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---

### Backdrop and recent developments
- Political and regional factors: political polarization since mid-2010, fall of the coalition government in January 2011, prolonged government formation until June, and regional unrest contributed to a downturn in 2011.
- BdL intervention and reserves:
  - BdL defended the pound in January 2011, losing about half of its net foreign exchange holdings.
  - Gross international reserves were about $32 billion as of end-November 2011 and cover 27 percent of broad money or 43 percent of foreign currency deposits (BdL issued foreign currency CDs and banks placed excess reserves with the BdL so gross reserves remained unchanged).
- Fiscal buffer prior to 2011: a marked decline in the debt-to-GDP ratio since 2006 and a sizeable primary surplus in 2010 allowed an accommodative fiscal stance in 2011 and continued access to foreign currency debt markets.

### 2011 performance — the lost year
- Growth:
  - Growth virtually came to a halt in 2011; with latest indicators pointing to some pick-up, growth could reach 1–2 percent in 2011, markedly below an average of 8 percent during 2007–10.
- Inflation and current account:
  - Headline inflation averaged about 5 percent in 2011; core inflation remained moderate.
  - Current account deficit set to widen to about 14 percent of GDP in 2011 owing to higher food and fuel prices and a drop in tourism.
- Credit and deposits:
  - Annual credit growth at end-October 2011: 15 percent (compared with 25 percent in 2010).
  - Deposits: inflows resumed in March 2011; deposits growing at 9 percent annually, with most growth in foreign currency deposits; deposit dollarization on a downward trend but still above end-2010 level.
- Banking and markets: sovereign and CDS spreads rose and the stock index dropped sharply, broadly in line with emerging market and regional averages.
- Fiscal position:
  - Fuel excise halving in February 2011 implied an annual revenue loss of almost one percent of GDP.
  - Primary expenditure rose due to higher military wages/allowances and transfers to the electricity company.
  - Primary surplus expected to fall to about one percent of GDP from 2.7 percent of GDP in 2010.

### Outlook and risks (2012 and medium term)
- Baseline 2012 projection:
  - Growth projected at 3½ percent in 2012 assuming an improved external environment and recovery in tourism and retail trade; planned public investment (including large-scale electricity project) could add further boost.
  - Headline inflation expected to remain elevated due to wage increases and a possible VAT rate hike.
  - Current account deficit: rebound in exports expected to be largely offset by higher capital imports; current account deficit would remain broadly unchanged.
- Major downside risks:
  - Uprising in Syria: large downside risk with effects already including weaker investor confidence, disrupted tourism, higher bilateral and transit trade costs, and reduced bank exposure to Syria.
  - Further escalation and sanctions by the Arab League could have far-reaching repercussions.
  - Worsening outlook in Europe could produce sizeable second-round effects if regional oil exporters are affected.
  - Domestic tensions (Lebanon’s stance on Syria, cooperation with the Special Tribunal for Lebanon, wage increases) could exacerbate macrofinancial stress.
- Potential macrofinancial consequences if risks materialize:
  - Dampened growth prospects.
  - Higher sovereign risk premium and interest rates worsening government debt dynamics.
  - Eroded bank profit margins and exposure of maturity mismatches on banks’ balance sheets.

### Lebanon’s interconnectedness — key linkages and numbers
- External integration:
  - Exports of goods and services ≈ 60 percent of GDP.
  - Imports of goods and services ≈ 75 percent of GDP.
  - Remittances ≈ 15 percent of GDP.
  - FDI and nonresident deposit inflows each estimated at 11 percent of GDP on average over the last five years.
- Financial exposures:
  - Almost 40 percent of total bank deposits belong to nonresidents.
  - Wholesale funding from BIS-reporting banks equals $5.5 billion, or 4 percent of bank assets.
  - Largest banking exposure to Syria: $7½ billion in assets in seven subsidiaries and $1½ billion in direct loans from Lebanon.
  - Most FDI (90 percent) comes from Kuwait, Qatar, Saudi Arabia, and the UAE.

### Real estate sector developments
- Market dynamics:
  - Real estate boomed during 2006–09; market started to correct in mid-2010.
  - Lebanese nationals (almost two thirds of which are residents) accounted for 80–90 percent of the market; most remaining demand from GCC countries.
  - Prices 10–15 percent off their peaks; demand shifted from luxury apartments toward smaller apartments.
- Economic relevance and risks:
  - Real estate and related activities contributed one fifth to GDP growth during 2005–09.
  - Real estate loans now account for more than a third of all loans, requiring close monitoring of nonperforming loans.
  - Beirut’s real estate was among the most expensive in the region in 2010.

### Indicators and recent data highlights (selected)
- Government debt: 134 percent of GDP at end-October 2011 (about 40 percent in foreign currency).
- Bank assets: 350 percent of GDP.
- Exports of goods and services ≈ 60 percent of GDP; imports ≈ 75 percent of GDP.
- Remittances ≈ 15 percent of GDP.
- Nonresident deposits ≈ 40 percent of total bank deposits.
- Wholesale funding from BIS banks: $5.5 billion (4 percent of bank assets).

### Macrofinancial vulnerabilities
- High government debt: 134 percent of GDP (end-October 2011) with large recurring financing needs.
- Banking sector exposures: funding from short-term deposits with significant maturity mismatch (about a quarter intermediated to deposits at the BdL and another quarter to long-term government debt).
- Financing of large current account deficits depends on continued inflows of nonresident deposits.
- Uprising in Syria deemed the most serious risk by authorities; protracted conflict impact impossible to quantify.

---

### Policy Theme #1 — Navigating uncertainty and safeguarding macro stability

### The 2012 budget — supporting confidence, growth, and equity
- Draft 2012 budget (first draft):
  - Envisaged increase in primary expenditure by 4 percent of GDP, largely for capital spending including electricity generation investment.
  - Revenue would increase by 1 percent of GDP reflecting a drop in non-tax revenue and substantial tax measures.
  - Proposed tax measures:
    - Increase in the VAT rate (to 12 from 10 percent).
    - Increase in the withholding tax on interest (to 8 from 5 percent).
    - A 3 percent fee on real estate sales.
  - Full implementation implied a primary deficit of 2 percent of GDP.
- Wage and compensation changes:
  - Approved increases in wages and allowances for public and private sector employees; transportation allowance subsumed into basic wage and made taxable with reduced social security contribution rate.
  - Overall increase in compensation up to 30 percent (depending on wage bracket).
  - Cumulative inflation since last wage increase in 2008: 17 percent.
  - Wage increase could be implemented even if the 2012 budget is not passed.
- Staff recommendations:
  - Target a small primary surplus (broadly neutral fiscal stance) to keep debt-to-GDP ratio on a downward path.
  - Suggested measures to achieve a primary surplus:
    - Implement proposed increases in VAT rate and withholding tax on interest.
    - Rescind February cut in fuel excise.
    - Limit public sector wage increase while allowing some increase in social and capital spending.
  - Cautions:
    - Avoid relying on underexecution of capital spending to control the deficit as it would undermine credibility.
- Equity and revenue recommendations:
  - Support revenue measures and higher social spending to mitigate VAT adverse social impact.
  - Postpone introduction of the real estate fee and an asset revaluation tax; subsume into a comprehensive capital gains tax focusing on realized gains.
  - Additional revenue options: increase excises on alcohol and tobacco and rescind fuel excise reduction.
  - Welcomed progress on a national targeting program for the extreme poor.
- Electricity sector investment:
  - Parliament approved in September 2011 a 3-year investment of 3 percent of GDP to boost electricity generation by almost half.
  - Increased generation would imply higher subsidies unless complemented by reforms; authorities plan to bring tariffs to cost-recovery levels in the medium term with substantial private sector participation as envisaged in the World Bank strategy.

### Reducing government reliance on Banque du Liban (BdL) financing
- Market financing difficulties in 2011:
  - Political uncertainty and tight pound liquidity reduced banks’ appetite for government debt in pounds.
  - Pound liquidity dried up; banks cannot use FX deposits to lend in pounds due to restrictions on open currency positions.
  - Only high-yielding 7-year T-bills had strong demand; government issued them twice in 2011.
  - Shortfall in demand for shorter-maturity T-bills was picked up by the BdL, preventing interest rates from rising.
- Interest rate policy:
  - Staff argued for allowing pound interest rates to rise to compensate for higher risks and attract banks to T-bills with maturities less than 7 years, reducing reliance on BdL financing and 7-year T-bills.
  - Authorities cautious: keeping rates steady after the government fall in January helped prop up confidence; gradual move could be appropriate.
  - Staff noted prolonged rate stability under the peg has been costly for BdL’s balance sheet and foreign reserves; supported gradual move given secondary market yield curve already shows higher rates for lower-maturity T-bills.
- Eurobond market and foreign borrowing:
  - Lebanon placed $1.5 billion 7-, 9-, and 15-year Eurobonds in November 2011 ($1.2 billion involved exchanging Eurobonds maturing in 2012).
  - Staff welcomed reduction in 2012 financing needs and supported seeking parliamentary approval for new foreign currency borrowing to use banks’ FX liquidity and low global interest rates to reduce reliance on BdL reserves.

