which could jeopardize the authorities’ financing strategy.

### Staff Appraisal
- Staff view the authorities’ program as adequately ambitious.
- Expected benefits:
  - The program will help bring debt towards sustainable levels.
  - It will maintain deposit inflows needed to satisfy the government’s large financing requirements.
  - It will reduce external vulnerabilities.
- Structural reforms:
  - Financial stability is necessary but not sufficient to sustain the recent growth acceleration over the medium term.
  - The program focuses on jump-starting structural reforms to tackle economy-wide productivity constraints, in particular in the energy and telecom sectors.

*Source: Executive Summary, _cr08363 - Executive Summary*

### Box 4. Lebanon: Impact of the Recent Financial Turbulence

### Box 4. Lebanon: Impact of the Recent Financial Turbulence

### Direct financial exposure and channels of impact
- Lebanese banks had only few direct links to foreign counterparties affected by the recent global financial market turmoil, and, under BdL directives, had no exposure to structured products.
- Liability-side structure:
  - Deposits account for 82 percent of banks’ liabilities and come mostly from residents, the Lebanese Diaspora, and regional investors.
  - Banks have no significant exposure to the international wholesale funding markets.
- Asset-side composition:
  - About 51 percent of banks’ assets are invested in government and BdL instruments (treasury bills, Eurobonds, certificates of deposits).
  - Lending to the private sector accounts for 23 percent of assets.
  - Liquid foreign assets account for about 13 percent of assets.
  - Banks have pursued a regional expansion strategy in recent years to diversify away from the sovereign.
- Non-bank financial sector is not of systemic importance, though individual institutions may have some exposure to the U.S. market.
- Indirect channels through which Lebanon could be affected:
  - GDP growth could be adversely affected by sluggish tourism and subdued FDI.
  - The external current account could widen if remittances and tourism receipts were to slow.
  - A sharp slowdown in deposit inflows, combined with a rising current account deficit, could put pressure on reserves and interest rates, with adverse impact on the government’s financing strategy.

### Donor support and external financing
- Only $930 million of the pledges for government support made at the Paris III conference were received through June 2008.
- During the remainder of 2008 and in 2009, disbursements of Paris III pledges could reach $910 million, helped by the resumption of Paris III reforms and authorization of new project loans by the reconvened parliament.
- Additional items noted:
  - $325 million in in-kind support was received or under preparation by end-June 2008.
  - Private sector support totaling $1.27 billion was signed.
  - Malaysia agreed to a debt exchange in 2007 that lengthened maturities and lowered interest costs.
- Foreign currency financing needs for 2009 are likely to reach $6 billion (of which around $1.3 billion are on behalf of EdL).
- The government has met most of its 2008 foreign currency needs by issuing Eurobonds and plans to meet 2009 foreign currency requirements from the Eurobond market, expected donor financing, and the government’s foreign currency revenues.
- Expected privatization receipts would be used to retire government debt.
- The government intends to refrain from central bank financing in 2009, after reducing the stock of government net-borrowing from the BdL in 2008.

### Fiscal program, targets, and policy measures
- Authorities’ objectives and outcomes:
  - The effort on the primary balance and the favorable interest rate-growth differential should help lower the government debt-to-GDP ratio by 9 percentage points in 2009 while privatization should contribute at least another 16 percentage points. As a result, the government debt ratio would decline to 136 percent of GDP by end-2009.
  - For 2008 the authorities target a primary surplus (excluding grants) of 0.2 percent of GDP, broadly the same as in 2007, corresponding to an overall deficit of just above 10 percent of GDP.
  - For 2009 the authorities aim for a primary surplus (excluding grants) of 0.6 percent of GDP, which corresponds to an overall deficit in percent of GDP broadly unchanged from 2008 despite a projected 1.2 percent of GDP loss of non-tax revenues from privatization.
- Selected revenue measures planned for 2009 (yields in percent of GDP and implementation timing where specified):
  - Increase capital gains tax on one-off revaluation of assets (increase capital gains tax from 1.5 percent to 2 percent): 0.3; Decree; Dec-08.
  - Remove provisions in VAT law allowing refunds on exempted activities: 0.1; Decree; Dec-08.
  - Apply rental charges on illegal seashore structures: 0.1; Decree; Dec-08.
  - Increase in the tax rate on interest income (from 5 to 7 percent): 0.4; Budget Law; Dec-08.
  - Note: the last time enterprises were allowed to realize revaluation gains was in 1993.
- Selected expenditure and structural measures:
  - Reduction in subsidies: projected yield 0.3 percent of GDP; administrative; ongoing.
  - Reduction in EdL losses: projected yield 1.2 percent of GDP; Decision by Council of Ministers; Dec-08.
  - Mobile company sale (privatization): projected yield 2.1 percent of GDP; Apr-09.
  - Privatization is expected to cause a revenue loss of 1.2 percent of GDP in non-tax revenues.
- Additional fiscal reforms:
  - Finalize the global income tax law with a view to submitting it to parliament by March 2009.
  - Adopt a new tax procedure and pilot a new risk-based tax audit manual.
  - Establish a public debt directorate and introduce a treasury single account.
  - Develop a reform program for the National Social Security Fund with World Bank assistance, including an actuarial study of the pension plan.

### Monetary policy, exchange rate policy, and financial market stability
- Exchange rate peg:
  - Authorities view the exchange rate peg as an effective nominal anchor that has supported financial stability.
  - They project deposit growth to slow somewhat in 2009 and deposit dollarization to stabilize, and intend to further strengthen reserves.
  - Authorities stand ready to adjust interest rates as needed to meet balance of payments objectives.
- Financial sector health and regulatory actions:
  - Bank profitability is rising and balance sheets are expanding.
  - Regulatory framework prevented Lebanese banks from having an exposure to structured products central to the global turmoil, but banks remain vulnerable to a fall in deposit inflows that could result from a slowdown in the Gulf.
  - BdL supports banks’ regional expansion strategies and emphasis on growing private sector credit.
  - BdL tightened mortgage lending regulations in 2008 to prevent a real estate bubble.
  - Banking Control Commission (BCC) stepped up supervision to limit risks from the global crisis.
  - Authorities are reconsidering the main features of the deposit insurance fund and principles for supervision of the non-banking financial sector.

