## IMF Country Report _cr09131 — Executive Summary and Key Findings

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### Impact of the crisis and 2008 outcomes
- Despite large vulnerabilities, Lebanon maintained financial stability, raised international reserves, and reduced public debt in 2008.
- Key 2008 outcomes:
  - Real GDP growth: more than 8 percent in 2008.
  - Primary fiscal balance (excluding grants): 0.5 percent of GDP in 2008.
  - Public debt: decreased from 168 to 162 percent of GDP in the course of 2008.
- Market signals:
  - Eurobond and Credit Default Swap spreads are now lower than the emerging market average.
- Short-term 2009 outlook:
  - GDP growth likely to slow to 3 percent in 2009 (from over 8 percent in 2008).
  - Deposit growth expected to decline to 10 percent in 2009 (from 15 percent in 2008).
  - Inflation remaining low in line with international price trends.
  - Lower oil prices reducing the current account deficit, but capital account weakening due to lower investment flows.

### Authorities’ risk assessment and intended policy responses
- Key 2009 risks identified:
  - Larger-than-expected impact of the global recession and slowdown in the Gulf.
  - More difficult-than-anticipated government financing.
  - Political and security shocks, particularly in coincidence with the June elections.
- Authorities’ intended measures:
  - Further accumulate reserves and maintain a sufficiently high interest rate differential between domestic currency and foreign currency rates.
  - Maintain the debt-to-GDP ratio constant to meet 2009 financing needs from the market while addressing potential social needs.
  - Step up banking-sector vigilance against weaker deposit growth or worsening loan quality.
- Medium-term anchor:
  - Paris III agenda focusing on fiscal consolidation (notably increase in VAT rate), reduction in EdL losses, and telecom privatization (postponed near term).

### Staff appraisal and key policy recommendations
- Staff view:
  - Agrees with authorities’ risk assessment and advises preparation of contingency plans.
  - Monetary and exchange rate policy considered broadly appropriate.
  - Given downside risks, staff recommended a tighter fiscal stance in 2009 to keep financing requirements unchanged and ensure continued debt reduction.
  - Restarting the medium-term Paris III agenda should be a priority after the elections.

### Monetary, exchange rate, and BdL actions
- Banque du Liban (BdL) actions:
  - Continued rapid accumulation of international reserves; gross international reserves exceeded the end-December target by $1.8 billion (around 10 percent of reserves).
  - Allowed a growing deposit interest rate differential in favor of the local currency to attract deposit inflows and promote de-dollarization.
  - The peg has faced no pressures so far.
- BdL balance-sheet and policy guidance:
  - Staff suggests BdL consider using its large T-bill portfolio as the main sterilization tool to lower sterilization costs and support fiscal discipline.
  - Given risks, limited scope for lowering interest rates in the near term; caution should last at least until the elections.

### Fiscal policy, Paris III pledges, and reforms
- Fiscal performance and measures:
  - Fiscal policy in 2008 capitalized on the growth dividend; revenues increased following reintroduction of gasoline excises (authorities fixed the excise level at LL470 and uncapped the price of gasoline in January 2009).
  - Primary fiscal balance (excluding grants) and other fiscal targets under EPCA were met at end-December 2008.
- Paris III pledges and disbursements:
  - Timely and flexible disbursement of Paris III pledges is critical for debt reduction; disbursements have fallen short of expectations.
  - Staff supports authorities’ request that donors provide as much budgetary support as possible.
- Structural fiscal reforms and projected yields (2010–14):
  - With full implementation, primary surpluses (excluding grants) could reach over 5 percent of GDP over the medium term.
  - Change in primary balance (excluding grants) reported in source table as: 2.9-0.41.31.60.15.5 (figures presented as in source).
  - Specific measures referenced: increase in VAT rate (from 10 to 15 percent), introduction of the global income tax, increase in gasoline excises to pre-capping level, taxation of seashore properties (penalties), cuts in non-essential spending, reduction in EdL losses.

### Debt dynamics and scenario projections
- Baseline projection:
  - Government debt could decline to around 136 percent of GDP by 2014 under the baseline (full implementation of Paris III reform measures).
- Shock scenarios (labels and figure elements as in source):
  - Real interest rate shock: Permanent increase in the real interest rate of 220 basis points; panel label shows Baseline136 and Shock157.
  - Growth shock: Permanent decrease in real GDP growth of 1.6 percentage points; panel label shows Hist.137 and Growth shock average 158.
  - Limited implementation of fiscal reforms: Halving of fiscal reform yields; primary surplus converges to about 3.0 percent of GDP in 2014 (baseline: 5.8 percent).
  - No fiscal consolidation: scenario label shows No fiscal consolidation 190 and Baseline136.
  - Panel box values presented in source:
    - Panel 4 (Primary Balance Shock): Baseline:5.8, Shock:8.0, Historical:8.0.
    - Panel 2 (Real Interest Rate Shock): Baseline:3.7, Shock:2.1, Historical:0.6.
    - Panel 3 (Growth Shock): Baseline:4.0, Shock:2.4, Historical:4.0.
- Key interpretation:
  - Even with ambitious implementation, vulnerabilities persist and debt remains high; higher interest rates, lower growth, or delays could renew increases in the debt-to-GDP ratio.

### Banking sector scale, soundness, and vulnerabilities
- Scale and funding:
  - Commercial bank assets amount to 324 percent of GDP (assets exceed three times nominal GDP).
  - Around 90 percent of banks’ non-equity funding comes from deposits.
- Liquidity and asset quality:
  - Banks maintain large liquidity buffers: 50 percent ratio of liquid assets to short-term liabilities (including deposits).
  - Non-performing loans were 3.1 percent at end-2008.
  - Stress tests by the Banking Control Commission show banks could absorb a hypothetical increase in non-performing loans by 50 percent (to levels experienced after the 2006 war).
- Concentration and exposures:
  - Sovereign exposure accounts for 55 percent of bank assets.
  - Banks face maturity mismatch from funding lending with short-term deposits and indirect currency exposure from foreign exchange lending to unhedged clients.
- Market context:
  - Fall in the stock market (at end-February; lost 26 percent year-on-year) and end of the housing boom, combined with projected slowdown, could increase non-performing loans including from regional operations.
  - High exposure to the sovereign and regional opportunities have supported bank profitability and limited risky market exposures.