### Gross financing requirements (selected table extracts, 2012)
- A. Primary Deficit ($ mln.): -130, -489, 466, -3, -156
- A. Primary Deficit (percent of GDP): -0.3, -1.1, 1.1, 0.0, -0.4
- B. Interest ($ mln.): 825, 1,071, 855, 1,054, 3,805
  - On LL debt: 521, 611, 565, 590, 2,286
  - On FX debt: 304, 461, 290, 464, 1,519
- C. Amortization ($ mln.): 2,965, 2,163, 2,959, 3,099, 11,185
  - On LL debt: 2,405, 1,743, 2,454, 2,839, 9,442
  - On FX debt: 559, 420, 505, 259, 1,743
- Gross Financing Need = B + C - A ($ mln.): 3,660, 2,745, 4,280, 4,149, 14,835
- Gross Financing Need (Percent of GDP): 8.3, 6.2, 9.7, 9.4, 33.7
- Memorandum item: GDP ($ mln.): 44,013

---

### Policy Theme #2 — Securing sustained inclusive growth and economic resilience

### Structural reforms and competitiveness
- Growth and labor market challenges:
  - Rapid 2006–10 growth concentrated in and around Beirut; employment creation limited and focused on low-paying construction, retail, and hospitality jobs.
  - Official unemployment rate: 10 percent in 2007.
    - Share of youth in the unemployed: 45 percent.
    - Share of the highly educated in the unemployed: 30 percent.
  - From 1998 to 2009 output grew about 4 percent on average per year, but employment remained broadly unchanged and concentrated in low productivity sectors.
  - Informal employment reportedly more than one third of those employed.
  - Skill mismatches, labor market rigidities, and high reservation wages cause inefficiencies.
- Labor market specifics:
  - Large difference (almost 50 percentage points) between male and female labor force participation rates; small gender gap in unemployment (2 percentage points).
  - Employers identify labor skills and labor regulations, including end-of-service indemnity design, as major business constraints.
  - With recently approved wage increase, minimum wage would be among the highest in the region though broadly in line when adjusted for cost of living.
- Infrastructure and sectoral reforms:
  - Electricity: 3-year investment of 3 percent of GDP approved to boost generation by almost half.
  - Water sector reforms under discussion; telecom investments ongoing; need to open telecom to competition, upgrade the regulatory framework, and consider privatization.
  - Public-private partnerships could attract private infrastructure investment but should minimize contingent liabilities.
- Business climate and labor market reforms:
  - Need for improved enforcement transparency and even application of business regulations.
  - Improve labor market efficiency by aligning education with market needs and reforming end-of-service indemnity to enhance mobility while limiting government interference.
- Competitiveness and the peg:
  - De-facto peg classified as a “stabilized arrangement”; staff estimates point to a modest overvaluation of the pound relative to fundamentals.
  - REER assessment: macroeconomic balance and external sustainability approaches point to modest overvaluation in the range of 11–17 percent; equilibrium real exchange rate approach suggests slight overvaluation of about 3 percent.
  - Real effective exchange rate appreciated slightly since early-2010; NEER depreciated since mid-2010 due to U.S. dollar weakness; pace of appreciation picked up slightly in September 2011.
  - Important to pursue productivity-enhancing measures and caution that wage increases beyond productivity gains would be counterproductive.

---

### Debt dynamics, reform scenario, and fiscal strategy

### Current debt dynamics and staff view
- High public debt: identified as root cause of macrofinancial vulnerabilities; large interest payments "absorb much of the budget (40 percent of 2011 revenue)" and crowd out priority spending.
- Staff observation: sharp past reduction in debt-to-GDP largely a windfall from strong growth; with moderate growth expected, reduction must come from sizeable primary surpluses.
- Baseline (no policy change) projection: debt ratio would stay around 130 percent in the medium term.

### Reform scenario objectives and measures
- Objective: bring debt ratio to below 100 percent of GDP by 2020.
- Revenue measures:
  - Introduce a capital gains tax.
  - Broaden the VAT base and increase its rate to 15 percent.
  - Estimated yields (Annex 1): comprehensive capital gains tax yield 0.3 percent of GDP; increasing selected excises yield 0.6 percent of GDP; increasing VAT to 15 percent yield 1.1 percent of GDP.
- Expenditure measures:
  - Reduce subsidy to the electricity sector as investment and reforms bear fruit; reduce transfers to the loss-making electricity company by more than two thirds over the medium term.
  - Rationalize nonpriority spending; strengthen safety net; accelerate capital spending.
- Expected effects:
  - Primary surplus would rise gradually; buoyed confidence would lower interest rates and increase growth, contributing to substantial reduction in debt ratio (reform scenario: total government debt percent of GDP falls to 97 percent by 2020).

### Public Debt Sustainability Analysis — baseline and stresses (selected)
- Gross government debt: 134 percent of GDP (US$ 54.2 billion) at end-October 2011.
- Debt composition and maturities:
  - Share of domestic-currency debt: 61 percent; average maturity: 2.6 years.
  - Average maturity of foreign-currency debt: 5.2 years.
  - Holdings: domestic banks 54 percent; BdL 20 percent.
- Baseline public sector debt series (selected): 2011: 134.3; 2012: 131.8; 2013: 130.0; 2014: 130.4; 2015: 131.1; 2016: 132.1.
- Stress tests (public debt):
  - Interest rate shock (½ s.d.): debt ratio increases to 145 percent of GDP by 2016.
  - Growth shock (½ s.d.): debt ratio increases to 148 percent by 2016.
  - Primary balance shock (½ s.d.): debt ratio increases to 136 percent by 2016.
  - Combined permanent shock (¼ s.d. to interest, growth, primary): debt ratio increases to 146 percent by 2016.

---

### External debt sustainability and vulnerabilities

### External debt level and composition
- External debt-to-GDP: 161 percent in 2010 (down from 199 percent in 2006).
- Composition: about 80 percent of external debt consists of short-term nonresident deposits in the banking sector.
- Nonresident deposits largely owned by the Lebanese diaspora; treated as behaving like long-term deposits and comprise about 85 percent of gross financing needs over the medium term.
- Data treatment note: lack of maturity information leads to treating all external nondeposit liabilities of banks and full external debt of nonbanks as short-term, biasing gross annual financing needs upward.

### Baseline projections (external debt)
- Under baseline, external debt expected to increase to 178 percent of GDP by 2016.
- Baseline external debt series (selected): 2010: 161.1; 2011: 157.6; 2012: 158.6; 2013: 163.5; 2014: 169.7; 2015: 174.0; 2016: 177.7.

### Stress tests (external debt)
- One-time real depreciation of 30 percent in 2012:
  - Debt level on impact: 244 percent of GDP; rises to 273 percent of GDP by 2016.
- Permanent shock (½ s.d.) to interest rate: debt ratio rises to 183 percent by 2016.
- Permanent shock (½ s.d.) to growth rate: debt ratio rises to 191 percent by 2016.
- Permanent shock (½ s.d.) to noninterest current account balance: debt ratio rises to 194 percent by 2016.
- Combined permanent shock (¼ s.d. to interest, growth, current account): debt ratio rises to 195 percent by 2016.
- Implication: debt dynamics most sensitive to exchange rate shocks; underscores importance of the exchange rate peg for stability.

### Gross external financing need (selected)
- In billions of U.S. dollars: 2010: 55.1; 2011: 58.3; 2012: 60.5; 2013: 66.1; 2014: 73.4; 2015: 80.7; 2016: 88.3.
- In percent of GDP: 2010: 143.2; 2011: 144.0; 2012: 137.4; 2013: 138.9; 2014: 145.3; 2015: 150.2; 2016: 154.7.
- External debt-to-exports ratio (selected): 2010: 248.9; 2011: 247.4; 2012: 252.5; 2013: 260.2; 2014: 265.1; 2015: 266.8; 2016: 267.4.

---

### Projections and key macroeconomic indicators (selected, 2009–16)

### Real GDP (annual percent change)
- 2009–16: 8.5, 7.0, 1.5, 3.5, 4.0, 4.0, 4.0, 4.0

### Price indicators
- GDP deflator: 7.0, 3.0, 3.7, 5.1, 3.9, 2.2, 2.2, 2.2
- Consumer prices (end-of-period): 3.4, 5.1, 5.5, 5.5, 2.2, 2.2, 2.2, 2.2

### Investment and saving (percent of GDP)
- Gross capital formation: 33.7, 28.1, 21.4, 24.0, 25.9, 25.9, 25.9, 25.9
- Gross national savings: 23.9, 17.5, 7.3, 10.2, 12.9, 13.9, 14.7, 15.4

### Government finances (percent of GDP, selected)
- Government overall balance (cash basis): -8.2, -7.5, -8.3, -8.3, -8.1, -8.0, -8.3, -8.8
- Primary balance (cash basis): 2.8, 2.7, 1.0, 0.4, 0.6, 0.6, 0.6, 0.6
- Total government debt (percent of GDP): 146, 137, 134, 132, 130, 130, 131, 132

### Central government finances (levels in billions of Lebanese pounds, 2010–16)
- Revenue and grants: 12,802; 12,738; 13,654; 16,135; 17,256; 18,278; 19,339; 20,522
- Total expenditures: 17,095; 16,963; 18,732; 21,637; 23,042; 24,406; 26,097; 28,075
  - Interest payments: 5,799; 5,905; 5,684; 5,736; 6,215; 6,575; 7,233; 8,043
  - Capital expenditure: 757; 829; 1,070; 2,190; 2,045; 2,178; 2,310; 2,456

### External sector (millions of U.S. dollars, 2010–16)
- Current account (excl. official transfers): -3,453; -4,062; -5,707; -6,097; -6,186; -6,060; -6,016; -5,985
- Exports f.o.b.: 4,716; 5,467; 6,068; 6,553; 7,143; 7,800; 8,487; 9,229
- Imports f.o.b.: -15,895; -17,724; -19,621; -21,151; -22,801; -24,579; -26,497; -28,563
- Current account balance (percent of GDP): -9.7, -10.6, -14.1, -13.9, -13.0, -12.0, -11.2, -10.5
- Gross international reserves (levels, in millions U.S.$): 27,405; 30,172; 30,601; 34,358; 37,641; 41,588; 45,134; 47,983
- Foreign direct investment (percent of GDP): 10.5; 9.9; 8.3; 9.3; 9.2; 9.4; 9.5; 9.7