### Reserve adequacy and buffers (Box 5)
- Using 2008 data, reserve adequacy estimates range from $18 billion to $27 billion.
- Gross international reserves excluding gold were $16.7 billion as of August 2008.
- Commercial banks hold $12 billion in liquid foreign assets that serve as a buffer against capital outflows.
- Specific approaches and point estimates:
  - Composite threshold (full coverage of short-term external debt plus 20 percent of broad money) yields a minimum reserve level of $20 billion.
  - Alternative threshold (full coverage of foreign debt service, plus 10 percent of broad money, plus 20 percent of annual imports) yields $18 billion.
  - Jeanne and Ranciere (2006) calibrated model suggests an optimal level of reserves of $22 billion under standard parameterization; with more conservative parameter values an optimal level of $27 billion results.
- Policy implication: Lebanon should continue to gradually strengthen its reserve position.

### Structural reforms beyond fiscal measures
- Telecom sector:
  - Authorities aim to re-launch the sale of the two existing mobile phone licenses by holding an auction in April 2009.
  - Authorities are preparing to corporatize Telecom du Liban and to auction broadband licenses.
- Other state-owned assets:
  - Authorities are assessing whether conditions are right for the sale of BdL’s non-financial assets, including shares in the national airline and a holding company that owns Casino du Liban.
- Energy sector:
  - Authorities are taking initial steps toward reforming the energy sector.
  - Revising the electricity tariff structure to reduce budgetary transfers to the power utility (5.2 percent of GDP in 2008).
  - Planned switching to less expensive gas at one power plant would yield additional savings.
  - Government finalizing an energy sector reform plan in collaboration with the World Bank to enhance generation capacity and service quality while restoring EdL’s financial health.
- Central bank governance:
  - BdL is developing a roadmap toward full implementation of the International Financial Reporting Standards.
  - BdL will adopt a formal policy for selection, appointment, and rotation of external auditors, formal guidelines for foreign reserve management, and establish an investment committee.
- Technical assistance:
  - Authorities intend to seek further technical assistance from the Fund in consumer price statistics, national accounts, balance of payments, revenue administration, and public finance management.

### Medium-term outlook, debt sustainability, and risks
- Debt dynamics and projections:
  - Government debt-to-GDP ratio projected at 136 percent at end-2009.
  - With successful implementation of the 2008–09 program, phased implementation of Paris III measures, further privatization and pledged donor support, debt-to-GDP ratio would decline by 21 percentage points to 115 percent of GDP in 2013.
  - Associated improvement in confidence is expected to sustain growth at 4–5 percent a year.
- Risks and vulnerabilities:
  - Lebanon’s large debt overhang and fiscal and external imbalances leave it vulnerable to liquidity shocks for years, even with full implementation of reforms.
  - Delays in privatization and fiscal adjustment would slow vulnerability reduction.
  - Vulnerability to macroeconomic shocks (shortfalls in growth or higher than projected real interest rates), which could materialize as a consequence of the global financial crisis.
  - Uncertainties over the yield of reforms and contingent liabilities (mainly from NSSF) remain and are being quantified.
- Staff’s adjustment scenario (2010–13) includes a range of revenue and expenditure measures intended to improve the primary balance; implementation and technical risks are noted, including political risk.

### IMF access, program monitoring, and financing role
- Authorities indicated they would seek access to Fund resources of 12.5 percent of quota (SDR 25.375 million, $37.6 million).
- Staff considers this level of access justified; while small relative to Lebanon’s financing needs, Fund involvement would facilitate continued donor support.
- Exceptional financing for 2008–09 is projected at close to $1.5 billion.
- Staff intends to update the Executive Board regularly on progress under EPCA in the form of short factual reports.

*Source: _cr08363 - Box 4. Lebanon: Impact of the Recent Financial Turbulence*

### 23.      Lebanon is expected to meet its financial obligations to the Fund in a timely

### _cr08363 - 23.      Lebanon is expected to meet its financial obligations to the Fund in a timely

### Financial obligations, Fund exposure, and safeguards
- Lebanon has maintained a perfect record of meeting external debt payments, including during its civil war and recent episodes of financial pressures.
- Fund credit would be low relative to quota and in absolute terms.
- Debt service to the Fund would remain below 0.2 percent of exports of goods and non-factor services.
- An update of the 2007 safeguard assessment of the Banque du Liban has been initiated.
- Management understands that members confirm the Fund’s preferred creditor status in respect of drawing by Lebanon under the EPCA and acknowledge the importance of timely repayment to the Fund of the amounts provided under the EPCA.

### Debt Sustainability Analysis (DSA) — baseline and shock scenarios
- Overall finding: The decline in the debt-to-GDP ratio is broadly stable under most shocks.
- The DSA shows the impact of five shocks (with scenario descriptions preserved verbatim):
  - Panel 1: The baseline scenario—continued implementation of Paris III reform measures.
  - Panel 2: A permanent increase in the real interest rate of 210 basis points (i.e., one-half standard deviation from its past distribution) relative to the baseline.
  - Panel 3: A permanent decrease in real GDP growth of 1.2 percent (i.e., one-half of the standard deviation from its past distribution).
  - Panel 4: Limited implementation of the fiscal reforms that would halve the yield from the fiscal reform package during 2010–13. This implies that the primary surplus converges to about 3 percent of GDP in 2013, compared with 6 percent in the baseline.
  - Panel 5: Failure to implement the revenue and expenditure measures planned for 2009. This worsens the primary balance by about 2.5 percent of GDP in 2009, leading to a 5 percentage point increase in the debt-to-GDP ratio in 2013 relative to the baseline.
  - Panel 6: No privatization—since privatization essentially brings forward the income stream from the privatized companies, the scenarios with and without privatization converge to the same debt ratio in the long run. However, this abstracts from the negative impact that abandoning privatization plans would have on growth and, possibly, interest rates, relative to the baseline.
- Figure 3 highlights public debt (public debt in percent of GDP) for 2003–13 under baseline and shocks; note labels preserved in the source:
  - Panel 1 (Baseline Scenario): Baseline:115 (historical references provided in figure).
  - Panel 2 (Real Interest Rate Shock 1/): Baseline:115; Shock:131; Historical:145.
  - Panel 3 (Growth Shock 1/): Baseline:115; Shock:137; Historical:139.
  - Panel 4 (Primary Balance Shock 2/): Baseline:115; Shock:137; Historical:115; Baseline:3.2; Shock:5.3; Historical:8.5.
  - Panel 5 (Implementation of no revenue or expenditure measures in 2009 3/): Baseline:115; No revenue or expenditure measure in 2009:120; Baseline:115; No revenue or expenditure measure in 2009:125.
  - Panel 6 (No Privatization 4/): Baseline:115; No privatization:125.
- Footnotes and assumptions (preserved wording):
  - 1/ Growth and interest rate shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline scenario and shock scenario; historical refers to 10-year averages.
  - 2/ The planned revenue and expenditures reforms generate half of the estimated yield of the baseline scenario. This leads to a primary surplus of 3 percent of GDP by 2013.
  - 3/ None of the revenue (i.e, increase in the tax on interest income), or expenditure measure (i.e., revision of the electricity tariff schedule) planned for 2009 are implemented.
  - 4/ No privatization in the projected period. Assumes no adverse dynamic impact of no privatization.