### Remittances and external flows
- 2008 remittance flows:
  - Gross remittances inflows: an estimated 20 percent of GDP in 2008.
  - Remittances outflows: estimated at 8 percent of GDP in 2008.
  - Net remittances inflows: 12 percent of GDP in 2008.
- Projected 2009 remittance slowdown:
  - Projected fall in gross remittances inflows of up to 12 percent (2.4 percent of GDP) in 2009.
  - Projected fall in net remittances inflows of up to 25 percent (3 percent of GDP) in 2009.
  - Some 54 percent of remittances to Lebanon originate in the Gulf Cooperation Council (GCC) and another 16 percent in Australia, the US, and Canada.

### Lebanon–GCC linkages (Box 4 highlights)
- Economic linkages:
  - Remittances from Lebanese living in the GCC amount to around half of total gross remittances to Lebanon.
  - Up to 400,000 Lebanese are living in the Gulf (anecdotal evidence and migration data).
  - GCC countries accounted for 24 percent of Lebanese exports in 2007.
  - In 2008, tourists from the GCC bought 48 percent of total hotel nights (excluding Lebanese nationals).
  - Direct investment flows from the GCC accounted for around 60 percent of total FDI to Lebanon over 2002–07, more than half in real estate.
  - Gulf investors are thought to hold a large number of high-value deposits at Lebanese banks.
- Transmission channels:
  - Remittances, FDI, tourism spending, and nonresident deposits linked to the GCC can transmit GCC economic conditions to Lebanon; concentration in real estate and high-value deposits amplify exposure.

### Selected macroeconomic and fiscal aggregates (selected series and levels from source)
- Real GDP (market price, selected series): 0.6; 7.5; 8.5; 3.0; 4.0; 4.0; 4.5; 4.5; 4.5
- Consumer prices (end-of-period, selected series): 7.2; 6.0; 6.4; 3.9; 2.9; 2.6; 2.6; 2.1; 2.2
- Current account including official transfers (percent of GDP, selected series): -5.6; -7.1; -11.4; -10.5; -10.0; -10.0; -9.6; -8.9; -7.9
- Nominal GDP (in billions of U.S. dollars, selected series): 22.4; 25.0; 28.9; 31.3; 33.2; 35.6; 37.9; 40.4; 43.1
- Primary balance (excluding grants, percent of GDP, selected series): -0.4; 0.3; 0.7; 0.0; 3.0; 2.6; 3.8; 5.4; 5.5
- Total government debt (percent of GDP, selected series): 180; 168; 162; 162; 146; 144; 144; 141; 136
- Gross international reserves (excluding gold, in millions of U.S. dollars, selected series): 11,353; 11,496; 18,769; 20,865; 24,312; 25,391; 27,148; 29,322; 32,376

### Program monitoring, monitorable actions, and EPCA performance
- EPCA performance:
  - End-December 2008 quantitative indicative targets met; gross international reserves exceeded target by $1.8 billion (around 10 percent of reserves).
- Selected monitorable actions (Dec 2008–Jun 2009):
  - Submit Global Income Tax draft law — Target: End-March 2009.
  - Establish a Treasury Single Account — Target: End-June 2009.
  - BdL: Establish an investment committee and formal guidelines for foreign reserve management — Target: End-December 2008; Implementation: Done on January 28, 2009.
  - Power sector: Revise electricity tariff structure — Target: End-December 2008; Implementation: Not met.
  - Privatization: Issue Request for Application for MIC1 and MIC2 — Target: End-March 2009; Implementation: Privatization postponed due to unfavorable international capital markets.
- Quantitative indicative targets (selected, end-of-period, in millions of U.S. dollars as presented): Gross reserves of the Banque du Liban (stocks): 24,718; 24,509; 26,793; 24,867; 25,436; 27,818; 29,049.

### External financing capacity, Fund relations, and Annex I highlights
- Fund relations and obligations:
  - Quota: 203.00 (SDR million).
  - Post-Conflict Emergency Assistance outstanding: 76.13 (SDR million).
  - Projected Fund charges/obligations (selected): 2009 Charges/Interest: 0.91 (SDR million); 2010 Principal: 12.69, Charges/Interest: 1.17, Total: 13.86 (SDR million).
- Safeguards assessment:
  - Full safeguards assessment of BdL completed on March 10, 2008 in conjunction with first EPCA; recommendations issued and follow-up steps outlined; update safeguards assessment under way in second EPCA context.
- Exchange arrangement:
  - Lebanese pound is a conventional peg; BdL intervened since October 1999 to keep the pound around LL 1,507.5 per $1 with a bid-ask spread of LL+/-6.5.

### Technical assistance, AML/CFT, statistics, and TA priorities
- Fund TA readiness and priority areas:
  - Public financial management, tax administration, banking regulation/supervision, AML/CFT, central bank reforms, and statistics.
  - Authorities expressed interest in a possible FSAP update in 2009.
- AML/CFT and statistics:
  - Authorities improving AML legislation to cover CFT and increasing powers of Lebanon’s Special Investigative Commission; Lebanon undergoing AML/CFT assessment by MENAFATF.
  - Statistical improvements: national accounts published to 2007; improved CPI index launched in 2008 with Fund TA.
  - Remaining gaps: balance of payments, employment, wage and social indicators require high-level commitment to address.

### Staff appraisal — achievements, risks, and priorities (summary)
- Achievements:
  - Resilience during global crisis reflects macroeconomic discipline under EPCA and strict financial oversight; international reserves at record highs; banking sector not under stress.
- Risks and priorities:
  - Deepening global recession, dysfunctional international credit markets, domestic political uncertainty, and regional instability.
  - Priorities: reduce untargeted energy subsidies and EdL inefficiencies; proceed with telecom privatization when market conditions allow; gradually increase VAT to 15 percent.
  - Even with full implementation, vulnerabilities decline only gradually and significant risks persist for many years.