### Baseline versus reform scenario (selected comparisons, 2009–16)
- Real GDP (market prices):
  - Baseline: 8.5, 7.0, 1.5, 3.5, 4.0, 4.0, 4.0, 4.0
  - Reform: 8.5, 7.0, 1.5, 3.5, 4.5, 5.0, 5.0, 5.0
- Total government debt (percent of GDP):
  - Baseline: 146, 137, 134, 132, 130, 130, 131, 132
  - Reform: 146, 137, 134, 132, 128, 125, 120, 116
- Current account (percent of GDP):
  - Baseline: -9.7, -10.6, -14.1, -13.9, -13.0, -12.0, -11.2, -10.5
  - Reform: -9.7, -10.6, -14.1, -13.9, -12.7, -11.5, -10.4, -9.3
- Gross reserves (excluding gold, U.S.$ billions):
  - Baseline: 27.4, 30.2, 30.6, 34.4, 37.6, 41.6, 45.1, 48.0
  - Reform: 27.4, 30.2, 30.6, 34.4, 37.0, 39.0, 40.1, 40.5

---

### Financial sector soundness, statistics, and IMF relations

### Banking sector highlights (2007–11)
- Bank assets (millions U.S.$): 82,255; 94,255; 115,250; 128,925; 141,891 (2007–11)
- Capital adequacy ratio (Feb 2011 / Basel II weights): 12.5; 12.1; 13.7; 13.3; 13.3
- NPLs (percent): 10.1; 7.5; 6.0; 4.3; 3.8
- Provisions against NPLs (percent of NPLs): 56.9; 61.3; 63.9; 62.0; 60.1
- Share of claims on government (percent of assets): 26.1; 27.0; 25.2; 22.7; 21.1
- Net liquid assets/total assets: 40.3; 42.3; 46.5; 45.1; 41.5
- FC deposits/total deposits (Aug 2011 series): 77.4; 69.6; 64.5; 63.3; 66.0
- Returns and margins (selected): Average return on assets (after tax) ~1.02–1.23; Average return on equity (after tax) ~12.1–13.8; Net interest margin ~2.0–1.7

### BdL balance sheet and recommendations
- BdL policy to maintain large reserves warranted but finances weakened by sterilized accumulation; issuance of $1.75 billion foreign currency CDs in early 2011 costly.
- Staff recommended arresting deterioration in BdL’s balance sheet, weighing costs of replenishing reserves, and developing a strategy to strengthen its income position.
  - Policy options: consider reducing remuneration of banks’ foreign currency deposits; gradually phase out exemptions from reserve requirements once recovery takes hold.

### Supervision, provisioning, and AML/CFT
- Regulatory actions and preparedness:
  - Plans to implement Basel III; most banks expected to meet Basel III capital requirements by 2012; small banks and some foreign bank branches required to conform by 2015.
  - On average, ninety percent of banks’ capital is Tier 1, mainly common equity.
  - Liquidity rules: banks required to place 15 percent of term and 25 percent of demand deposits in domestic currency with the BdL; for foreign currency deposits, banks must place 15 percent with the BdL and maintain a further 10 percent in liquid assets.
  - BCC plan to introduce supervisory colleges for cross-border oversight and annual group audits; need for legal protection for BCC supervisors.
- Provisioning and classification:
  - Staff view: net provisioning low during upswing; recommend introducing forward-looking provisions and tightening loan classification and provisioning rules (including guidance on re-aging).
- AML/CFT:
  - Progress accelerated after Lebanese-Canadian Bank identified as an institution of money laundering concern and subsequently absorbed; AML supervision strengthened; draft law under review for cross-border cash declaration system; BdL decision to raise minimum capital of money exchanges expected to encourage consolidation and improve AML/CFT preventive capacity.

### Statistics and data gaps
- Lebanon’s statistics lag those of most middle-income countries; gaps in national accounts, balance of payments, and social and labor market indicators.
- Authorities intend to provide legal mandate and funding to the Central Administration of Statistics (CAS); staff emphasize need for upgraded statistics.
- Data adequacy for surveillance: serious shortcomings in national accounts, labor market, general government, and BoP; monthly CPI compiled since May 2008; national accounts compilation transfer to CAS planned.

### IMF relations and TA (as of November 30, 2011)
- Membership: Joined April 14, 1947; Article VIII.
- Quota: 266.40 (SDR million).
- Outstanding EPCA credit: EPCA: 38.06 (SDR million; 14.29 percent quota).
- Technical assistance highlights (FAD; MCM; Statistics; METAC): VAT advice and tax administration, payment and settlement systems, early warning system development, national accounts and CPI improvements, balance of payments assistance.
- Article IV consultation: Mission November 2011; staff report expected January 2012; next Article IV proposed on standard 12-month cycle.

---

*Source: LEBANON 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND (excerpts presented in the supplied content).*

### 1. Selected Economic Indicators, 2009–16 _______________________________________________________ 28

### 1. Selected Economic Indicators, 2009–16

### Backdrop and recent developments
- Lebanon’s economy lost momentum in 2011 after four strong years; political polarization since mid-2010, the fall of the coalition government in January 2011, prolonged government formation talks until June, and regional unrest contributed to the downturn and weaker market confidence.
- The Banque du Liban (BdL) intervened when the pound came under pressure from deposit outflows and currency conversions in January 2011:
  - BdL defended the pound, losing about half of its net foreign exchange holdings.
  - Gross international reserves remained unchanged because BdL issued foreign currency Certificates of Deposit (CDs) and banks placed excess reserves with the BdL.
  - Reserves were about $32 billion as of end-November and cover 27 percent of broad money or 43 percent of foreign currency deposits.
- The improved fiscal position prior to 2011 (marked decline in the debt-to-GDP ratio since 2006 and a sizeable primary surplus in 2010) allowed an accommodative fiscal stance in 2011 and continued access to foreign currency debt markets.

### The economic context — 2011: a lost year
Findings on 2011 performance
- Growth:
  - Growth virtually came to a halt in 2011.
  - With latest indicators pointing to some pick-up, growth could reach 1–2 percent in 2011, markedly below an average of 8 percent during 2007–10.
- Inflation and current account:
  - Headline inflation averaged about 5 percent in 2011; core inflation remained moderate.
  - The current account deficit is set to widen to about 14 percent of GDP in 2011 owing to higher food and fuel prices and a drop in tourism.
- Credit and deposits:
  - Annual credit growth at end-October 2011 stood at 15 percent compared with 25 percent in 2010.
  - Deposit inflows resumed in March 2011; deposits growing at 9 percent annually, with most growth in foreign currency deposits.
  - Deposit dollarization was on a downward trend but still above its end-2010 level.
- Banking and markets:
  - Sovereign and CDS spreads rose and the stock index dropped sharply, broadly in line with emerging market and regional averages.
- Fiscal position:
  - The fuel excise halving in February 2011 implied an annual revenue loss of almost one percent of GDP.
  - Primary expenditure rose due to higher military wages/allowances and transfers to the electricity company.
  - The primary surplus was expected to fall to about one percent of GDP from 2.7 percent of GDP in 2010.

Policy and reform progress since 2010 Article IV consultation (Box 1)
- Macroeconomic policy:
  - The 2010 primary surplus surpassed staff’s recommended target by almost one percent of GDP.
  - Authorities gradually reduced interest rates in 2009–10 and kept them unchanged since mid-2010.
- Structural reform progress:
  - Cabinet approved a reform strategy for the electricity sector.
  - Parliament passed laws on investments in the electricity sector and on the development of capital markets.
  - Banking sector supervision improved; some progress in modernizing tax administration and public financial management (extending budget coverage, enhancing transparency).
  - Reforms in telecom and statistics were slow; introduction of a global income tax and implementation of a Treasury Single Account stalled.

### Real estate sector developments
- Real estate boom and correction:
  - Real estate boomed during 2006–09; the market started to correct in mid-2010.
  - Lebanese nationals (almost two thirds of which are residents) accounted for 80–90 percent of the market; most remaining demand came from GCC countries.
  - Prices are now 10–15 percent off their peaks.
  - Demand shifted from luxury apartments toward smaller apartments.
- Economic relevance and risks:
  - Real estate and related activities contributed one fifth to GDP growth during 2005–09.
  - Real estate loans now account for more than a third of all loans, requiring close monitoring of nonperforming loans.
  - Beirut’s real estate was one of the most expensive in the region in 2010.

### Outlook and risks (2012 and medium term)
- Baseline projection for 2012:
  - Assuming an improved external environment, growth is projected at 3½ percent in 2012, supported by recovery in tourism and retail trade and continued GCC growth.
  - Planned increases in public investment, including a large-scale electricity project, could provide additional boost.
  - Headline inflation expected to remain elevated despite retreat in food and fuel prices because of wage increases and a possible VAT rate hike.
  - A rebound in exports is expected to be largely offset by higher capital imports; the current account deficit would remain broadly unchanged.
- Major downside risks:
  - The uprising in Syria represents a large downside risk given close political and economic ties; effects already include weaker investor confidence, disrupted tourism, higher bilateral and transit trade costs, and reduced bank exposure to Syria.
  - Further escalation and sanctions by the Arab League could have far-reaching political and economic repercussions.
  - Worsening outlook in Europe presents additional risks; while direct impact may be muted, second-round effects could be sizeable if regional oil exporters are affected via lower oil prices or financial losses.
  - Domestic tensions (e.g., Lebanon’s stance on Syria, future cooperation with the Special Tribunal for Lebanon, wage increases) could flare and exacerbate macrofinancial stress.
- Potential macrofinancial consequences if risks materialize:
  - Dampened growth prospects.
  - Higher sovereign risk premium and interest rates worsening government debt dynamics.
  - Eroded bank profit margins and exposure of maturity mismatches on banks’ balance sheets.

### Lebanon’s interconnectedness (Box 2) — key linkages and numbers
- External integration:
  - Exports of goods and services ≈ 60 percent of GDP.
  - Imports of goods and services ≈ 75 percent of GDP.
  - Remittances ≈ 15 percent of GDP.
  - FDI and nonresident deposit inflows each estimated at 11 percent of GDP on average over the last five years.
- Financial exposures:
  - Almost 40 percent of total bank deposits belong to nonresidents.
  - Wholesale funding from BIS-reporting banks equals $5.5 billion, or 4 percent of bank assets.
  - Largest banking exposure in assets and loans is to Syria: $7½ billion in assets in seven subsidiaries and $1½ billion in direct loans from Lebanon.
  - Most FDI (90 percent) comes from Kuwait, Qatar, Saudi Arabia, and the UAE.