### Risks to program implementation and Fund exposure
- Main program risks:
  - Deterioration in the political and security situation (including renewed political stalemate in the run-up to the 2009 elections or pre-election pressures).
  - Possible impact of the global financial crisis, including spill-over effects to the region.
- Specific vulnerabilities from a global crisis:
  - Could jeopardize the authorities’ financing strategy.
  - Could set back the schedule for privatization.
  - Could exacerbate existing vulnerabilities.
- Authorities’ commitment: Government is committed to its economic program and determined to move ahead with reforms.
- Consultations: Staff and management consulted with authorities and, through Executive Directors, with the bulk of Lebanon’s official bilateral donors and creditors to address risks posed by Fund financing.

### Staff appraisal — Achievements
- Macroeconomic improvements despite political strife and security problems:
  - Growth remains strong.
  - The government debt-to-GDP ratio is on a downward trend.
  - Deposit inflows have accelerated.
  - The BdL’s foreign reserve position is now much stronger.
- Improved political climate after formation of the national unity government provides an opportunity to address vulnerabilities and start reforms to lift growth potential.

### Staff appraisal — Challenges and policy priorities
- Top priority: Further lowering the public debt-to-GDP ratio toward sustainable levels to shore up market confidence and maintain strong deposit inflows needed for large government financing requirements.
- Structural reforms needed to sustain medium-term growth acceleration, targeting obstacles to economy-wide productivity, in particular in the energy and telecom sectors.
- The authorities’ program addresses these challenges despite electoral deadlines and the need for broad consensus.

### Fiscal policy guidance and measures
- Authorities’ fiscal targets are appropriately ambitious.
- Targeted improvement in the primary surplus (excluding grants) would help bring down the debt-to-GDP ratio, even if telecom privatization does not materialize in 2009.
- Implementation requirements:
  - Timely implementation of planned revenue measures.
  - Strict control on outlays, especially in the run-up to the May elections.
  - Ensure lower transfers to EdL materialize through a combination of sufficiently higher electricity tariffs and savings in power generation.
- Social protection:
  - In light of recent increases in food prices, a well-targeted and cost-effective safety net—under preparation by the authorities—is needed.
  - Such a safety net would be more efficient than generalized wage increases.
- Tax reform:
  - Decision to submit the draft GIT law to parliament signals commitment to tax reform to make the tax system more efficient and equitable and mobilize tax resources.
- Energy price policy:
  - Authorities should profit from the decline in oil prices from their 2008 peak and gradually restore gasoline excises to 2004 levels.

### Exchange rate, monetary policy, and reserves
- The exchange rate has constituted the effective anchor for Lebanon’s financial stability.
- Monetary policy needs to continue to safeguard the peg, with fiscal consolidation addressing the external imbalance.
- Risks:
  - Wage increases could ignite inflationary pressures that may require shoring up confidence in the peg through higher interest rates, in addition to fiscal tightening.
- BdL targets accumulation of gross international reserves considered appropriate; close monitoring of net-foreign-asset position is needed.
- Government intention to avoid central bank financing should help BdL achieve its international reserve target.

### Banking system and global financial turmoil
- Prudent oversight by the central bank and supervisory authority has limited exposure to structured products.
- Potential indirect effects of the global crisis:
  - Weakening of conditions in the Gulf could reduce deposit inflows, remittances, and direct investment from the region.
  - Slower inflows may erode banks’ profitability.
- Supervisory recommendations:
  - BCC and BdL should be ready to step up supervision to minimize risks to the banking system.
  - Recent regulation limiting bank financing of real estate speculation is welcome.
  - Continued close monitoring of loan portfolio quality is needed as banks expand private-sector lending.

### Energy sector reform and telecom privatization
- Energy sector:
  - Revision of the tariff structure is an initial step in a broader medium-term reform to increase electricity supply, improve service quality, and reduce fiscal cost of power generation.
  - Authorities, in collaboration with the World Bank, are finalizing a comprehensive reform plan that envisages private sector participation.
- Telecom privatization:
  - Government intention to speed up sale of telecom companies is welcome.
  - Completing sale by June 2009 requires immediate action to ensure broad political support.
  - Authorities’ projections and staff’s DSA conservatively assume the sale does not affect the fiscal position over the medium term.
  - A liberalized telecom sector has potential to generate significant additional fiscal resources in the future.

### Donor support and implementation capacity
- Success of reform strategy requires sustained donor support.
- In 2007–08, disbursements fell short of Paris III pledges partly because of protracted stalemate and security incidents.
- Donors should step up implementation of reconstruction projects and deliver on pledges given the improved situation.
- IMF staff stands ready to provide technical assistance to restore institutional and administrative capacity, particularly in the fiscal area.

### Summary of principal risks (staff view)
- Main risks: unraveling of domestic political situation and deterioration in regional security.
- Lebanon remains highly vulnerable to shifts in market confidence and could be affected by the evolving global financial crisis.
- BdL has sought to increase international reserves as a buffer.
- Support from donors and the Fund is an essential component for the success of the strategy.

*Source: IMF staff report excerpt.*

### 35.      The staff considers that the criteria for Fund support under EPCA have been met, and,

### _cr08363 - 35.      The staff considers that the criteria for Fund support under EPCA have been met, and,

### Staff recommendation and program request
- The staff considers that the criteria for Fund support under EPCA have been met and recommends Board approval of the authorities’ request.
- The Government of Lebanon requests continued IMF support in the form of a second drawing under EPCA in an amount equivalent to SDR 25.375 million, or 12.5 percent of quota.