_Italic: Source: IMF staff report, excerpts from cr09131 (Prepared by Middle East and Central Asia Department, March 31, 2009)._

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

### Executive Summary

### Impact of the crisis
- Despite large vulnerabilities, Lebanon has so far weathered the global financial crisis, maintained financial stability, raised international reserves, and reduced public debt in 2008.
- Eurobond and Credit Default Swap spreads are now lower than the emerging market average.
- The Fund’s engagement through the EPCA (which was broadly on track at end-December) has contributed to this performance.
- Key 2008 outcomes:
  - Real GDP growth: more than 8 percent in 2008.
  - Primary fiscal balance (excluding grants): 0.5 percent of GDP in 2008.
  - Public debt: decreased from 168 to 162 percent of GDP in the course of 2008.
- The global downturn, particularly in the Gulf, is expected to affect Lebanon in 2009 with:
  - GDP growth likely to slow to 3 percent in 2009 (from over 8 percent in 2008).
  - Deposit growth expected to decline to 10 percent in 2009 (from 15 percent in 2008).
  - Inflation remaining low in line with international price trends.
  - Lower oil prices reducing the current account deficit, but capital account weakening due to lower investment flows.

### Policy discussions and authorities’ intended responses
- Key risks for 2009 identified by the authorities:
  - A larger-than-expected impact of the global recession and slowdown in the Gulf.
  - More difficult-than-anticipated government financing.
  - Political and security shocks, particularly in coincidence with the June elections.
- Authorities’ intended measures:
  - Further accumulate reserves to preserve confidence through a sufficiently high interest rate differential between domestic currency and foreign currency rates.
  - Maintain the debt-to-GDP ratio constant to protect fiscal achievements and allow the 2009 financing needs to be met from the market, while addressing potential social needs arising from the effects of the global recession.
  - Step up vigilance over the banking sector owing to risks from a stronger-than-expected fall in deposit growth or worsening loan quality.
- Medium-term anchor and reforms:
  - Paris III agenda remains the anchor for medium-term plans focusing on continued fiscal consolidation mainly through revenue measures, such as an increase in VAT rate, and the reduction in the large losses at Electricité du Liban (EdL).
  - Telecom privatization is expected to boost private sector activity and further reduce the debt (though it was postponed in the near term).

### Staff appraisal and policy recommendations
- Staff agrees with authorities’ view of the risks in 2009, particularly their possible combined effects, and recommends preparation of contingency plans.
- Monetary and exchange rate policy is broadly appropriate.
- Given downside risks, staff recommended a tighter fiscal stance in 2009 to keep unchanged financing requirements and ensure continued debt reduction.
- Restarting the medium-term Paris III agenda should be a priority after the elections.

### Navigating the crisis — monetary, fiscal, and financial sector policies
- Monetary and exchange rate policy:
  - The Banque du Liban (BdL) has continued to accumulate international reserves at a swift pace and allowed a growing deposit interest rate differential in favor of the local currency to attract deposit inflows and promote de-dollarization.
  - Gross international reserves of the BdL exceeded the end-December target by $1.8 billion (around 10 percent of reserves).
  - The peg has faced no pressures so far.
- Fiscal policy and public finances:
  - Fiscal policy in 2008 capitalized on the growth dividend; revenues increased following the unprogrammed reintroduction of gasoline excises (in January 2009 the authorities fixed the excise level at fixed at LL470 and uncapped the price of gasoline).
  - The primary fiscal balance (excluding grants) and other fiscal targets under EPCA were met at end-December 2008, though there were slippages in some structural policies (notably delayed actions on electricity tariffs and telecom privatization).
- Banking sector vigilance:
  - Banks have so far been little affected by the global financial crisis but face structural vulnerabilities that warrant careful monitoring.

### Banking sector and vulnerability highlights
- Banking sector scale and funding:
  - Commercial bank assets exceed three times nominal GDP.
  - Commercial bank assets amount to 324 percent of GDP.
  - Around 90 percent of banks’ non-equity funding comes from deposits.
- Liquidity and asset quality:
  - Banks maintain large liquidity buffers, with a 50 percent ratio of liquid assets to short-term liabilities (including deposits).
  - Non-performing loans were 3.1 percent at end-2008.
  - Stress tests by the Banking Control Commission (BCC) show banks could absorb a hypothetical increase in non-performing loans by 50 percent (to levels experienced after the 2006 war with Israel).
- Concentration and exposures:
  - Sovereign exposure accounts for 55 percent of bank assets.
  - Banks face maturity mismatch from funding lending with short-term deposits and indirect currency exposure from foreign exchange lending to unhedged clients.
- Market and profitability context:
  - Fall in the stock market (at end-February; lost 26 percent year-on-year) and end of the housing boom, combined with the projected economic slowdown, could increase non-performing loans including from regional operations.
  - High exposure to the sovereign and new growth opportunities in the region have supported bank profitability and limited risky market exposures.

### Remittances and external flows
- Remittances:
  - Gross remittances inflows were an estimated 20 percent of GDP in 2008.
  - Remittances outflows were estimated at 8 percent of GDP in 2008.
  - Net remittances inflows amounted to 12 percent of GDP in 2008.
- Projected remittance slowdown in 2009 due to weaker GCC and other advanced-country growth:
  - Projected fall in gross remittances inflows of up to 12 percent (2.4 percent of GDP) in 2009.
  - Projected fall in net remittances inflows of up to 25 percent (3 percent of GDP) in 2009.
  - Some 54 percent of remittances to Lebanon originate in the Gulf Cooperation Council (GCC) and another 16 percent in Australia, the US, and Canada.