*Source: LEBANON 2011 ARTICLE IV REPORT, INTERNATIONAL MONETARY FUND (excerpt).*

### 13.      At unchanged policies, the

### At unchanged policies, the medium-term growth outlook is moderate

### Outlook and vulnerabilities
- Growth projection:
  - In the absence of reforms, growth is expected to remain modest at 4 percent.
- Key vulnerabilities:
  - Government debt at 134 percent of GDP at end-October 2011 (about 40 percent of which is in foreign currency) remains among the highest in the world and gives rise to large recurring financing needs.
  - Banking sector size and structure:
    - Bank assets: 350 percent of GDP.
    - Banks fund themselves from short-term deposits, about a quarter of which is intermediated to deposits at the BdL and another quarter to long-term government debt, exposing banks to sovereign risk and a maturity mismatch.
    - Banks’ expanded regional presence makes them vulnerable to ongoing unrest.
  - Financing of persistent and large current account deficits hinges on continued inflows of nonresident deposits.
- Authorities’ assessment and risks:
  - The uprising in Syria, particularly if protracted, presents the most serious risk; the impact from an escalation is impossible to quantify at this point.
  - Authorities emphasized Lebanon’s proven resilience due to loyal depositors.
  - On medium-term growth prospects, authorities expected investment in the electricity sector to boost potential growth.

*Sources: Lebanese authorities; WEO; IFS; and IMF staff estimates.*

### Macrofinancial indicators highlighted
- Currency composition of government debt (October 2011, from figure):
  - 39% Local currency debt
  - 61% Foreign currency debt
- Other published indicators (figures and notes):
  - Government Debt, 2010: Lebanon among highest in the world (figure context).
  - Government Gross Financing Needs, 2011 (figure context).
  - Bank Assets, 2010: as percent of GDP (figure context).
  - Maturity structure of bank deposits, August 2011 (figure context).
  - External Debt, 2010 (figure context).
  - Gross international reserves and commercial banks’ net foreign assets (figure context).
  - Deposits, 2010 (in percent of total assets) and deposit outflow episodes (figure context).

---

### Policy Theme #1 — Navigating uncertainty and safeguarding macro stability

### The 2012 budget — supporting confidence, growth, and equity
- Draft 2012 budget (first draft):
  - Envisaged an increase in primary expenditure by 4 percent of GDP, largely for capital spending, including investment in electricity generation capacity.
  - Revenue would increase by 1 percent of GDP, reflecting a drop in nontax revenue and substantial tax measures.
  - Proposed tax measures include:
    - Increase in the VAT rate (to 12 from 10 percent).
    - Increase in the withholding tax on interest (to 8 from 5 percent).
    - A 3 percent fee on real estate sales.
  - Full implementation would have implied a primary deficit of 2 percent of GDP.
- Wage and compensation changes:
  - Cabinet approved increases in wages and allowances for both public and private sector employees in late December (discussions ongoing).
  - Under the approved scheme, the transportation allowance would be subsumed into the basic wage and become taxable, with the tax rate on social security contributions reduced accordingly.
  - The overall increase in compensation would be up to 30 percent (depending on the wage bracket).
  - Cumulative inflation since the last wage increase in 2008: 17 percent.
  - The wage increase could be implemented even if the 2012 budget is not passed.
- Staff recommendations and concerns:
  - Staff argued that implementing the draft budget would interrupt a decade-long record of primary surpluses and a reduction in the debt-to-GDP ratio since 2006, sending a negative signal to markets.
  - With government already having difficulties placing local currency debt in 2011, a more expansionary budget would exacerbate financing pressures.
  - Staff recommended the budget should target a small primary surplus (broadly neutral fiscal stance) to keep the debt-to-GDP ratio on a downward path.
  - Suggested measures to achieve a primary surplus included:
    - Implementing the proposed increases in the VAT rate and the withholding tax on interest.
    - Rescinding the February cut in the fuel excise.
    - Limiting the public sector wage increase while allowing some increase in social and capital spending compared to 2011.
  - Staff cautioned against relying on underexecution of capital spending to control the deficit, as this would undermine budget credibility.
- Equity and revenue recommendations:
  - Staff supported most revenue measures and higher social spending to mitigate the adverse social impact of the VAT increase.
  - Recommended postponing the introduction of the real estate fee and an asset revaluation tax, subsuming them into a comprehensive capital gains tax that would focus on realized gains.
  - Additional revenue options: increase excises on alcohol and tobacco and rescind the reduction in the fuel excise (which disproportionately benefits the well-off).
  - Welcomed progress on a national targeting program for the extreme poor.
- Electricity sector investment:
  - Parliament approved in September 2011 a 3-year investment of 3 percent of GDP to boost Lebanon’s electricity generation by almost half.
  - Staff noted increased generation capacity would imply higher subsidies unless complemented by reforms.
  - Authorities plan to address sector losses and bring tariffs to cost-recovery levels in the medium term, in line with a World Bank strategy envisaging substantial private sector participation.
  - Staff highlighted the importance of communicating a comprehensive strategy to the public to build support for future tariff increases.

### Reducing the government’s reliance on Banque du Liban (BdL) financing
- Market financing difficulties:
  - Political uncertainty combined with tight pound liquidity reduced banks’ appetite for government debt in pounds in 2011.
  - Pound liquidity dried up in 2011; banks cannot use foreign exchange deposits to lend in pounds due to restrictions on open currency positions.
  - Only high-yielding 7-year T-bills draw strong demand; government resorted to them twice in 2011.
  - Banks largely shy away from shorter-maturity T-bills which yield about the same or less than banks pay on pound deposits.
  - Shortfall in demand for shorter-maturity T-bills was picked up by the BdL, preventing interest rates from rising.
- Interest rate policy:
  - Staff argued for allowing pound interest rates to rise to compensate for higher risks and attract banks to T-bills with maturities of less than 7 years, reducing reliance on BdL financing and 7-year T-bills.
  - Authorities felt holding interest rates steady after the fall of the government in January helped prop up confidence.
  - Staff noted prolonged interest rate stability under the currency peg has been costly for the BdL’s balance sheet and foreign reserves.
  - Authorities acknowledged a gradual move could be appropriate but were cautious that marginally higher rates might not bring investors back and rapid increases could undermine depositor confidence.
  - Staff supported a gradual move; noted the yield curve in the secondary market already shows higher rates for lower-maturity T-bills.
- Eurobond market and foreign borrowing:
  - Lebanon successfully placed $1.5 billion 7-, 9-, and 15-year Eurobonds in November 2011 ($1.2 billion of which involved exchanging Eurobonds maturing in 2012).
  - Staff welcomed the reduction in financing needs in 2012 and supported the authorities’ intention to seek parliamentary approval for new foreign currency borrowing to take advantage of banks’ ample foreign exchange liquidity and globally low interest rates, and to reduce reliance on BdL reserves.
  - Financing government spending through additional foreign currency borrowing could increase banks’ pound liquidity, which could then be channeled to the local currency T-bill market.

### Gross financing requirements, 2012 (figured table extracted)
- A. Primary Deficit ($ mln.): -130, -489, 466, -3, -156
- A. Primary Deficit (percent of GDP): -0.3, -1.1, 1.1, 0.0, -0.4
- B. Interest ($ mln.): 825, 1,071, 855, 1,054, 3,805
  - On LL debt: 521, 611, 565, 590, 2,286
  - On FX debt: 304, 461, 290, 464, 1,519
- C. Amortization ($ mln.): 2,965, 2,163, 2,959, 3,099, 11,185
  - On LL debt: 2,405, 1,743, 2,454, 2,839, 9,442
  - On FX debt: 559, 420, 505, 259, 1,743
- Gross Financing Need = B + C - A ($ mln.): 3,660, 2,745, 4,280, 4,149, 14,835
- Gross Financing Need (Percent of GDP): 8.3, 6.2, 9.7, 9.4, 33.7
- Memorandum item: GDP ($ mln.): 44,013

---

### Policy Theme #2 — Securing sustained inclusive growth and economic resilience

### Structural reforms and competitiveness
- Growth pattern and labor market challenges:
  - Rapid growth during 2006–10 concentrated in and around Beirut; employment creation was limited and focused on low-paying jobs in construction, retail, and hospitality.
  - Unemployment remains chronic, especially among youth and the educated.
  - Official unemployment rate: 10 percent in 2007.
    - Share of youth in the unemployed: 45 percent.
    - Share of the highly educated in the unemployed: 30 percent.
  - From 1998 to 2009, output grew by about 4 percent on average per year, but employment remained broadly unchanged and concentrated in low productivity sectors.
  - Informal employment appears to have increased, with now more than one third of those employed allegedly in the informal sector.
  - Skill mismatches, labor market rigidities, and high reservation wages cause market inefficiencies.
- Labor market specifics:
  - Large difference (almost 50 percentage points) between male and female labor force participation rates.
  - Small gender gap in unemployment (2 percentage points).
  - Employers identify labor skills and labor regulations, including the end-of-service indemnity design, as major constraints to business and impediments to employment.
  - With the recently approved wage increase, the minimum wage would be among the highest in the region though, when adjusting for costs of living, broadly in line with the regional average.
  - High remittances and education costs contribute to voluntary unemployment by keeping reservation wages high.
- Infrastructure and sectoral reforms:
  - Infrastructure is a government priority: electricity (3-year investment of 3 percent of GDP approved to boost generation by almost half), water sector reforms under discussion, and ongoing telecom investments.
  - Unlocking sector growth potential requires opening telecom to competition, upgrading the regulatory framework, and potentially privatization.
  - Public-private partnerships could help attract private infrastructure investment but should operate within a sound framework that minimizes contingent liabilities for the public sector.
- Business climate and labor market reforms:
  - Improvements needed in enforcement transparency and even application of business regulations.
  - Labor market efficiency should be improved by attuning education to market needs and reforming the end-of-service indemnity to enhance labor mobility while limiting government interference in private sector wage setting.
- Competitiveness and the peg:
  - Strengthening competitiveness would support the currency peg (de facto peg classified as a “stabilized arrangement”).
  - Staff estimates point to a modest overvaluation of the pound relative to fundamentals.
  - The real effective exchange rate has appreciated slightly since early-2010, indicating some loss of competitiveness; recently approved wage increases might lead to a further loss.
  - While export performance has been solid so far, competitiveness needs to improve to place the current account on a sustainable path.
  - Important to pursue productivity-enhancing measures.