### Macroeconomic outlook and projections
- Real GDP (market price):
  - 2007: 4.0
  - 2008 (Est.): 6.0
  - 2009 (Proj.): 5.0
  - 2010–2013 (Proj.): 4.5, 4.5, 5.0, 5.0
- GDP deflator (inflation):
  - 2007: 4.1
  - 2008 (Est.): 10.1
  - 2009 (Proj.): 7.8
  - 2010–2013 (Proj.): 3.2, 3.4, 2.7, 2.2
- Consumer prices (end-of-period):
  - 2007: 6.0
  - 2008 (Est.): 13.1
  - 2009 (Proj.): 2.7
- Growth expectations cited in Letter of Intent:
  - 2008: at least 6 percent
  - 2009: 5 percent

### Fiscal developments, targets and measures
- Central government fiscal outcomes (in percent of GDP unless noted):
  - Revenue (including grants):
    - 2007: 24.8
    - 2008 (Est.): 24.9
    - 2009 (Proj.): 23.1
  - Expenditure:
    - 2007: 35.9
    - 2008 (Est.): 35.1
    - 2009 (Proj.): 33.6
  - Budget balance (including grants):
    - 2007: -11.0
    - 2008 (Est.): -10.2
    - 2009 (Proj.): -10.4
  - Primary balance (including grants):
    - 2007: 1.7
    - 2008 (Est.): 1.4
    - 2009 (Proj.): 1.1
  - Primary balance (excluding grants):
    - 2007: 0.3
    - 2008 (Est.): 0.2
    - 2009 (Proj.): 0.6
- Key fiscal policy measures pledged for 2009:
  - Increase withholding tax on interest income from 5 to 7 percent.
  - Apply rental charges related to seashore real estate.
  - Eliminate the VAT law provision allowing refunds on some exempted activities.
  - Increase capital gains tax on revaluation of assets by companies from 1.5 to 2 percent.
  - Rationalize subsidies and reduce transfers to Electricité du Liban (EdL), mainly by adopting a new tariff structure.
  - Consider reforming regulated profit margins for fuel importers to allow an increase in the gasoline excise without affecting retail prices.
- EdL transfers and related measures:
  - Transfers in 2008 estimated at $1.5 billion or 5.2 percent of GDP.
  - Tariff revision expected to yield about $240 million.
  - Switching Beddawi plant production from oil to natural gas from January 2009 expected to lower fuel costs by $100 million.

### Public debt and sustainability
- Total government debt (percent of GDP):
  - 2007: 171
  - 2008 (Est.): 162
  - 2009 (Proj.): 136
  - 2010–2013 (Proj.): 130, 125, 120, 115
- Public sector debt-to-GDP (baseline path):
  - 2007: 170.6
  - 2008: 161.6
  - 2009: 136.2
  - Debt-stabilizing primary balance reported as 0.8 (percent of GDP).
- Identified debt-creating flows and primary deficit (percent of GDP):
  - Primary deficit:
    - 2007: -1.8
    - 2008: -1.4
    - 2009: -1.1
  - Automatic debt dynamics (contribution):
    - 2007: -0.8
    - 2008: -12.9
    - 2009: -7.3
- Public sector debt composition highlights:
  - Share foreign-currency denominated (percent of GDP):
    - 2007: 85.0
    - 2008: 75.9
    - 2009: 54.5

### Monetary and external sector
- Gross official reserves (end-year, excl. gold, millions of U.S. dollars):
  - 2004: 9,575
  - 2005: 9,611
  - 2006: 11,353
  - 2007: 11,494
  - 2008 (Est.): 17,115
  - 2009 (Proj.): 21,446
  - 2010–2013 (Proj.): 24,437; 25,789; 27,768; 30,171
- Gross reserves reported by Banque du Liban (Attachment I projections, in millions of U.S. dollars):
  - Mar: 24,718
  - Jun: 24,867
  - Sept: 25,436
  - Dec (Prog): 27,818
  - 2009 (Prog): 29,049
- Current account including official transfers (percent of GDP):
  - 2007: -7.2
  - 2008 (Est.): -10.9
  - 2009 (Proj.): -10.7
  - 2010–2013 (Proj.): -8.9, -8.7, -8.1, -7.3
- External debt (year-end; percent of GDP):
  - 2007: 197.3
  - 2008 (Est.): 190.4
  - 2009 (Proj.): 174.6
  - 2010–2013 (Proj.): 168.5; 158.8; 151.4; 143.0
- Net foreign assets of the banking system (in tables):
  - 2007 (commercial banks + BdL combined snapshots): examples include 25,112 (commercial banks) and 25,500 (BdL) in reported series.

### Banking sector and financial soundness
- Banking sector soundness indicators (selected):
  - Capital adequacy ratio:
    - 2003: 22.3
    - 2007: 24.0
  - Net problem loans/net total loans:
    - 2003: 12.8
    - 2007: 4.8
  - Provisions against problem loans/problem loans:
    - 2003: 46.3
    - 2007: 56.6
  - Share of foreign currency deposits in total private sector deposits:
    - 2003: 66.2
    - 2007: 77.4
  - Broad money (M5) growth (year-on-year):
    - 2007: 10.9
    - 2008 (Proj.): 14.0
    - 2009 (Proj.): 13.0

### Program conditionality, structural commitments, and monitorable actions (December 2008–June 2009)
- Key monitorable actions and targets:
  - Fiscal:
    - Submit to parliament the Global Income Tax draft law — Target date: End-March 2009.
    - Establish a Treasury Single Account — Target date: End-June 2009.
  - Banque du Liban (BdL):
    - Establish an investment committee and draft formal guidelines for foreign reserve management — Target date: End-December 2008.
    - Adopt formal policies for the selection, appointment, and rotation of the BdL’s external auditors — Target date: End-June 2009.
  - Power sector:
    - Revise electricity tariff structure consistent with program objectives — Target date: End-December 2008.
  - Privatization:
    - Issue a Request for Application to participate in acquiring the licenses and assets of the two mobile telephone companies (MIC1 and MIC2) — Target date: End-March 2009.
- Letter of Intent commitments and timelines:
  - Privatization of telecom mobile companies: issue request for applications in March 2009 and complete sale by June 2009.
  - Use proceeds from telecom sale in the second half of 2009 to reduce foreign exchange and domestic currency debt held by the private sector and BdL.
  - Operational targets: Treasury Single Account operational by end-June 2009; submission of Global Income Tax law to parliament by end-March 2009; BdL to adopt IFRS implementation roadmap by end-2008.

### Quantitative program indicators (selected, from Attachment I)
- Primary balance of the government, before grants (cumulative flows, in billions of Lebanese pounds):
  - Mar: 79
  - Jun: -346
  - Sept: 314
  - Dec (Prog): 157
  - 2009 (Proj): 283
- Government net borrowing from the Banque du Liban (stocks, in billions of Lebanese pounds):
  - Mar: 5,905
  - Jun: 5,700
  - Sept: 5,700
  - Dec (Prog): 4,469
  - 2009 (Proj): 4,388
- Accumulation of government gross arrears (cumulative flows, continuous): 0 reported at checkpoints shown.
- Memorandum items:
  - Outstanding letters of credit contracted by Electricité du Liban (stock, millions of U.S. dollars):
    - Mar: 1,046
    - Dec (Prog): 777
  - Disbursements of official grants and loans to government (cumulative flows, millions of U.S. dollars):
    - Mar: 1,304
    - Dec (Prog): 822
    - 2009 (Proj): 1,431
  - Banque du Liban's holdings of Republic of Lebanon Eurobonds (stock, millions of U.S. dollars): 1,187 (constant in the table snapshots shown).
  - Projection of revenue from companies slated for privatization (cumulative flows): 2009 projections include 415; 830; 909; 988 shown across program milestones.