### Implementation under EPCA and structural actions
- EPCA performance and monitorable actions:
  - End-December 2008 quantitative indicative targets met; gross international reserves exceeded target by $1.8 billion (around 10 percent of reserves).
  - Some structural monitorable actions slipped: electricity tariff adjustment not observed due to lower oil prices (electricity subsidies remain significant); telecom privatization postponed; draft Global Income Tax bill submission to Council of Ministers targeted by end-March with likely minor delay to Parliament submission.
  - The BdL established an investment committee and prepared formal guidelines for foreign reserve management (end-December monitorable action).
- Medium-term reform priorities:
  - Sustain debt reduction and structural reform under Paris III once the political calendar allows (post-elections).

*Source: IMF staff report, Executive Summary (cr09131).*

### Box 4. Lebanon and the GCC

### Box 4. Lebanon and the GCC

### Economic linkages
- Remittances from Lebanese living in the GCC amount to around half of total gross remittances to Lebanon.
- Anecdotal evidence and data on past migration flows suggest that up to 400,000 Lebanese are living in the Gulf, in large part well-educated professionals.
- The GCC countries are Lebanese exports’ largest market, with a share of 24 percent in 2007.
- In 2008, tourists from the GCC bought 48 percent of total hotel nights (excluding Lebanese nationals).
- GCC nationals also spend proportionately more than tourists from other countries.
- Direct investment flows from the GCC have accounted for around 60 percent of total FDI to Lebanon over the period 2002–07, more than half of which has been in real estate.
- Lebanon receives around one-third of all GCC investments to MENA countries.
- Gulf investors are thought to hold a large number of the high-value deposits at Lebanese banks.

### Trade and financial exposure (summary points)
- Exports to the GCC represented 24 percent of Lebanese exports in 2007.
- Remittances, FDI, tourism spending, and nonresident deposits linked to the GCC constitute major external links that can transmit GCC economic conditions to Lebanon.
- The concentration of FDI to real estate and the importance of high-value Gulf-held deposits amplify Lebanon’s exposure to GCC financial and economic cycles.

_Italic: Source: Box 4, _cr09131 - Box 4. Lebanon and the GCC_ (IMF country report content provided)._

### 20.      Timely and flexible disbursement of Paris III pledges is another important

### _cr09131 - 20. Timely and flexible disbursement of Paris III pledges is another important

### Paris III pledges and donor disbursements
- Timely and flexible disbursement of Paris III pledges is a key component of the debt reduction strategy.
- Disbursements have fallen short of expectations partly because of political and security conditions and longer-than-expected negotiations.
- Given the relatively insufficient share of budget support in the total, disbursements have not been fully aligned with the goal of debt reduction.
- Staff supports the authorities’ request that donors provide as much budgetary support as possible.
- Table (excerpted presentation in source) shows pledge and receipt aggregates (in millions of U.S. dollars), including lines labeled:
  - EPCA Prog. Total7,5655,0182,327933172206851,639
  - Multilateral3,9782,21383516110720320500
  - Bilateral3,5872,8051,4927736503661,138
  - Memorandum item: Other grants and loans 2/.........4289370268766
  - 2007–09 Total Pledges; Jan 2007–Sep 2008 Received; Of Which: New Grants and Loans to Government Received; 2009 Proj.Total Of Which: Budget Support Oct–Dec 2008 Total Pledges 1/
  - Sources: Lebanese authorities, and Fund staff estimates.

### Fiscal reforms, projected yields, and fiscal stance
- Several structural fiscal reforms are under preparation:
  - Parliament approved the tax procedure code at end 2008 (several associated regulations pending).
  - A cash management unit was legally created by end 2008 and is implementing a pilot on monthly payment forecasts with three line ministries.
  - The draft Global Income Tax bill should be submitted to the Council of Ministers and Parliament in the coming months.
  - Early stages of restructuring the tax administration; Treasury Single Account legislation under examination in parliament.
- Projected yield from authorities' fiscal measures, 2010–14 (in percent of GDP) — summary statements from source:
  - With full implementation, primary surpluses (excluding grants) could reach over 5 percent of GDP over the medium term.
  - Change in primary balance (excluding grants) reported as 2.9-0.41.31.60.15.5 in the source table (figures as presented).
  - Specific measures referenced include: increase in VAT rate (from 10 to 15 percent), introduction of the global income tax, increase in gasoline excises to their pre-capping level, taxation of seashore properties (penalties), cuts in non-essential spending, reduction in EdL losses, and others, with technical and implementation risk annotations.
- Fiscal stance recommendations:
  - A primary surplus of close to 2 percent of GDP in 2009 is desirable to preserve debt reduction trends and maintain overall financing requirements.
  - Staff recommends that any revenue over-performance be saved and any shortfall in capital spending be preserved.
  - Targeted redirection of expenditures is advised to meet social objectives more efficiently than generalized wage increases.

### Debt dynamics and shock scenarios (debt sustainability)
- Baseline and scenario projections:
  - Baseline (full implementation of Paris III reform measures): government debt could decline to around 136 percent of GDP by 2014.
  - Panel 2: Permanent increase in the real interest rate of 220 basis points (i.e., one-half standard deviation from its past distribution) relative to the baseline.
  - Panel 3: Permanent decrease in real GDP growth of 1.6 percentage points (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 2010–14; primary surplus would converge to about 3.0 percent of GDP in 2014 (baseline: 5.8 percent).
  - Panel 5: Failure to implement a fiscal consolidation process keeping a nil primary balance in 2009 and in the medium term; medium-term growth assumed one percentage point lower than in the baseline.
  - Panel 6: No privatization — scenarios with and without privatization converge to the same debt ratio in the long run under assumptions that abstract from adverse dynamic impacts.
- Scenario highlights and numeric labels from figures (as presented in source):
  - Baseline: 136 (public debt in percent of GDP by 2014).
  - Growth shock: panel label shows Hist.137 and Growth shock average 158 (figure elements as in source).
  - i-rate shock: panel label shows Baseline136 and Shock157 (figure elements as in source).
  - Panel 4 (Primary Balance Shock) notes: Baseline:5.8, Shock:8.0, Historical:8.0 (presented box values).
  - Panel 2 (Real Interest Rate Shock) notes: Baseline:3.7, Shock:2.1, Historical:0.6 (presented box values).
  - Panel 3 (Growth Shock) notes: Baseline:4.0, Shock:2.4, Historical:4.0 (presented box values).
  - Panel 5 (No Fiscal Consolidation) shows No fiscal consolidation 190 and Baseline136 (chart labels as in source).
- Key interpretation:
  - Even with ambitious implementation, vulnerabilities persist and debt remains high; higher interest rates, lower growth, or delays in implementation could renew increases in the debt-to-GDP ratio.