*Lebanon 2011 Article IV Report — International Monetary Fund.*

### 28.      The authorities remain committed to

### _cr1239 - 28.      The authorities remain committed to

### Debt dynamics and fiscal strategy
- High public debt identified as the root cause of Lebanon’s macrofinancial vulnerabilities; large interest payments "absorb much of the budget (40 percent of 2011 revenue)" and crowd out priority spending.
- Staff observation: the sharp reduction in the debt-to-GDP ratio over past years was largely a windfall from strong growth; with growth expected to stay moderate, future reduction must come from sizeable primary surpluses.
- Baseline (no policy change) projection: the debt ratio would stay at around 130 percent in the medium term.
- Reform scenario objectives and measures:
  - Bring the debt ratio to below 100 percent of GDP by 2020.
  - Revenue measures: introduce a capital gains tax; broaden the VAT base and increase its rate to 15 percent.
  - Expenditure measures: reduce the subsidy to the electricity sector as investment and reforms bear fruit; rationalize nonpriority spending; strengthen the safety net; accelerate capital spending.
  - Additional gains from modernization of revenue administration and reforms in public financial management (PFM).
  - Expected effects: primary surplus would rise gradually; with buoyed confidence, interest rates would fall and growth would increase, contributing to substantial reduction in the debt ratio over time.

### Real exchange rate and external sustainability
- The real effective exchange rate appreciated slightly since early 2010; NEER has depreciated since mid-2010 due to U.S. dollar weakness; pace of appreciation picked up slightly in September 2011.
- Export performance: trade deficit about 32 percent of GDP per year during 2006–10; goods export volumes estimated to have grown at an average of 17 percent per year during 2006–10; tourism receipts at 19 percent.
- REER assessment:
  - Macroeconomic balance and external sustainability approaches point to a modest overvaluation in the range of 11–17 percent.
  - Equilibrium real exchange rate approach suggests a slight overvaluation of about 3 percent.
  - Variation reflects methodological differences and limited data availability.

### Banque du Liban (BdL) balance sheet
- BdL’s policy to maintain large reserves has been warranted, but BdL’s finances have been weakened by sterilized accumulation of reserves.
- Recent developments: issuance of $1.75 billion foreign currency CDs in early 2011 has been costly; remuneration of banks’ excess foreign currency reserves in longer-term deposits is costly.
- Staff recommendation: arrest trend deterioration in BdL’s balance sheet; weigh cost implications of replenishing reserves and develop a strategy to strengthen its income position.
  - Policy options: consider reducing the remuneration of banks’ foreign currency deposits; gradually phase out exemptions from reserve requirements (introduced to stimulate lending in Lebanese pounds) once recovery takes hold.

### Banking sector resilience and supervision
- Current position: banks report capital above the regulatory minimum, high liquidity buffers, low nonperforming loans (NPLs), and stable profits.
- Risks: currency-induced credit risk from foreign currency loans extended to unhedged borrowers; compressed profit margins from declining interest margins; regional exposure due to banks’ expansion abroad.
- Regulatory actions and preparedness:
  - Plans to implement Basel III; most banks will meet Basel III capital requirements by 2012; the few that will not (small banks and some foreign bank branches) are required to conform by 2015.
  - On average, ninety percent of banks’ capital is Tier 1, mainly common equity.
  - Liquidity rules: banks currently required to place 15 percent of term and 25 percent of demand deposits in domestic currency with the BdL; for foreign currency deposits, banks must place 15 percent with the BdL and maintain a further 10 percent in liquid assets.
  - BCC plan to introduce supervisory colleges for cross-border oversight and annual group audits; need for legal protection for BCC supervisors.
- Strengthening provisioning and classification:
  - Staff view: net provisioning has been low during the upswing; recommend introducing forward-looking provisions to account for expected losses.
  - Loan classification and provisioning rules should tighten, including guidance on re-aging of overdrafts and arrears.
- AML/CFT improvements:
  - Progress accelerated after identification of Lebanese-Canadian Bank (LCB) as an institution of money laundering concern; LCB subsequently absorbed by another bank.
  - AML supervision of financial transactions strengthened; draft law under review to put in place a declaration system for cross-border cash transactions.
  - BdL decision to raise minimum capital of money exchanges expected to encourage consolidation and improve AML/CFT preventive capacity.

### Statistics and data
- Lebanon’s statistics lag those of most middle-income countries; gaps span national accounts, balance of payments, and social and labor market indicators.
- Authorities intend to provide a clear legal mandate and appropriate funding to the Central Administration of Statistics (CAS); staff welcome this intention and emphasize need for upgraded statistics.

### Staff appraisal and policy recommendations
- Recent performance and risks:
  - A four-year spell of strong economic performance has ended; domestic political uncertainty and regional unrest have eroded market confidence.
  - Lebanon faces high risks, including spillovers from the conflict in Syria.
  - Vulnerabilities: persistently high current account deficit; one of the highest government debt-to-GDP ratios in the world; reliance of financial stability on deposit inflows.
- Policy priorities:
  - Maintain fiscal discipline and high buffers; 2012 budget should target a small primary surplus to keep debt-to-GDP on a downward path.
  - Embed the 2012 budget in a medium-term agenda to facilitate prioritization; revenue measures to improve equity; target new program for the extreme poor to pave way for better targeting of subsidies.
  - Reduce government reliance on BdL financing: allow interest rates on T-bills with maturities of less than 7 years to rise; seek parliamentary approval for new foreign currency borrowing.
  - Tackle infrastructure bottlenecks through investment and reform; improve business climate and labor market to promote inclusive and sustained growth.
  - Preserve the currency peg as cornerstone of financial stability, while regaining competitiveness through productivity-enhancing reforms; caution that wage increases beyond productivity gains would be counterproductive.
  - Strengthen BdL’s balance sheet via a medium-term plan to improve its income position.
  - Enhance bank regulation and supervision to focus on early problem detection, integrated cross-border stress testing, factoring stress test results into capital buffers and provisions, and strengthening loan classification and provisioning.
  - Continue to enhance the AML/CFT framework.
  - Provide CAS with appropriate support, mandate, and funding to improve statistics.

*Source: LEBANON 2011 ARTICLE IV REPORT — excerpts presented in the supplied content.*

### 48.      It is proposed that the next

### _cr1239 - 48.      It is proposed that the next

### Article IV consultation timing
- It is proposed that the next Article IV consultation takes place on the standard 12-month cycle.

### Summary of macroeconomic performance and projections (2009–16)
- Real GDP (market prices): 8.5, 7.0, 1.5, 3.5, 4.0, 4.0, 4.0, 4.0 (annual percent change, 2009–16)
- GDP deflator: 7.0, 3.0, 3.7, 5.1, 3.9, 2.2, 2.2, 2.2
- Consumer prices (end-of-period): 3.4, 5.1, 5.5, 5.5, 2.2, 2.2, 2.2, 2.2
- Investment and saving (percent of GDP): Gross capital formation 33.7, 28.1, 21.4, 24.0, 25.9, 25.9, 25.9, 25.9; Gross national savings 23.9, 17.5, 7.3, 10.2, 12.9, 13.9, 14.7, 15.4
- Government overall balance (cash basis, percent of GDP): -8.2, -7.5, -8.3, -8.3, -8.1, -8.0, -8.3, -8.8
- Primary balance (cash basis, percent of GDP): 2.8, 2.7, 1.0, 0.4, 0.6, 0.6, 0.6, 0.6
- Total government debt (percent of GDP): 146, 137, 134, 132, 130, 130, 131, 132

### Central government finances (levels and composition, 2010–16; in billions of Lebanese pounds)
- Revenue and grants (2010–16): 12,802; 12,738; 13,654; 16,135; 17,256; 18,278; 19,339; 20,522
- Revenue (2010–16): 12,625; 12,684; 13,543; 16,025; 17,228; 18,250; 19,312; 20,495
  - Tax revenue (2010–16): 8,968; 9,976; 9,556; 11,717; 12,619; 13,355; 14,077; 14,935
    - VAT revenues (component): 2,889; 3,193; 3,197; 4,213; 4,541; 4,837; 5,100; 5,435
- Total expenditures (2010–16): 17,095; 16,963; 18,732; 21,637; 23,042; 24,406; 26,097; 28,075
  - Interest payments (2010–16): 5,799; 5,905; 5,684; 5,736; 6,215; 6,575; 7,233; 8,043
  - Capital expenditure (2010–16): 757; 829; 1,070; 2,190; 2,045; 2,178; 2,310; 2,456
- Overall balance (checks issued, 2010–16): -4,293; -4,225; -5,078; -5,502; -5,787; -6,128; -6,757; -7,553
- Net financing and main sources (2010–16): Net financing 4,321; 4,327; 5,078; 5,502; 5,787; 6,128; 6,757; 7,553
  - Banking system financing: 4,856; 3,002; 5,760; 3,357; 3,924; 4,184; 4,821; 5,637