### Capacity to repay the Fund and Fund-related flows
- Fund repurchases and charges (in millions of SDRs and U.S. dollars, selected):
  - Fund repurchases (millions of SDRs):
    - 2008: 1.5
    - 2009 (Proj): 15.7; 27.5; 26.4; 13.1 across projection years shown
  - Fund credit outstanding (millions of SDRs):
    - 2007: 50.8
    - 2008: 76.1
    - 2009 (Proj): 76.1; subsequent projected reductions to 63.4; 38.1; 12.7; 0.0
  - Fund credit outstanding (in millions of U.S. dollars):
    - 2007: 77.7
    - 2008: 119.8
    - 2009 (Proj): 119.0; projected declines to 99.7; 59.9; 20.0; 0.0

*Sources: Lebanese authorities; and IMF staff estimates, projections and Letter of Intent (November 3, 2008).*

### INTRODUCTION

### INTRODUCTION

### Scope and Purpose
- Memorandum sets out the commitments of the Lebanese authorities for the period to June 30, 2009 relating to the Emergency Post-Conflict Assistance (EPCA) requested in the Letter of Intent.
- Section II defines the indicative quantitative targets and relative adjustors reported in Attachment I.
- Section III establishes the content and frequency of the data to be provided to IMF staff for monitoring the program.

### Definitions and Concepts
- Test dates:
  - Quantitative indicative targets are set quarterly starting December 31, 2008 through June 30, 2009, and are to be met at the end of each quarter unless otherwise specified.
- Government:
  - “Government” includes the central government, the Council for Development and Reconstruction (CDR), and the grant-financed operations of the Higher Relief Commission (HRC).
  - Excludes: Electricité du Liban (EDL), municipalities, the Régie, and NSSF, and other agencies not specifically listed.
  - Government balance defined on a modified cash basis to include foreign-financed expenditure of the CDR, all operations of the HRC, any treasury advance, and arrears (as defined below).
  - Fiscal data compiled according to the Government Finance Statistics (GFS) manual 1986, unless otherwise specified.
- Grants:
  - Project grants: grants to the government linked to specific project financing; do not include grants received for general budgetary support.
  - Budgetary grants: grants received for general budgetary support, including grants in support of specific budget lines and grants to be applied to debt reduction.
  - Concepts include conflict-related and Paris III grants.
- Arrears:
  - Domestic arrears: government expenditures not paid within 90 days of a payment order being issued.
  - External arrears: overdue payments (principal or interest) on external debt contracted or guaranteed by the government or the Banque du Liban (BdL).
- Valuation changes:
  - All data expressed in Lebanese pounds (LL), unless otherwise indicated.
  - To exclude foreign exchange valuation effects:
    - gold will be valued at the December 31, 2007 price of US$ 828.4 per fine troy ounce;
    - the U.S. dollar value of foreign assets and liabilities will be converted into LL at the exchange rate of US$1 = LL 1507.5;
    - all foreign assets and liabilities denominated in currencies other than the U.S. dollar will be converted into U.S. dollars and/or LL at their respective exchange rates prevailing as of December 31, 2007, as published in the IFS.

### Indicative Targets
- Target 1 — Gross Reserves (GR) of the BdL (floor, U.S. dollars):
  - GR defined as BdL’s callable foreign exchange deposits abroad, foreign exchange holdings (including SDR), gold, Eurobonds issued by the Republic of Lebanon (“Eurobonds”), and holdings of investment grade liquid foreign currency-denominated securities.
  - Encumbered assets excluded from GR.
  - Floor for GR will be adjusted:
    - downward (upward) for the full amount of any shortfall (excess) in disbursements of official grants and loans to the government relative to program projections;
    - downward (upward) for the full amount of sale (purchase) by the BdL of Eurobonds relative to the baseline projection of BdL holdings.
- Target 2 — Primary balance of the government, before grants (floor):
  - Defined as the overall fiscal balance on a modified cash basis plus interest payments minus grants received.
  - Securitization proceeds will not be counted as above-the-line revenue.
  - Any transfer from the BdL not related to realized profits (including from gold revaluation) will be considered capital (below the line) transfers and excluded from the primary balance.
  - Monitoring carried out from the financing side; overall balance on a modified cash basis calculated as the negative of the sum of:
    - (i) change in net BdL claims on the central government;
    - (ii) change in net claims on the central government by the rest of the banking system;
    - (iii) change in net claims on the central government by public sector institutions;
    - (iv) change in net claims on the central government by other creditors;
    - (v) net change in government arrears;
    - (vi) proceeds from exceptional financing (privatization revenues, gold or foreign exchange revaluation proceeds, securitization proceeds);
    - minus (vii) net change in the CDR and HRC accounts at the BdL.
  - Budgetary and project grants to the government will be measured through BdL.
  - All changes calculated as difference between end-period stocks, net of valuation changes from currency movements and changes in accrued interest reported separately by instrument.
  - Interest payments measured on a cash basis.
  - Floor on the primary balance before grants will be adjusted:
    - downward (upward) for higher (lower) than projected project grant disbursements;
    - downward for the net amount of the revenues lost due to privatization pro-rated on the basis of the revenue projections specified in Attachment I.
- Target 3 — Net government borrowing from the BdL (ceiling):
  - Defined as difference between the BdL claims on the government, in domestic and foreign currency, including all holdings of government securities; and the deposits in domestic and foreign currency of the government at the BdL.
  - Any transfers from the BdL other than realized profits (e.g., from securitization of future profits) treated as net government borrowing from the BdL.
  - Ceiling for net government borrowing from the BdL will be adjusted:
    - downward for the full amount of any excess in transfers from the BdL’s gold revaluation relative to program projections;
    - downward (upward) for higher (lower) than projected budgetary grant disbursements.
- Target 4 — New gross domestic arrears of the government (continuous ceiling):
  - Defined as the change in gross domestic arrears arising after September 30, 2008.
  - “Gross” arrears indicates taxes and contributions owed to the government are not netted out of the arrears.
- Target 5 — New external arrears of the government and the BdL (continuous ceiling):
  - Defined as the change in external arrears after September 30, 2008.