### Banking sector, BdL balance sheet, monetary policy, and contingency planning
- Banking sector:
  - Lebanese banking system has been insulated from global deleveraging due to specific funding and asset structures and effective supervision.
  - Continued vigilance is needed: the slowdown in Lebanon and the region could raise non-performing loans despite sizeable provisioning and capitalization.
  - Authorities’ focus on bank resolution framework and implementation of the merger law is welcome.
- BdL (Banque du Liban) balance sheet and interest rate environment:
  - Authorities recognize the need to strengthen the BdL’s balance sheet over the medium term.
  - Planned fiscal consolidation, together with de-dollarization, will allow a lowering of interest rates and help strengthen the BdL’s balance sheet.
  - Privatization of central bank–held assets once market conditions permit will help the BdL’s financial balance and the government’s growth agenda.
  - Staff believes BdL should consider shifting from issuing higher-yielding securities toward using its large T-bill portfolio as the main tool for sterilizing excess liquidity to lower sterilization costs and support fiscal discipline.
  - Given risks, there is not much scope for lowering interest rates in the near term; caution should last at least until the elections to attract deposit inflows, foster de-dollarization, and buttress international reserves.
- Contingency planning for government financing:
  - International capital market seizure and wider fiscal deficit increase the burden on domestic banks for government financing amid slowing deposit growth.
  - Staff agrees that under prudent assumptions banks should be able to provide sufficient financing even absent international investor funding, but contingency planning remains essential.
  - Appropriate responses could include a combination of fiscal adjustment, a lower pace of reserve accumulation, higher interest rates, and possibly additional use of Fund resources.

### Other issues: AML/CFT, statistics, TA needs
- Technical assistance and TA priorities:
  - Fund stands ready to provide assistance in public financial management, tax administration, banking regulation/supervision, Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT), central bank reforms, and statistical issues.
  - Authorities expressed interest in a possible FSAP update in the course of 2009.
- AML/CFT framework:
  - Authorities are improving existing AML legislation to cover CFT, increasing powers of Lebanon’s Special Investigative Commission, and stiffening penalties for AML breaches.
  - Lebanon is currently undergoing an AML/CFT assessment by MENAFATF.
- Statistical improvements and remaining gaps:
  - With support from INSEE, quality of GDP data and timeliness improved; national accounts published to 2007.
  - In 2008 an improved CPI index was launched with Fund TA.
  - Significant deficiencies remain in balance of payments, employment, wage and social indicators.
  - High-level commitment by the next government and by the BdL is needed for a comprehensive strategy to strengthen statistics.

### Staff appraisal — achievements, risks, and priorities
- Achievements:
  - Resilience of the Lebanese economy during the global crisis reflects benefits of macroeconomic policy discipline under the EPCA and strict financial sector oversight.
  - International reserves hit a record high; the banking sector has not come under stress; Lebanese Eurobonds have outperformed the emerging market average; no clear slowdown in economic activity so far.
- EPCA:
  - The quarterly monitoring framework under EPCA has been effective; authorities met all quantitative targets with substantial margins.
  - Slippages in the structural reform agenda reflect domestic and international environment; swift implementation after elections is necessary to reduce vulnerabilities.
- Main challenges and risks:
  - Deepening global recession, dysfunctional international credit markets, domestic political uncertainty, and regional instability are main risks.
  - Monetary and fiscal prudence, vigilant financial supervision, and proactive contingency planning are essential.
- Paris III top priorities highlighted by staff:
  - Reduce untargeted energy subsidies and address EdL inefficiencies.
  - Proceed with planned privatization of mobile phone providers when market conditions allow.
  - Gradually increase the VAT rate to 15 percent to bring primary surpluses toward levels approaching medium-term debt sustainability.
  - Even with full implementation, vulnerabilities decline only gradually and significant risks persist for many years.

*Source: IMF staff report (excerpts from _cr09131).*

### 38.      It is proposed that the next Article IV consultation be held on the standard 12-month

### _cr09131 - 38.      It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Consultation scheduling
- It is proposed that the next Article IV consultation be held on the standard 12-month cycle.

### Macroeconomic outlook and key aggregates (selected indicators, 2006–14)
- Real GDP (market price): 0.6; 7.5; 8.5; 3.0; 4.0; 4.0; 4.5; 4.5; 4.5
- GDP deflator: 2.0; 3.8; 6.5; 5.0; 2.0; 3.0; 1.9; 2.1; 2.2
- Consumer prices (end-of-period): 7.2; 6.0; 6.4; 3.9; 2.9; 2.6; 2.6; 2.1; 2.2
- Consumer prices (period average): 5.6; 4.1; 10.8; 3.6; 2.1; 3.2; 2.0; 2.2; 2.2
- Gross capital formation: 22.7; 27.4; 21.4; 21.1; 23.5; 20.5; 22.5; 32.1; 29.8
- Gross national savings: 17.1; 20.3; 10.1; 10.5; 13.5; 10.4; 12.9; 23.2; 21.9
- Current account including official transfers (percent of GDP): -5.6; -7.1; -11.4; -10.5; -10.0; -10.0; -9.6; -8.9; -7.9
- Nominal GDP (in billions of U.S. dollars): 22.4; 25.0; 28.9; 31.3; 33.2; 35.6; 37.9; 40.4; 43.1