### Government debt structure (2009–16)
- Total government gross debt (in percent of GDP): 146, 137, 134, 132, 130, 130, 131, 132
- Foreign-denominated debt (percent of gross debt): 42, 39, 38, 42, 45, 48, 51, 53 (noted in various tables)
- Net debt (in billions LL; 2009–16): 46,428; 49,042; 52,384; 56,034; 59,872; 63,938; 68,420; 73,431
- Gross debt by holder (in billions LL; 2009–16): 51,152; 52,602; 54,372; 58,022; 61,860; 65,926; 70,408; 75,419
  - Banking system holdings (2009–16): 37,558; 38,318; 40,541; 42,767; 45,370; 48,146; 51,344; 55,084
  - Eurobonds (2009–16): 12,603; 12,388; 13,017; 14,969; 17,289; 19,851; 22,855; 25,682

### Monetary sector and liquidity (2009–13)
- Broad money (M5, year levels in trillions of LL): 148.8; 167.0; 182.0; 200.2; 220.2 (2009–13)
- Broad money (M5, percent change): 23.2, 12.2, 9.0, 10.0, 10.0 (selected years)
- Deposits in foreign currency (2009–13, in trillions LL): 93.8; 103.2; 118.3; 126.2; 138.9
- Reserve and foreign asset indicators:
  - Gross international reserves (excluding gold, in billions of U.S. dollars): 27.4; 30.2; 30.6; 34.4; 37.6 (2009–13)
  - Gross international reserves (including gold, in billions U.S.$): 37.5; 43.2; 45.7; 49.4; 52.7
  - Gross reserves (in months of next year imports): 10.6; 10.8; 10.3; 10.8; 11.1 (2009–13)

### External sector and balance of payments (2009–16, millions of U.S. dollars)
- Current account (excl. official transfers, 2010–16): -3,453; -4,062; -5,707; -6,097; -6,186; -6,060; -6,016; -5,985
- Goods (net, 2010–16): -11,179; -12,258; -13,553; -14,598; -15,658; -16,779; -18,010; -19,334
  - Exports f.o.b. (2010–16): 4,716; 5,467; 6,068; 6,553; 7,143; 7,800; 8,487; 9,229
  - Imports f.o.b. (2010–16): -15,895; -17,724; -19,621; -21,151; -22,801; -24,579; -26,497; -28,563
- Current account balance (in percent of GDP): -9.7, -10.6, -14.1, -13.9, -13.0, -12.0, -11.2, -10.5
- Total external debt (year-end; in percent of GDP): 175, 161, 158, 159, 163, 170, 174, 178
- Gross international reserves (levels, 2009–16, in millions U.S.$): 27,405; 30,172; 30,601; 34,358; 37,641; 41,588; 45,134; 47,983
- Foreign direct investment (2010–16): 10.5; 9.9; 8.3; 9.3; 9.2; 9.4; 9.5; 9.7

### Baseline and reform scenario comparisons (selected indicators, 2009–16)
- Real GDP (market prices)
  - Baseline scenario: 8.5, 7.0, 1.5, 3.5, 4.0, 4.0, 4.0, 4.0
  - Reform scenario: 8.5, 7.0, 1.5, 3.5, 4.5, 5.0, 5.0, 5.0
- Central government finances (cash basis, percent of GDP)
  - Revenue (baseline vs. reform, 2009–16): baseline 24.3, 22.0, 22.4, 24.3, 24.1, 24.0, 23.9, 23.9; reform 24.3, 22.0, 22.4, 24.3, 24.6, 24.8, 25.9, 26.0
  - Expenditure (baseline vs. reform): baseline 32.5, 29.4, 30.7, 32.6, 32.1, 32.0, 32.2, 32.6; reform 32.5, 29.4, 30.7, 32.6, 31.6, 30.0, 29.8, 29.4
  - Overall balance (baseline vs. reform): baseline -8.2, -7.5, -8.3, -8.3, -8.1, -8.0, -8.3, -8.8; reform -8.2, -7.5, -8.3, -8.3, -7.0, -5.1, -3.9, -3.4
  - Primary balance (baseline vs. reform): baseline 2.8, 2.7, 1.0, 0.4, 0.6, 0.6, 0.6, 0.6; reform 2.8, 2.7, 1.0, 0.4, 1.5, 2.9, 3.7, 3.9
- Total government debt (percent of GDP)
  - Baseline: 146, 137, 134, 132, 130, 130, 131, 132
  - Reform: 146, 137, 134, 132, 128, 125, 120, 116
- Current account balance (percent of GDP)
  - Baseline: -9.7, -10.6, -14.1, -13.9, -13.0, -12.0, -11.2, -10.5
  - Reform: -9.7, -10.6, -14.1, -13.9, -12.7, -11.5, -10.4, -9.3
- Gross reserves (excluding gold, in billions of U.S. dollars)
  - Baseline: 27.4, 30.2, 30.6, 34.4, 37.6, 41.6, 45.1, 48.0
  - Reform: 27.4, 30.2, 30.6, 34.4, 37.0, 39.0, 40.1, 40.5

### Banking sector financial soundness indicators (2007–11 highlights)
- Assets (in millions of U.S. dollars, 2007–11): 82,255; 94,255; 115,250; 128,925; 141,891
- Capital adequacy ratio (Feb 2011 / Basel II weights): 12.5; 12.1; 13.7; 13.3; 13.3
- NPLs (percent): 10.1; 7.5; 6.0; 4.3; 3.8
- Provisions against NPLs (percent of NPLs): 56.9; 61.3; 63.9; 62.0; 60.1
- Share of claims on government (percent of assets): 26.1; 27.0; 25.2; 22.7; 21.1
- Net liquid assets/total assets: 40.3; 42.3; 46.5; 45.1; 41.5
- FC deposits/total deposits (Aug 2011): 77.4; 69.6; 64.5; 63.3; 66.0 (series shown across years)
- Returns and margins (selected): Average return on assets (after tax) ~1.02–1.23; Average return on equity (after tax) ~12.1–13.8; Net interest margin ~2.0–1.7

### Indicators of financial and external vulnerability (2007–11)
- Broad money (M5, levels in millions U.S.$): 69,423; 80,174; 98,737; 110,761; 120,730 (2007–11)
- Private sector credit (annual percent change): 15.8; 18.5; 15.1; 24.8; 11.0
- Overall fiscal balance (in percent of GDP, 2007–11): -10.8; -9.5; -8.2; -7.5; -8.3
- Interest payments (in percent of GDP): 12.5; 11.0; 11.0; 10.2; 9.3
- Gross public debt (in percent of GDP): 167.7; 156.3; 146.5; 136.7; 134.3
- External current account balance (in percent of GDP): -6.8; -9.2; -9.7; -10.6; -14.1
- Gross official reserves (millions U.S.$): 11,496; 18,769; 27,405; 30,172; 30,601
  - Reserves (in percent of short-term external debt): 29.7; 44.8; 52.6; 56.4; 55.4

### Key demographic and memorandum items
- Population: est. 3.9 million; 2010
- Per capita GDP: est. US$9,840; 2010
- Quota: SDR 266 million
- Poverty rate: 28 percent; 2004–05
- Unemployment: 9.7 percent; 2007
- Nominal GDP (in billions of U.S. dollars, 2009–16): 34.9; 38.5; 40.5; 44.0; 47.6; 50.6; 53.7; 57.1

*Sources: Lebanese authorities; and IMF staff estimates and projections.*

### Annex 1. Lebanon: Public Debt Sustainability Analysis

### Annex 1. Lebanon: Public Debt Sustainability Analysis

### Debt level and structure
- Gross government debt: 134 percent of GDP (US$ 54.2 billion) at end-October 2011.
- Share of domestic-currency debt: 61 percent; average maturity: 2.6 years.
- Average maturity of foreign-currency debt: 5.2 years.
- Holdings: domestic banks 54 percent; Banque du Liban (BdL) 20 percent.

### Baseline scenario (no policy change)
- Assumptions:
  - Primary balance: stay broadly unchanged at around ½ percent of GDP from 2013 onward.
  - Annual growth: converge to potential of 4 percent.
  - Interest rates: increase gradually in line with projected increase in global interest rates.
- Projection:
  - Debt-to-GDP ratio: would hover slightly above 130 percent throughout the medium term.
  - Baseline public sector debt series (selected): 2011: 134.3; 2012: 131.8; 2013: 130.0; 2014: 130.4; 2015: 131.1; 2016: 132.1.
- Key macro assumptions underlying baseline (selected):
  - Real GDP growth: 2011: 5.2; 2012–2016: 3.1 (2012), 1.5 (2013), 3.5 (2014), 4.0 (2015), 4.0 (2016), 4.0 (long run).
  - Average nominal interest rate on public debt: 2011: 8.6; 2012–2016: 1.7 (2012 historical std?), 7.2 (2013), 7.0 (2014), 7.1 (2015), 7.1 (2016), 7.3 (long run).
  - Primary deficit (percent of GDP): 2011: -1.0; 2012: -0.4; 2013: -0.6; 2014: -0.6; 2015: -0.6; 2016: -0.6.

### Stress tests and shocks (public debt)
- Individual permanent shock of ½ standard deviation (relative to baseline) applied to:
  - Interest rate: debt ratio increases to 145 percent of GDP by 2016.
  - Growth rate: debt ratio increases to 148 percent of GDP by 2016.
  - Primary balance: debt ratio increases to 136 percent of GDP by 2016.
- Combined permanent shock of ¼ standard deviation (relative to baseline) applied to interest rate, growth rate, and primary balance:
  - Debt-to-GDP ratio increases to 146 percent by 2016.

### Reform scenario (policy package)
- Measures to increase medium-term growth and fiscal consolidation, lowering government debt and spreads.
- Revenue measures (estimated yields):
  - Comprehensive capital gains tax: yield 0.3 percent of GDP.
  - Increasing selected excises: 0.6 percent of GDP.
  - Increasing VAT rate to 15 percent: yield 1.1 percent of GDP.
  - Broadening VAT and income tax bases.
- Expenditure measures:
  - Reform electricity sector to allow gradual tariff increases to cost recovery; reduction in transfers to the loss-making electricity company by more than two thirds over the medium term.
- Outcome under reform scenario:
  - Debt declines to 97 percent of GDP by 2020.