### Reporting Requirements
- Information to be provided to the IMF Resident Representative in Beirut (frequency indicated):
  - Gross Reserves and components (monthly).
  - BdL’s net foreign exchange position, defined as official foreign currency assets, including gold and SDRs, less foreign exchange liabilities; includes exceptional deposits by foreign government at the BdL and IMF purchases, but excludes liabilities to the government of Lebanon and other official creditors.
  - Weekly BdL gross foreign exchange market purchases and sales.
  - Monetary aggregates, including currency in circulation, M3 and non-resident deposits (weekly).
  - BdL balance sheet, including a break down of all assets and liabilities by instrument, by currency and remaining time to maturity (monthly).
  - Data on outstanding BdL instruments by type (coupon or discount), currency, amounts, remaining maturity, and yield (monthly). Data on auctions or sale of CDs by the BdL, including amount, maturity, yield, and any premium paid (monthly).
  - BdL income statement on an accrual basis (quarterly).
  - Commercial banks’ balance sheet (monthly).
  - On a checks-issued basis, summary budget operations, revenues, expenditures (including net advances), net domestic financing, balances in the government accounts with the BdL and commercial banks (including privatization accounts), the receipt and use of privatization proceeds (monthly), monthly cash data on foreign-financed capital expenditures, and relief and reconstruction expenditures.
  - Government debt and financing: government debt statistics as per usual reporting format provided by the BdL, including BdL lending to EdL; government interest expenditure on a cash basis by debt instrument and currency; grants received by government (including CDR and HRC), of which project-related grants; privatization proceeds; valuation changes to the outstanding stock of debt due to currency fluctuations; changes in the outstanding stock of accrued interest that is reflected in the debt stock; the new stock of domestic and external arrears; any put or call options, collateral guarantees, warrants or similar derivative arrangements entered into by the government or the BdL; on-lending operations of the government; securitization of future payment flows to the government or resulting in future payment flows to or from the government; amortization payments by debt instrument.
  - Outstanding debt contracted by EdL and guaranteed by the government, including letters of credit entered into, with breakdown of principal and interest (monthly).
  - The annual accounts of the NSSF, including disaggregated accounts of each of the three NSSF funds and any contractual arrears (as defined above) from the central government on NSSF contributions.
  - Foreign assistance received (separating grants from loans and budget support from project financing), and full terms of the newly-contracted but not disbursed loans (monthly).
  - Balance of payments (current, capital, and financial accounts) (monthly).
  - List of short-, medium-, and long-term public or publicly guaranteed external loans contracted during each quarter; identifying, for each loan: the creditor, the borrower, the amount and currency, the maturity and grace period, and interest rate arrangements (quarterly).
  - Revision of electricity tariff structure and resulting savings for EdL.
- Data submission deadlines:
  - Weekly data and data on central bank CD auctions: sent with a lag of no more than one week.
  - Monthly and quarterly data: sent within no more than four weeks, except balance of payments data, which should be sent within no more than eleven weeks.
  - Any revisions to previously reported data should be communicated to the Resident Representative’s office in the context of the regular updates.
- Reporting on program progress:
  - Authorities will prepare and send reports, with appropriate documentation, indicating progress achieved, explaining any deviations relative to the initial targets, and specifying expected revised completion dates of the monitorable actions specified in Section III.
  - Details on major economic and social measures expected to have an impact on program sequencing (such as new legislation on decrees) will be sent in a timely manner to the Resident Representative’s office.

### Annex I — Fund Relations (selected items as of September 30, 2008)
- Membership Status:
  - Joined 04/14/47; Article VIII (07/01/93).
- General Resources Account (SDR Million; Percent of Quota):
  - Quota: 203.00 — 100.00
  - Fund holdings of currency: 234.92 — 115.72
  - Reserve position in Fund: 18.83 — 9.28
- SDR Department (SDR Million; Percent of Allocation):
  - Net cumulative allocation: 4.39 — 100.00
  - Holdings: 22.26 — 506.72
- Outstanding Purchases and Loans:
  - Post-Conflict Emergency Assistance: 50.75 — 25.00
- Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Forthcoming Principal and Charges/Interest and Total by year:
    - 2008: Charges/Interest 0.50; Total 0.50
    - 2009: Charges/Interest 1.85; Total 1.85
    - 2010: Principal 12.69; Charges/Interest 1.76; Total 14.45
    - 2011: Principal 25.38; Charges/Interest 0.99; Total 26.36
    - 2012: Principal 12.69; Charges/Interest 0.15; Total 12.84
- Safeguards Assessment:
  - Fund completed a safeguards assessment of the Banque du Liban in March.
  - Report suggested areas for enhancing BdL’s financial reporting, audit, and control procedures; authorities have outlined steps to follow up.
  - Report suggested an update of the central bank law.
  - An updated safeguards assessment would be required to be conducted within the EPCA program period.
- Exchange arrangement:
  - The Lebanese pound is a conventional peg.
  - Since October 1999, the Banque du Liban has intervened to keep the pound around a mid-point parity of LL 1,507.5 per $1, with a bid-ask spread of LL+/-6.5.
- Article IV Consultation:
  - The 2007 Article IV consultation concluded by the Executive Board on October 3, 2007 (IMF Country Report No. 07/382).
- Technical assistance (selected):
  - Fiscal area: advice on introducing the VAT, reforming customs tariffs and income taxes, strengthening tax and customs administration, improving public expenditure management, consolidating fiscal accounts; fiscal ROSC report published May 2005; missions in 2005, October 2006, November 2007, and 2007–early 2008 provided various fiscal follow-up support.
  - Financial area: assistance on payments system and vulnerability indicators; assessment of compliance with Core Principles for Systemically Important Payments Systems; a 2006 mission assessed banking sector soundness and stress-test exercise.
  - Statistical area: technical assistance in national accounts, price and balance of payments statistics; no official PPI; balance of payments data remain incomplete; new monthly country-wide CPI launched March 2008; statistical gaps remain substantial, particularly in national accounts, price statistics, and the balance of payments.