### Public finances and fiscal projections (central government; selected nominal and percent-of-GDP figures)
- Revenue (including grants, percent of GDP): 25.1; 24.4; 24.8; 25.2; 24.4; 23.4; 23.8; 25.3; 25.3
- Grants (percent of GDP): 2.9 1.4 0.9 0.4 0.4 0.2 0.2 0.3 0.3 (presented as contiguous digits in source)
- Expenditure (percent of GDP): 35.5; 35.3; 34.6; 37.5; 34.2; 34.0; 32.5; 31.4; 29.3
- Budget balance (including grants, percent of GDP): -10.4; -10.9; -9.9; -12.3; -9.8; -10.7; -8.7; -6.1; -4.0
- Primary balance (including grants, percent of GDP): 2.6; 1.7; 1.6; 0.5; 3.3; 2.8; 4.1; 5.7; 5.8
- Primary balance (excluding grants, percent of GDP): -0.4; 0.3; 0.7; 0.0; 3.0; 2.6; 3.8; 5.4; 5.5
- Total government debt (percent of GDP): 180; 168; 162; 162; 146; 144; 144; 141; 136
- Total government debt (in billions of Lebanese pounds, memorandum): 60,851; 63,364; 70,874; 76,365; 73,132; 77,256; 82,267; 86,009; 88,683
- Interest payments (in billions of Lebanese pounds): 4,381; 4,732; 4,979; 6,003; 6,565; 7,233; 7,284; 7,140; 6,368

### Revenue composition (central government, selected levels in billions of LL and percent of GDP)
- Revenue and grants (in billions of LL): 8,486; 9,221; 10,799; 11,912; 12,217; 12,521; 13,588; 15,434; 16,443
- Revenue (in billions of LL): 7,490; 8,696; 10,412; 11,711; 12,019; 12,401; 13,452; 15,277; 16,261
- Tax revenue (in billions of LL): 4,922; 5,581; 7,241; 8,239; 9,215; 10,209; 11,113; 12,780; 13,591
- VAT revenues (in billions of LL): 1,659; 2,003; 2,584; 2,758; 3,304; 3,517; 3,728; 4,917; 5,242

### Debt structure and holders (2006–14, selected)
- Net debt (in millions of U.S. dollars): 39,278; 40,606; 43,576; 47,417; 45,239; 47,942; 51,232; 53,681; 55,422
- Gross debt by holder (in millions of U.S. dollars): 40,365; 42,033; 47,014; 50,656; 48,512; 51,248; 54,572; 57,054; 58,828
- Banking system holding of debt (in millions of U.S. dollars): 29,405; 28,942; 33,093; 37,269; 34,762; 37,071; 39,893; 42,102; 43,967
- Treasury bills held by banking system (in millions of U.S. dollars): 16,963; 16,870; 21,652; 23,630; 23,729; 26,759; 29,728; 32,786; 34,700
- Eurobonds (market and BdL holdings, selected): Eurobonds (total held by market/nonbanks and BdL components presented in tables)

### Monetary sector and liquidity (selected)
- Broad money (annual percent change): 6.4; 10.9; 15.5; 10.0; 10.0; 9.0; 9.0; 9.0; 9.0
- Broad money (M5 levels, in billions of Lebanese pounds): 62,606; 69,423; 80,174; 88,191
- Net foreign assets (Banque du Liban, in millions of U.S. dollars): 23,047; 25,538; 36,927; 40,860
- Gross international reserves (excluding gold, in millions of U.S. dollars): 11,353; 11,496; 18,769; 20,865; 24,312; 25,391; 27,148; 29,322; 32,376
- Gross reserves in percent of short-term external debt: 32; 30; 40; 44; 47; 44; 42; 42; 44
- Broad money velocity (level): 0.4; 0.4; 0.4; 0.4; 0.3; 0.3; 0.3; 0.3; 0.3

### External sector and financing (selected, 2006–14)
- Current account (excl. official transfers, in millions of U.S. dollars): -1,538; -1,979; -3,421; -3,360; -3,422; -3,583; -3,647; -3,621; -3,438
- Exports, f.o.b. (in millions of U.S. dollars): 3,207; 4,077; 5,149; 5,406; 5,893; 6,482; 7,195; 8,023; 8,985
- Imports, f.o.b. (in millions of U.S. dollars): -9,345; -11,926; -16,315; -15,483; -16,474; -17,529; -18,738; -20,293; -21,978
- Capital and financial account (in millions of U.S. dollars): 1,926; 495; 6,997; 4,621; 6,580; 4,422; 5,280; 5,652; 6,349
- External debt (year-end; percent of GDP): 198.9; 194.1; 190.8; 182.1; 181.4; 185.9; 194.2; 194.2; 194.1

### Banking sector soundness (selected indicators, 2006–08)
- Assets (in millions of U.S. dollars): 78,855; 88,853; 101,862
- Capital adequacy ratio: 25.0; 12.5; 11.8
- Net problem loans/net total loans: 6.8; 4.7; 3.1
- Provisions against problem loans/problem loans: 54.4; 56.9; 61.0
- Net liquid assets/total assets: 42.9; 40.3; 42.2
- FC deposits/total deposits (percent): 75.9; 77.0; 69.2
- FC loans/total loans (percent): 87.1; 87.5; 87.6
- Average return on assets (post tax): 0.9; 1.0; 1.1
- Average return on equity (post tax): 10.1; 12.2; 14.0

### Public sector debt sustainability framework (2006–14, baseline)
- Baseline public sector debt (percent of GDP): 179.9; 162.5; 161.9; 146.1; 144.1; 144.1; 141.2; 136.4
- Change in public sector debt (percent of GDP): 4.2; -1.0; 2.1; -5.4; -0.6; -15.8; -2.0; 0.0; -2.9; -4.8
- Identified debt-creating flows (percent of GDP): 6.9; -14.3; -12.6; 0.0; -15.9; -2.1; 0.0; -3.0; -5.9
- Primary deficit (percent of GDP): -1.7; -1.8; -1.4; -0.5; -3.3; -2.8; -4.1; -5.7; -5.8
- Automatic debt dynamics contribution (percent of GDP): 8.6; -6.2; -11.2; 0.5; 3.8; 3.8; 4.0; 2.6; -0.1
- Public sector debt-to-revenue ratio (percent): 717.1; 687.2; 656.3; 641.0; 598.6; 617.0; 605.4; 557.3; 539.3