### Projections and selected fiscal tables (high-level figures)
- Public sector debt-to-revenue ratio (selected): 2011: 600.3; 2012: 542.1; 2013: 540.4; 2014: 543.7; 2015: 548.8; 2016: 554.0.
- Gross financing need (in billions of U.S. dollars, selected): 2010: 44.9; 2011: 42.9; 2012: 42.1; 2013: 54.2; 2014: 33.7; 2015: 25.8; 2016: 26.9; (additional rows show in billions) 2010: 13.5; 2011: 15.0; 2012: 16.2; 2013: 21.9; 2014: 14.8; 2015: 12.3; 2016: 13.6; 2017: 18.0; 2018: 17.8 (table formatting in source).
- Scenario snapshots:
  - Scenario with key variables at their historical averages: shows declining debt from 134.3 (2011) to 125.0 (2016) in table series.
  - Scenario with no policy change (constant primary balance) in 2011–2016: series shown as 134.3 (2011), 131.2 (2012), 129.0 (2013), 129.0 (2014), 129.2 (2015), 129.8 (2016).

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### Annex 2. Lebanon: External Debt Sustainability Analysis

### External debt level and composition
- External debt-to-GDP: estimated at 161 percent in 2010 (down from 199 percent in 2006).
- Composition: about 80 percent of external debt consists of short-term nonresident deposits in the banking sector.
- Nonresident deposits: largely owned by the Lebanese diaspora; treated as behaving like long-term deposits; comprise about 85 percent of gross financing needs over the medium term.
- Data treatment note: due to lack of maturity information, all external nondeposit liabilities of banks and the full amount of external debt of nonbanks are treated as short-term, implying an upward bias in gross annual financing needs and short-term external debt estimates.

### Baseline projections (external debt)
- Under baseline, external debt expected to increase to 178 percent of GDP by 2016, reflecting expected increase in nominal interest rates and continuous inflows of nonresident deposits.
- Baseline external debt series (selected): 2010: 161.1; 2011: 157.6; 2012: 158.6; 2013: 163.5; 2014: 169.7; 2015: 174.0; 2016: 177.7.

### Stress tests and shocks (external debt)
- One-time real depreciation of 30 percent in 2012:
  - Debt level on impact: 244 percent of GDP; rises to 273 percent of GDP by 2016.
- Permanent shock of ½ standard deviation (relative to baseline) applied to:
  - Interest rate: debt ratio rises to 183 percent of GDP by 2016.
  - Growth rate: debt ratio rises to 191 percent of GDP by 2016.
  - Noninterest current account balance: debt ratio rises to 194 percent of GDP by 2016.
- Combined permanent shock of ¼ standard deviation applied to interest rate, growth rate, and noninterest current account balance:
  - Debt ratio rises to 195 percent of GDP by 2016.

### Drivers and sensitivities
- Debt dynamics are most sensitive to exchange rate shocks; underscores importance of the exchange rate peg as a linchpin of macroeconomic and financial stability in Lebanon.
- Gross external financing need (selected):
  - In billions of US dollars: 2006: 34.9; 2007: 37.3; 2008: 40.8; 2009: 45.1; 2010: 55.1; 2011: 58.3; 2012: 60.5; 2013: 66.1; 2014: 73.4; 2015: 80.7; 2016: 88.3.
  - In percent of GDP: 2010: 143.2; 2011: 144.0; 2012: 137.4; 2013: 138.9; 2014: 145.3; 2015: 150.2; 2016: 154.7.
- External debt-to-exports ratio (selected): 2010: 248.9; 2011: 247.4; 2012: 252.5; 2013: 260.2; 2014: 265.1; 2015: 266.8; 2016: 267.4.

### Key macro assumptions underlying external baseline (selected)
- Real GDP growth: 2011: 5.2; 2012: 3.2; 2013: 1.5; 2014–2016: 3.5, 4.0, 4.0 respectively; long-run: 4.0.
- Nominal external interest rate (in percent): 2011: 7.0; projections: 2012: 4.7; 2013: 5.0; 2014: 5.2; 2015: 5.5; 2016: 5.8; long-run: 5.9.
- Current account balance, excluding interest payments (percent of GDP): 2011: 6.9; 2012: 6.6; 2013: 5.4; 2014: 3.5; 2015: 1.9; 2016: 0.8.
- Net non-debt creating capital inflows (percent of GDP): 2011: -8.3; 2012: -9.3; projections around -9.2 to -9.7 through 2016.

*Source: Annex 1 and Annex 2. Lebanon: Public Debt Sustainability Analysis and External Debt Sustainability Analysis, IMF staff estimates and country desk data, 2011 Article IV Report (tables and figures as provided in the source).*

### ANNEX I. LEBANON—FUND RELATIONS

### ANNEX I. LEBANON—FUND RELATIONS (As of November 30, 2011)

### Membership and Quota Position
- Joined: April 14, 1947; Article VIII
- General Resources Account (SDR Million; Percent Quota)
  - Quota: 266.40; 100.00
  - Fund holdings of currency: 269.78; 101.27
  - Reserve position in Fund: 34.68; 13.02
- SDR Department (SDR Million; Percent)
  - Allocation / Net cumulative allocation: 193.29; 100.00
  - Holdings: 192.61; 99.65

### Use of Fund Resources and Financial Arrangements
- Outstanding credit originates from two drawings under Emergency Post-Conflict Assistance (EPCA) in April 2007 and November 2008.
- The last EPCA assessment report was issued in November 2009.
- Outstanding Purchases (SDR Million; Percent Quota)
  - EPCA: 38.06; 14.29
- Latest Financial Arrangements: None.

### Projected Obligations to Fund (SDR million; based on existing use of resources and present holdings of SDRs)
- Forthcoming
  - 2012
    - Principal: 25.38
    - Charges/interest: 0.30
    - Total: 25.68
  - 2013
    - Principal: 12.69
    - Charges/interest: 0.10
    - Total: 12.79
  - 2014
    - Principal: 0.00
    - Charges/interest: 0.01
    - Total: 0.01
  - 2015
    - Principal: 0.00
    - Charges/interest: 0.00
    - Total: 0.00

### Safeguards Assessment
- A full safeguards assessment of the Banque du Liban (BdL) was completed in conjunction with the first EPCA.
- The 2008 safeguards assessment report proposed specific measures to enhance BdL’s financial reporting, audit, and control procedures, and recommended an update of the central bank law.
- An update safeguards assessment was completed in August 2009 in the context of the second EPCA.
  - The update noted progress in enhancing procedures for reserve management and external audit.
  - Recommended further actions to strengthen financial reporting transparency, oversight, central bank legislation, and internal audit.

### Nonfinancial Relations — Exchange Arrangement
- Lebanon accepted the obligations of Article VIII, Sections 2, 3 and 4 in 1993 and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions.
- The exchange arrangement maintains a de-facto peg to the U.S. dollar and is classified as stabilized.
- 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 and Financial Sector Assessments
- Last Article IV Consultation: concluded by the Executive Board on July 30, 2010.
  - Directors welcomed Lebanon’s strong economic and financial performance during the global recession.
  - Directors underscored the need to address the high government debt, implement growth-enhancing structural reforms, and maintain vigilance to prevent new vulnerabilities.
- Financial Sector Assessment Program participation:
  - Participated in 1999 (report presented at the 1999 Article IV consultation).
  - Financial System Stability Assessment update conducted in 2001 (report presented at the 2001 Article IV consultation).

### Resident Representation
- IMF Resident Representative Office opened January 2008 and closed August 2011.
  - Mr. Edward Gardner: Resident Representative from January 2008 to March 2009.
  - Mr. Eric Mottu: Resident Representative from September 2009 to August 2011.
- Fund maintains a local office headed by Ms. Najla Nakhle and hosted by METAC.

### Technical Assistance (TA) — Summary of Activities and Focus Areas
- Fiscal area (FAD; METAC)
  - Advice provided on introducing the VAT, reforming customs tariffs and income taxes, strengthening tax and customs administration, and improving expenditure policy and public expenditure management.
  - Fiscal ROSC published in May 2005.
  - 2005–07 TA focused on:
    - (i) consolidating fiscal accounts;
    - (ii) improving liquidity management;
    - (iii) identifying fiscal reform priorities;
    - (iv) reforming subsidies and restoring gasoline excises;
    - (v) improving budget preparation and execution processes.
  - 2008–09: targeted follow-up support to tax administration and public financial management (PFM), e.g., tax audit program, treasury single account and cash management.
  - 2010–11: assistance on tax policy options and reform priorities in tax administration and PFM; METAC assistance on tax and customs administration, compliance management in the banking sector, and merging the VAT and income tax directorates.
- Financial area (MCM; METAC)
  - TA mainly on payment and settlement systems and vulnerability indicators.
  - Assessed compliance with Core Principles for Systemically Important Payment Systems.
  - Advised on systems to improve efficiency and liquidity management of public sector payments and receipts.
  - Advised on developing an early warning system (EWS) for the financial sector based on prudential data.
  - 2010–11: METAC provided training on consolidated supervision and assessing banks’ business and strategic plans; continued assistance in developing an EWS.
- Statistical area (Statistics Department; METAC)
  - TA in national accounts, price and balance of payments statistics.
  - Several CPI missions through METAC (2007); new monthly country-wide CPI launched March 2008.
  - Resident advisor provided capacity-building for national accounts statistics and economic surveys.
  - METAC (2008) assisted on balance of payments and international investment position statistics; later provided recommendations on improving work processes in the BdL’s Statistics and Economic Research Department.
  - 2010–11 TA focused on:
    - (i) assessing work processes at the BdL;
    - (ii) developing a producer price index;
    - (iii) discussing plans to move compilation of national accounts statistics from the Prime Minister’s office to the Central Administration of Statistics;
    - (iv) improving balance of payments/international investment position statistics.