*International Monetary Fund — Lebanon: Use of Fund Resources—Request for Emergency Post-Conflict Assistance—Informational Annex (Prepared by Middle East and Central Asia Department, November 3, 2008).*

### Annex II. Lebanon: Relations with the World Bank Group

### Annex II. Lebanon: Relations with the World Bank Group

### World Bank Interim Strategy Note (ISN) and Objectives
- ISN covered fiscal years 2007–08; presented to the Board in August 2007.
- Anchored in Lebanon’s Paris III reform program; aims to provide a transitional framework of technical and financial assistance.
- Emphasis on the medium-term public expenditure and social reform agenda, particularly energy and social protection reforms, to support:
  - (i) commencing a transition to fiscal sustainability over the medium term;
  - (ii) garnering support for the government’s growth and social reform agenda;
  - (iii) galvanizing donors to disburse their Paris III pledges to underpin reform implementation.
- Key pillars of the ISN:
  - (i) governance for economic management and to support growth;
  - (ii) the development of human capital and the mitigation of the poverty effects of transition;
  - (iii) resource and environmental management.
- ISN foresaw up to $175 million in development policy-based lending over its implementation period, subject to progress in improving the debt outlook and progress in implementation in critical elements of the Paris III reform program.
- ISN builds on analytical and advisory work after summer-2006 hostilities, including the Economic and Social Impact Assessment (ESIA).

### World Bank Lending, Trust Funds, and Project Portfolio
- Active IBRD-financed portfolio: five projects focusing on education, infrastructure, transport and water.
  - Total net commitment of US$264.58 million.
  - Of which US$190.75 million has been disbursed to-date. (As of August 31, 2008.)
- Reform Implementation Development Policy Loan (RIDPL):
  - Amount: US$100 million.
  - Approved in August 2007.
  - Focus: energy, business environment and social services.
- Trust Fund for Lebanon (TFL):
  - Created in September 2006 with a transfer of US$70 million from IBRD surplus.
  - TFL assists municipal and water infrastructure rehabilitation and supports reform implementation in the energy and social sectors.
  - IFC use from TFL: US$15 million to scale up its Risk Sharing Facility — US$14 million as a first loss grant and US$1 million for technical assistance to expand coverage of Kafalat.
- Ongoing TFL grants and projects:
  - Emergency Social Protection Implementation Support Project (ESPISP I) — accelerate and improve implementation of social sector reforms (social insurance, safety nets, health expenditures).
  - Emergency Power Sector Reform Capacity Reinforcement Project — accelerate reforms and restructuring of Lebanese Power Company (EdL) by enhancing capacity in Ministry of Energy and Water, the Electricity utility, and a multi-Ministry Higher Level Committee.
  - Additional TFL grants negotiated and awaiting final approval:
    - Emergency Fiscal Management Reform Implementation Support Project (EFMISP) — grant negotiated in July 2008 and awaiting final approval; to strengthen public expenditure, debt and financial management capacity at the Ministry of Finance.
    - Second Emergency Social Protection Implementation Support Project (ESPISP II) — grant negotiated in September 2008 and awaiting final approval; to build on ESPISP I.
- Access to other Bank-administered trust funds:
  - Current portfolio includes 5 grants for a total of $2.3 million focused on institutional capacity building.

### Portfolio Performance and Implementation Risks
- Portfolio performance improved following the hostilities due to concerted efforts by project management units and Bank staff.
- Overall performance: implementation and development impact is good.
- All but one projects are performing satisfactorily.
- Average disbursement ratio over the last two years: about 25 percent, compared with regional average of 15 percent.
- Three projects remain at risk of not achieving development objectives.
- Bank will engage in a participatory CPPR to identify implementation bottlenecks and establish an action plan for satisfactory project completion.

### IFC Activities and Private Sector Support
- IFC exceeded its Paris III/Reconstruction pledge of US$250–275 million by committing $315 million.
- In FY08, IFC added US$212 million to the portfolio, including trade finance.
- An additional project totaling US$12 million is in final negotiations.
- More than $160 million has been channeled to local banks to lend to smaller businesses.
- IFC supported $120 million on trade flows through trade finance guarantees to Lebanese banks since the end of the conflict.
- Real sector: 2 equity investments concluded and one in appraisal over the last 18 months.
- IFC technical assistance program: 8 technical assistance activities underway or completed since end of the conflict. Examples include:
  - Assisting Societe Financiere du Liban to assess potential for establishing a private credit bureau.
  - Advising Kafalat to improve service, move into new markets, and expand capacity (second project with Kafalat).
  - Support to the Lebanon Transparency Association to champion stronger corporate governance.
  - Assistance to simplify the business registration process.
- FY09 and beyond emphasis:
  - Equity investments in retail and manufacturing sectors (regional growth-focused companies).
  - Select investments in the financial sector.
  - Continued technical assistance focused on long-term reforms, removal of obstacles for growth of MSMEs, and encouragement of public-private partnerships and privatizations.

### Financial Relations — Status as of September 29, 2008 (World Bank Group Operations)
- IBRD/IDA summary (In millions of U.S. dollars):
  - Total Disbursed (Active): 190.75
    - of which has been repaid: 30.20
  - Total Disbursed (Closed): 690.13
    - of which has been repaid: 524.17
  - Total Disbursed (Active + Closed): 880.88
    - of which has been repaid: 554.37
  - Total Undisbursed (Active): 70.08
  - Total Undisbursed (Closed): 0.00
  - Total Undisbursed (Active + Closed): 70.08
- Active projects listing includes project-specific amounts (selected entries shown in source):
  - P103885 Bekaa Emergency Water Supply Project — Approval FY 2007 — Amount: 15 — Undisbursed: 14.7
  - P074042 Ba'albeck Water and Wastewater — Approval FY 2002 — Amount: 43.5 — Undisbursed: 19.1
  - P050529 Cultural Heritage and Urban Dev. — Approval FY 2003 — Amount: 31.5 — Undisbursed: 16.4
  - P045174 Education Development Project — Approval FY 2000 — Amount: 56.6 — Grant: 12.00 — Undisbursed: 8.4
  - P104774 Emergency Power Reform Capacity Reinfor — Approval FY 2007 — Amount: 5 — Undisbursed: 3.3
  - P050544 First Municipal Infrastructure — Approval FY 2000 — Amount: 80 — Undisbursed: 8.2
  - P103875 Municipal Infrastructure — Approval FY 2007 — Amount: 30 — Undisbursed: 23.8
  - P034038 Urban Transport Dev. Project — Approval FY 2002 — Amount: 65 — Undisbursed: 18.0
  - P111849 Lebanon ESPISP 2 — Approval FY 2009 — Amount: 6

### IFC Portfolio Status (As of September 29, 2008)
- Statement of IFC’s Held and Disbursed Portfolio (In millions of U.S. dollars):
  - Debt: 187.7
  - Equity: 6.5
  - Quasi Equity: 15
  - Total: 209
- Top sectors and allocations:
  - Financial Markets (US$188 m)
  - Manufacturing & Services (US$35 m)
  - Health & Education (US$7.8 m)
- Top client noted: Fransabank (Finance & Insurance)
- Ranking in Doing Business Report: 99