### Program monitoring, program targets and monitorable actions (Dec 2008–Jun 2009)
- Monitorable actions, December 2008–June 2009 (selected):
  - Submit to parliament the Global Income Tax draft law — Target: End-March 2009.
  - Establish a Treasury Single Account — Target: End-June 2009.
  - Banque du Liban: Establish an investment committee and draft formal guidelines for foreign reserve management — Target: End-December 2008; Implementation: Done on January 28, 2009.
  - Banque du Liban: Adopt formal policies for the selection, appointment, and rotation of the BdL’s external auditors — Target: End-June 2009; Implementation: Done on January 28, 2009.
  - Power sector: Revise electricity tariff structure consistent with program objectives — Target: End-December 2008; Implementation: Not met.
  - Privatization: Issue a Request for Application for MIC1 and MIC2 — Target: End-March 2009; Implementation: Privatization has been postponed due to unfavorable international capital markets.
- Quantitative indicative targets under the EPCA program (selected, end-of-period, in millions of U.S. dollars unless otherwise indicated):
  - Gross reserves of the Banque du Liban (stocks): 24,718; 24,509; 26,793; 24,867; 25,436; 27,818; 29,049
  - Government net borrowing from the Banque du Liban (stocks): 5,905; 5,984; 4,428; 5,700; 5,700; 4,469; 4,388
  - Outstanding letters of credit contracted by Electricité du Liban (stock, millions of U.S. dollars): 1,046; 997; 766; 733; 777; 777; 777
  - Disbursements of official grants and loans to government (cumulative flows): 1,304; 1,022; 222; 365; 822; 1,431

### External financing capacity and Fund relations (selected indicators and capacity to repay)
- Fund repurchases and charges (in millions of SDRs): 0.0; 1.5; 2.1; 1.3; 13.9; 26.2; 25.8; 12.8; 0.0
- Fund credit outstanding (in millions of SDRs): 0.0; 50.8; 76.1; 76.1; 63.4; 38.1; 12.7; 0.0; 0.0
- Fund credit outstanding (in millions of U.S. dollars): 0.0; 77.7; 119.8; 114.7; 96.7; 58.2; 19.5; 0.0; 0.0
- Memorandum exports of goods and NFS (in millions of US$): 13,711; 16,005; 22,838; 23,929; 25,847; 28,091; 30,449; 32,998; 35,809
- Government external debt service (in millions of US$): 1,765; 1,991; 2,020; 2,937; 2,199; 2,069; 2,134; 2,037; 2,352
- Quota (in millions of SDRs): 203 (constant)
- Gross official reserves (in millions of US$): 11,353; 11,496; 18,769; 20,865; 24,312; 25,390; 27,148; 29,322; 32,375

_Prepared by Middle East and Central Asia Department, March 31, 2009._

### Annex I. Lebanon: Fund Relations

### Annex I. Lebanon: Fund Relations

### Membership and 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: 260.29 — 128.22
- Reserve position in Fund: 18.83 — 9.28

### SDR Department (SDR Million; Percent of Allocation)
- Net cumulative allocation: 4.39 — 100.00
- Holdings: 21.61 — 491.97

### Outstanding Purchases and Loans (SDR Million; Percent of Quota)
- Post-Conflict Emergency Assistance: 76.13 — 37.50

### Latest Financial Arrangements
- None

### Projected Obligations to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- 2009
  - Principal: (no principal due in 2009 listed)
  - Charges/Interest: 0.91
  - Total: 0.91
- 2010
  - Principal: 12.69
  - Charges/Interest: 1.17
  - Total: 13.86
- 2011
  - Principal: 25.38
  - Charges/Interest: 0.83
  - Total: 26.21
- 2012
  - Principal: 25.38
  - Charges/Interest: 0.40
  - Total: 25.77
- 2013
  - Principal: 12.69
  - Charges/Interest: 0.13
  - Total: 12.82

### HIPC/MDRI
- Implementation of HIPC Initiative: Not Applicable
- Implementation of Multilateral Debt Relief Initiative (MDRI): Not Applicable

### Safeguards Assessment
- A full safeguards assessment of the Banque du Liban (BdL) was completed on March 10, 2008 in conjunction with the first Emergency Post-Conflict Assistance (EPCA).
- Recommendations included several specific measures to enhance BdL’s financial reporting, audit, and control procedures, and suggested an update of the central bank law.
- Authorities have outlined steps to follow up on these recommendations.
- An update safeguards assessment is currently under way in the context of the second EPCA.

### Exchange Arrangement
- The Lebanese pound is a conventional peg.
- Since October 1999, the BdL 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 was concluded by the Executive Board on October 3, 2007 (IMF Country Report No. 07/382).

### Financial Sector Assessment Program (FSAP)
- Lebanon participated in the Financial Sector Assessment Program in 1999; the related report was presented at the time of the Article IV consultation.
- A Financial System Stability Assessment update was conducted in 2001 and presented at the time of the Article IV consultation.

### Technical Assistance (areas and recent activities)
- Fiscal area (FAD)
  - Advice on introducing the VAT, reforming customs tariffs and income taxes, strengthening tax and customs administration, improving public expenditure management, and consolidating fiscal accounts.
  - Fiscal ROSC report published May 2005.
  - 2005 missions: consolidation of fiscal accounts; public liquidity management.
  - October 2006: multi-sector mission on fiscal reform priorities after the conflict with Israel.
  - November 2007: FAD mission on reforming subsidies and restoring gasoline excises.
  - 2007–early 2008: FAD and METAC targeted follow-up support (tax audit program, Treasury Single Account, cash management).
- Financial area (Monetary and Capital Markets Department)
  - Technical assistance on payments system and vulnerability indicators.
  - Assessment of compliance with Core Principles for Systemically Important Payments Systems.
  - Advice on improving efficiency and liquidity management in public sector payments and receipts.
  - Assistance on framework for macro-prudential indicators.
  - 2006 mission: banking sector soundness assessment including stress-test exercise to develop a consolidation strategy.
  - Progress in implementing IMF recommendations has been limited.
- Statistical area (STA and METAC)
  - Technical assistance in national accounts, price, and balance of payments statistics.
  - No official producer price index (PPI).
  - Balance of payments data remain incomplete.
  - 2007 METAC missions on CPI; March 2008: new monthly country-wide CPI launched.
  - October–November 2008 METAC-STA mission: assistance on national accounts statistics and economic surveys.
  - March 2008 METAC mission: assistance on balance of payments and international investment position statistics.
  - Statistical gaps remain substantial, particularly in national accounts, price statistics, and balance of payments; stronger political commitment is needed to fill these gaps.