*Source: ANNEX I. LEBANON—FUND RELATIONS (As of November 30, 2011).*

### 1. Bank Work

### 1. Bank Work

### Bank Work Program — Ongoing and Planned Activities
- Country Assistance Strategy: Implementation between July 2010 and July 2014.
- Assistance to the Electricity Sector:
  - Possible investment lending in support of the strategic plan of the government.
  - Technical assistance for LNG and energy efficiency.
  - Board discussion in 2012.
- Assistance for Private Sector Development (SMEs):
  - Possible lending and TA for SME growth and innovation.
  - Implementation of the TA project started in May 2009.
  - Progress will be monitored through the Bank’s semi-annual supervision reports and the authorities’ quarterly progress reports.
  - Tentative board date: March 2012.
- Technical assistance on PFM (budget preparation, debt and aid management).
- National Poverty Targeting Program - Phase I: Ongoing; Implementation throughout FY2012-13.
- National Poverty Targeting Program – Phase II / Community Social Development: Possible lending; Tentative board date: July 2012; Implementation throughout FY2012-16.
- Lending operation in the education sector: Ongoing; Implementation throughout FY2010-16.
- Lending operation – Greater Beirut water project: Ongoing.
- Lending operation – Baalbek water project: Ongoing.
- Analytical and sector work and technical assistance in the area of social services (including education, health and pensions systems): Ongoing; Closing in 2012; Implementation throughout FY2012–13.
- Analytical work and technical assistance on labor market: Ongoing; Initiation in December 2011.
- Analytical and sector work on growth and welfare in a context of fiscal consolidation: Preparatory work is ongoing.
- Sector work on gender and environment: Ongoing throughout FY12; Completion throughout FY2012.
- Survey-Based Investment Climate Assessment (ICA) Update: Completed; Draft report submitted to the government; Dissemination in FY2012.
- Foreign Inflows and Broad Based Growth—Impact of Policy Choices: Completed; Implementation throughout FY2012–13.
- Assistance in implementing the statistical master plan: Initiation mission in December 2011.

### Timing and Delivery Notes (Bank)
- Board discussion in 2012 (Electricity Sector).
- Tentative board date: March 2012 (SME support).
- Tentative board date: July 2012 (Poverty Targeting Program Phase II).
- Initiation in December 2011 (labor market work; statistical master plan initiation mission in December 2011).
- Closing in 2012 (social services work).
- Implementation timelines explicitly noted as: Implementation between July 2010 and July 2014; Implementation throughout FY2012-13; Implementation throughout FY2012-16; Implementation throughout FY2010-16; Implementation throughout FY2012–13; Ongoing throughout FY12.

### 2. Fund Work Program

### Article IV Consultation and Technical Assistance
- Article IV Consultation Staff Report:
  - Mission: November 2011.
  - Expected delivery date: January 2012.
- Technical assistance (TA) topics and timing:
  - Capital gain tax — If requested, 2012.
  - PFM reform — If requested, 2012.
  - Budget System Law — If requested, 2012.
  - Statistics (national accounts, BOP) — Ongoing; 2012; Completion by April 2013.
  - Banking Supervision — If requested, 2012.
  - Early Warning System — Ongoing; 2012; Completion by December 2013.
- General TA timing references: Early 2012; 2012; Completion by April 2013; Completion by December 2013.

### 3. Joint Work Program

### FSAP Update
- FSAP Update: If requested, 2012; Timing noted as 2012.

*Source: 2011 ARTICLE IV REPORT—INFORMATIONAL ANNEX LEBANON, INTERNATIONAL MONETARY FUND*

### ANNEX III. LEBANON—STATISTICAL ISSUES

### ANNEX III. LEBANON—STATISTICAL ISSUES

### I. Assessment of Data Adequacy for Surveillance
- General
  - Data provision has serious shortcomings.
  - Weaknesses in compilation of national accounts, the labor market, general government and the other nonfinancial public sector, and balance of payments.
  - No national data on wages and real estate activity and prices.
  - Data on poverty and income distribution are patchy.
  - Raising statistical capacity to those of other upper middle income countries requires a firm commitment and high-level support from the government, allocation of sufficient resources, and a clear legal mandate to the Central Administration of Statistics (CAS).

- National accounts
  - National accounts data are weak; only annual data publicly available, currently until 2009.
  - National accounts statistics are produced by a team in the Prime Minister’s office using mostly administrative data sources and compilation methods that do not conform to best practices.
  - Launch of comprehensive economic surveys and transfer of national accounts compilation to CAS repeatedly delayed; transfer planned for the 2011 accounts.
  - STA assisting CAS to build capacity to produce national accounts estimates based on sound methodology and comprehensive data collection.
  - Work underway to incorporate the 2004 economic survey data into national accounts estimates.

- Price statistics
  - Since May 2008, CAS compiles and disseminates a monthly Consumer Price Index (CPI) following internationally accepted methodology, covering all areas in Lebanon and disseminated within three weeks after the reference month.
  - Since 2009 the CAS index is the primary CPI for Lebanon; prior to 2009 a private sector index based on Beirut and suburbs was used.
  - Remaining shortcomings: delays in survey of some prices (e.g., housing); need to develop regular and timely producer prices, wages, and real estate prices statistics.
  - METAC mission in 2010 produced a plan to develop a monthly producer price index to be compiled and released on a quarterly basis.

- Government finance statistics
  - Dissemination of central government finance statistics has improved markedly, but coverage is not comprehensive.
  - Published monthly central government budgetary accounts omit certain transfers, financing data, foreign-financed capital expenditure, and arrears.
  - Certain (treasury) spending identified ex-post and presented in an economic classification with a lag; these items are provided to the MCD country team in surveillance.
  - Government finance statistics: cash basis for revenue data; modified cash basis for budgetary expenditure data corresponding to issuance of payment orders.

- Monetary and financial statistics
  - Monetary statistics are adequate.
  - Sectoralization of institutional units and classification of financial instruments reported to STA fall short of what is needed for Standardized Report Forms.
  - Banque du Liban (BdL) does not publish externally audited financial statements and reporting practices are not yet fully compliant with International Financial Reporting Standards (reflecting in part domestic legislation restrictions).
  - Lack of reliable classification of deposits by residency complicates balance of payments analysis.

- Balance of payments
  - Balance of payments (BoP) statistics are weak with deficiencies in:
    - Current account: unrecorded exports; uncertainty in private sector services, workers’ remittances, and investment income estimates.
    - Capital account: grants.
    - Financial account: foreign direct investment, equity investment in the nonbank private sector, and corporate borrowing abroad.
  - No progress in implementation of a Foreign Direct Investment survey.
  - Forms and reporting requirements for banks and nonbanks amended in January 2010 to include a more comprehensive BoP breakdown.
  - Lack of effective inter-agency cooperation and staff constraints at BdL and CAS impede progress.

### II. Data Standards and Quality
- Participant in the General Data Dissemination System since January 2003.
- Metadata and the plans for improving the real and fiscal statistics need to be updated.
- No data ROSC is available.

### III. Reporting to STA
- Lebanon reports annual data based on GFSM 2001 for the Government Finance Statistics Yearbook; data suffer from weaknesses, mainly limited coverage.
- Reporting of monetary data to STA is irregular, though the MCD country team receives them on a timely basis.
- In September 2011, BdL started submitting to STA core Financial Soundness Indicators data and metadata; data for 2011 have been posted on the IMF website.

### Key surveillance-related indicator observations (as of January 6, 2012)
- Exchange Rates: Date of Latest Observation 01/05/12; Date Received 01/05/12; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities1: Date of Latest Observation 11/2011; Date Received 01/2012; Frequency M; Frequency of Reporting M; Frequency of Publication M.
- Reserve/Base Money: 11/2011 (11/2011 received 01/2012) — M / M / M.
- Broad Money: 11/2011 (11/2011 received 01/2012) — M / M / M.
- Central Bank Balance Sheet: 11/2011 (11/2011 received 01/2012) — M / M / M.
- Consolidated Balance Sheet of the Banking System: 11/2011 (11/2011 received 01/2012) — M / M / M.
- Interest Rates2: Date of Latest Observation 12/2011; Date Received 12/2011; Frequency of Data W/M; Frequency of Reporting W/M; Frequency of Publication W/M.
- Interest Rates3 (market rates): Date of Latest Observation 10/2011; Date Received 12/2011; Frequency M; Frequency M; Frequency M.
- Consumer Price Index: 11/2011 (Date Received 12/2011) — M / M / M.
- Revenue, Expenditure, Balance and Composition of Financing4 – General Government5: N/A / N/A / N/A / N/A / N/A.
- Revenue, Expenditure, Balance and Composition of Financing4 – Central Government: 09/2011 (Date Received 12/2011) — M / M / M.
- Stocks of Central Government and Central Government-Guaranteed Debt6: 10/2011 (Date Received 11/2011) — M / M / M.
- External Current Account Balance: Q4/2010 (Date Received Q2/2011) — Q / Q / Q.
- Exports and Imports of Goods and Services: Q4/2010 (Date Received Q2/2011) — Q / Q / Q.
- GDP/GNP: 2009 (Date Received 12/2010) — A / A / A.
- Gross External Debt7: 10/2011 (Date Received 11/2011) — M / M / M.
- International Investment Position: N/A / N/A / N/A / N/A / N/A.

Notes from the indicator table:
- 1 Includes reserve assets pledged or otherwise encumbered as well as net derivative positions (reported to the country team with a lag).
- 2 Both market-based and officially-determined policy interest rates (including discount rates, rates on treasury bills, notes and bonds).
- 3 Market interest rates (including average deposit and lending rates in Lebanese pounds and U.S. dollar).
- 4 Foreign, domestic bank, and domestic nonbank financing.
- 5 General government consists of central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.
- 6 Including currency and maturity composition.
- 7 Staff estimate based on public external debt, non-resident deposits, and claims of the BIS banks on nonfinancial private sector.
- 8 Frequency codes: Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); or Not Available (NA).

Italicized source attribution:
*Source: ANNEX III. LEBANON—STATISTICAL ISSUES (As of January 6, 2012).*

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