### Statistical Issues and Data Shortcomings
- Data provision has serious shortcomings that significantly hamper surveillance; some gaps widened owing to effects of the 2006 conflict.
- Serious shortcomings in compilation of:
  - national accounts,
  - employment,
  - general government and rest of the nonfinancial public sector,
  - international reserves template,
  - balance of payments.
- GDDS participation: began January 2003; metadata and plans for improving real and fiscal statistics not updated per GDDS commitments.
- National accounts:
  - CAS lacks capacity to produce national accounts statistics in line with accepted international standards despite technical assistance (July 2005).
  - STA is assisting to produce national accounts estimates based on comprehensive data collection and the 2004 economic survey.
  - Lebanon does not report national accounts data for publication in the International Financial Statistics.
- Consumer Price Index (CPI):
  - Since May 2008, CAS compiles and disseminates a new monthly CPI following internationally accepted methodology.
  - CPI disseminated within three weeks after the end of the reference month.
  - Sub-indices according to twelve main categories of COICOP are also disseminated.
  - New weights based on Household Budget Survey 2004–05; geographical coverage expanded to all areas in Lebanon.
  - Lebanon does not report CPI data for publication in the International Financial Statistics.
- Fiscal statistics:
  - Published monthly central government budgetary accounts are not comprehensive; omit certain transfers and financing data, omit foreign-financed capital expenditure, and do not cover arrears.
  - No data on widespread quasi-fiscal activities by public corporations.
  - Certain treasury spending identified only ex-post with lagged economic classification; these items are provided to staff in surveillance context.
  - Cash-based annual government finance statistics limited to budgetary central government published in Government Finance Statistics Yearbook (GFSY).
  - Lebanon reports some annual fiscal data for publication in the International Financial Statistics with a lag of up to 4-years.
- Central bank and monetary statistics:
  - 2002 GDDS/multisector mission found limited institutional coverage for central bank and other depository corporations.
  - Questions emerged about central bank’s statistical treatment of repos; some Eurobond repo transactions in mid-2005 may not have been recorded until end-2006.
  - Lebanon reports monthly monetary and financial statistics for publication in the International Financial Statistics with a lag of three months.
- Financial Soundness Indicators (FSIs):
  - Lebanon participated in the Coordinated Compilation Exercise for FSIs (year-end 2005).
  - Data and metadata posted on IMF website; Lebanon produced a very comprehensive set of indicators.
- Balance of payments (BOP):
  - BOP statistics are weak: deficiencies in current account (unrecorded exports, underestimation of private sector services and workers’ remittances), capital account (grants), and financial account (equity investment in nonbank private sector, corporate borrowing abroad).
  - METAC technical assistance mission March 2008: coverage of FDI transactions remains limited; no progress on an FDI survey as recommended in 2005.
  - Main impediments: lack of interagency cooperation and staff constraints at BDL and CAS.
  - 2008 mission provided technical advice on insurance services, coverage and valuation adjustments on imports, split of grants in current and capital transfers, and derivation of transactions from stocks.
  - Estimation procedure for workers’ remittances was assessed; proposals made to improve estimates.
  - Source data improved with implementation in 2003 of International Transactions Reporting Systems (ITRS).
  - Significant revisions in financial account data and large flows in investment income-portfolio investment data (debit) for 2003.
  - Trade credits data not compiled.
  - Official reserve assets compiled on a gross basis consistent with international guidelines.
  - Authorities made progress in periodicity of BOP data and in disseminating detailed sources and methods via BDL’s Annual External Sector Reports.
  - Lebanon reports quarterly BOP statistics for publication in the International Financial Statistics with a lag of up to 1-year.

### Common Indicators Required for Surveillance (As of October 3, 2008) — Selected entries
- Exchange Rates: Date of latest observation 06/2008; Date received 8/1/2008; 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 06/2008; Date received 08/2008; Frequency of Data: M; Frequency of Reporting: M; Frequency of publication: M.
- Reserve/Base Money: Date of latest observation 05/2008; Date received 7/24/2008; Frequency: M / M / M.
- Broad Money: Date of latest observation 05/2008; Date received 7/24/2008; Frequency: M / M / M.
- Consumer Price Index: Date of latest observation 07/2005; Date received 09/2005; Frequency: M; Frequency of Reporting: At the time of mission or on request; Frequency of publication: M.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 07/2005; Date received 09/2005; Frequency: M / M / M.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 08/2005; Date received 09/2005; Frequency: M / M / M.
- External Current Account Balance: Date of latest observation Q4/2007; Date received 06/2008; Frequency of Data: Q; Frequency of Reporting: A; Frequency of publication: unpublished.
- GDP/GNP: Latest observation 2004; (est) 05/2005; Frequency: A.
- Gross External Debt: Date of latest observation 06/2005; Date received 09/2005; Frequency: M / M / M.
- Lebanon reports various series to the IMF with differing lags and periodicities as summarized above.

### IMF Press Release — EPCA Approval (November 19, 2008)
- IMF Executive Board approved SDR 25.375 million (about US$ 37.6 million) in Emergency Post-Conflict Assistance (EPCA) to Lebanon in support of the authorities' economic program for 2008–09.
- This amount adds to SDR 50.75 million (about US$ 76.7 million) in EPCA provided in April 2007.
- EPCA support aims to:
  - further reduce the government debt-to-GDP ratio;
  - build up the international reserve buffer;
  - start implementation of key reforms.
- Mr. Murilo Portugal (Deputy Managing Director and Acting Chair) noted:
  - Successful completion of 2007 economic program supported by an EPCA.
  - Progress toward improving public finances and keeping debt-to-GDP ratio on a downward path.
  - External position improved with steady increase in international reserves under the fixed exchange rate regime.
  - Government able to finance domestic and foreign currency needs largely from the market.
  - Impact of the global financial crisis on Lebanon limited so far due to shielding of domestic financial sector, prudent regulation and effective supervision, reflected by sustained deposit growth and dedollarization of deposits.
  - Residual vulnerabilities include very high public indebtedness and large external financing needs.
  - Drawing under a follow-up EPCA intended to support policies through June 2009 aimed at:
    - making continued progress on fiscal consolidation by further improving the primary surplus;
    - strengthening further the international reserve buffer;
    - initiating privatization of the telecom sector and a broader reform of the energy sector, consistent with the authorities’ medium-term reform agenda presented at the Paris III conference in January 2007.
  - Timely disbursement of Paris III pledges is instrumental to these objectives.

*Annex II. Lebanon: Relations with the World Bank Group — source document content.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08363.pdf_