*Source: Annex I. Lebanon: Fund Relations (As of February 28, 2009).*

### 1.      On behalf of the Lebanese authorities, I would like to express my appreciation to

### On behalf of the Lebanese authorities, I would like to express my appreciation to

### Recent Developments and Outlook
- Lebanon’s economy showed significant resilience to the ongoing global financial and economic crisis.
- Real GDP growth exceeded 8 percent in 2008, driven by construction and tourism.
- Inflation declined to 4 percent in January 2009, after having reached double digits last summer.
- Primary fiscal surplus realization of 0.5 percent of GDP in 2008.
- Debt-to-GDP ratio lowered by 6 percentage points to 162 percent in 2008.
- Deposit inflows continued to increase at a rapid pace after decelerating briefly following the Lehman Brothers bankruptcy.
- Deposit dollarization declined steadily.
- Banque du Liban (BdL) continued to rapidly accumulate international reserves.
- All end-December 2008 quantitative targets under the Emergency Post-Conflict Assistance (EPCA)-supported program were met with substantial margins.
- Structural reform implementation was slow, reflecting the approach of the general elections set for June and a difficult international environment for privatization.
- Risks for 2009:
  - Worsening global financial and economic outlook, particularly in the Gulf, expected to reduce tourism, remittances, foreign direct and portfolio investment, and deposit inflows.
  - Potential slowdown in deposit growth could adversely affect financing of fiscal deficits by domestic banks.
- Near-term policy objectives of the authorities:
  - Further build international reserves.
  - Safeguard fiscal achievements.
  - Contain financing needs.
  - Strengthen the banking sector.
- Commitment to EPCA objectives and Paris III reform agenda, particularly fiscal consolidation, privatization of the telecommunications sector, and energy sector reform.
- Emphasis on continued strong international support and timely donor fulfillment of Paris III financial commitments.
- Authorities seek donor flexibility to convert project loan pledges into budgetary support to reduce the debt burden.

### Monetary and Exchange Rate Policies
- The monetary policy framework has helped maintain confidence in the Lebanese financial system.
- The exchange rate peg continues to serve the economy as a firm anchor to financial stability.
- The real exchange rate is assessed by authorities and staff as broadly in line with fundamentals.
- BdL policy actions and rationale:
  - Aim to further strengthen international reserves buffer to preserve confidence and support deposit growth.
  - Maintain the interest rate differential between domestic currency and foreign currency rates at the current level to achieve reserve accumulation.
  - Acknowledgement that reserve accumulation entails a high cost for the BdL balance sheet given the decline in international interest rates.
  - Once market conditions stabilize and deposit growth is comfortable, BdL may consider a further reduction in domestic currency interest rates.
- Fiscal adjustment and improved confidence would help reduce dollarization, facilitating further build-up of net international reserves and strengthening BdL’s income position.

### Fiscal Policy and Reforms
- 2009 budget framed against expected slowdown in economic activity and potential increase in social needs.
- Draft 2009 budget envisages a balanced primary account and a gross debt-to-GDP ratio that remains constant at 162 percent.
- Fiscal space creation measures include:
  - Reintroduction of gasoline excises.
  - Reduced need for budgetary transfers to Electricité du Liban due to lower fuel costs.
  - Delayed privatization of the mobile phone companies.
  - Implementation of revenue measures envisaged under EPCA.
- Additional resources intended to finance:
  - Approved increase in spending on wages and salaries.
  - Higher capital expenditures.
- Authorities fully committed to EPCA fiscal targets and will implement the 2009 budget prudently.
- Authorities stand ready to consider additional measures if needed to achieve budgetary objectives.
- Authorities have prepared a contingency anti-crisis plan aimed at boosting economic activity with minimal effects on the fiscal balance.
- Progress in budgetary reforms:
  - Parliament approved the tax procedure code at end-2008.
  - A cash management unit was established and is undertaking a pilot project on monthly payment forecasts with three line ministries.
  - The draft Global Income Tax law should be submitted to the Council of Ministers and Parliament in the coming months.
  - Restructuring of the tax administration has been initiated.
  - Treasury Single Account legislation is under examination in Parliament.
- Financing outlook and contingent responses:
  - Despite likely slowdown in deposit growth, authorities expect to meet 2009 financing needs from the market.
  - If elections or a protracted global recession lead to a critical drop in deposit inflows, possible responses include fiscal adjustment, a lower pace of reserve accumulation, higher interest rates, and possibly additional use of Fund resources.

### Financial Sector
- Effective regulation and supervision, coupled with a deposit-based funding structure, have shielded the domestic financial sector from exposure to international financial risks.
- Banking Control Commission (BCC) measures in response to the crisis:
  - Strengthened reporting requirements on domestic and foreign operations.
  - Carried out stress tests for the banking system.
  - Intensified on-site inspections.
- BdL recommendation to limit dividend payments to 25 percent of 2008 profits to enhance bank capitalization.
- Draft legislation prepared for creation of the regulatory authority for financial markets.
- Banking resolution framework reinforced with adoption of a revised bank merger law aimed at preventing bank failures by encouraging mergers and takeovers by sounder banks.
- Plans to reform the deposit insurance fund are underway.

*Source: _cr09131 - 1.      On behalf of the Lebanese authorities, I would like to express my appreciation to*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2009/_cr09131.pdf_