Public Information Notice: IMF Concludes 2004 Article IV Consultation with Lebanon

July 7, 2004

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 7, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lebanon.1


A positive external environment boosted economic activity in 2003. Despite the adverse effects of the war in Iraq, real GDP growth picked up to an estimated 3 percent, with inflation remaining in the low single digits. The rebound rests on stronger regional demand for tourism, real estate and other services, as well as goods exports. The depreciation of the U.S. dollar, to which the Lebanese pound is pegged, has strengthened competitiveness. These trends are expected to continue into 2004, with growth stabilizing at around 3 percent. However, growth remains below potential and, by all accounts, unemployment remains high and job prospects for recent graduates poor.

The strength of external demand has been matched by equally buoyant capital inflows. In addition to large official inflows related to Paris II, private capital inflows surged in 2003, driven by the reflow of Arab saving and attractive yields on deposits. As a result, liquidity (broad money plus nonresident deposits) grew by 15 percent in 2003. Yields on two-year CDs and T bills have stabilized at around 8 percent. While the current account deficit declined only modestly to 13 percent of GDP, the turnaround in the capital and financial account and dedollarization contributed to an increase in net international reserves (NIR) in 2003. Gross reserves stand at around US$10 billion. Capital inflows and monetary growth have remained strong in the first two months of 2004.

Policy outcomes have fallen short of the authorities' Paris II objectives. The domestic policy consensus that emerged around the Paris II conference gave way to renewed political tensions in the course of 2003, and major policy decisions are on hold ahead of forthcoming elections. Markets appear to have largely discounted the policy stalemate of 2004, banking on the emergence of a clearer political consensus for reform after elections.

Following an impressive deficit reduction in 2001-02, the pace of fiscal adjustment slowed down in 2003. While revenue grew strongly and wage and pension outlays were well contained, capital spending and transfers—in particular to the electricity company (EdL)—exceeded targets by wide margins. As a result, the primary surplus, at 3.6 percent of GDP, was well below target. The government gross financing need for 2003 (about 60 percent of GDP) was financed through a mix of exceptional and central bank financing, with limited recourse to the market.

The privatization of the two mobile phone operators fell through as foreign operators withdrew from the bidding process in January 2004, and bids from the two domestic operators came in below expectations. Unresolved issues about the government's stake in the companies and about the regulatory framework appear to have undermined the confidence of foreign investors. Management contracts were awarded in early April, pending a new privatization drive.

Failure to privatize the two mobile phone networks and slippages on the fiscal front resulted in a further increase in the debt ratio, to 185 percent at end-2003. The 2004 budget is also a reflection of the current policy stalemate, with no new tax or expenditure measures. If expenditure is kept in check, the primary fiscal surplus could be stabilized at 3½ percent of GDP. A decline in the government interest bill (due to lower spreads and exceptional financing related to Paris II) should permit a stabilization of the debt ratio in 2004.

Against a favorable external environment, the soft landing strategy presented at the Paris II conference remains the guiding policy framework for the authorities, notwithstanding recent policy slippages.

Executive Board Assessment

Executive Directors welcomed the recent positive macroeconomic developments in Lebanon, with real GDP growth accelerating despite the adverse effects of the war in Iraq, inflation remaining low, and international reserves increasing. The benign near-term economic outlook is underpinned by the confidence-building outcome of the Paris II conference and a generally favorable external environment, characterized by strong regional demand for Lebanese goods and services and improved competitiveness. Nevertheless, Directors cautioned that the way forward to strengthening economic viability in Lebanon remains long and arduous. They urged the authorities to continue to move forward vigorously with macroeconomic stabilization and structural reforms so as to seize full advantage of the positive momentum generated by the Paris II conference.

Directors emphasized that alleviation of the large financial imbalances and the government's debt burden will be key to achieving macroeconomic stability and sustainable growth. High domestic real interest rates and financial uncertainty dampen private investment and constrain growth, and impede efforts to improve social conditions and reduce unemployment and poverty. The high proportion of government debt on the balance sheets of the banks constitutes the greatest vulnerability in the banking system. The government's ability to roll over its debt depends on the stability of the banks' large deposit base, making Lebanon vulnerable to shifts in market confidence.

Against this background, Directors noted that the soft landing strategy presented at the Paris II conference remains the guiding policy framework for the authorities. They considered that financial risks appear to be manageable in the short run, owing to the favorable external environment and a comfortable level of central bank reserves. Directors were also encouraged by the recent favorable fiscal trends, and hoped that these would bring about a decline in the debt-to-GDP ratio in 2004. They cautioned, however, that in a context of rising world interest rates, achieving the debt and deficit targets set forth at the Paris II conference will become more challenging. Directors stressed that over the medium term a substantial increase in the primary surplus will be necessary to attain debt sustainability, and cautioned that even with considerable fiscal adjustment, the debt dynamics will remain fragile. Directors therefore urged the authorities to undertake deep-seated revenue and expenditure reforms to further reduce the budget deficit, while improving the effectiveness of the public sector. They commended the authorities for using Fund technical assistance effectively to lay the groundwork for future reforms, and urged them to act promptly on these initiatives while maintaining a tight grip on expenditure in 2004.

Directors concurred with the authorities that the exchange rate peg has been helpful in strengthening confidence and remains appropriate at the present juncture. A number of Directors suggested that, going forward, the authorities should consider greater exchange rate flexibility as part of a well-sequenced and broadly-based policy package that aims at continued strengthening of the underlying macroeconomic and structural policies. Directors considered that a clearer assignment of responsibilities for the monetary and debt management functions between the central bank and the ministry of finance would strengthen the monetary policy framework and increase its flexibility.

Directors commended the authorities for the measures taken to improve the soundness of the banking sector, given the dominant role of banks in intermediating government debt and financing the private sector. However, risks remain, relating to banks' exposure to the sovereign, the short maturity of their liabilities, and the foreign currency exposure of borrowers. Nonperforming loans have also increased in recent years, although provisioning for nonperforming loans appears to be adequate. Directors encouraged the authorities to build on recent measures to help establish full-fledged, effectively functioning capital markets in order to consolidate Lebanon's financial infrastructure, including by developing a supportive regulatory and legal framework and promoting reforms in corporate governance.

Directors underscored the importance of structural reforms and privatization to strengthen competitiveness, raise efficiency, and achieve sustained economic growth. They expressed disappointment that the reform momentum has lagged in 2003-04, including the delays in privatization in the telecommunications sector and the absence of new fiscal measures in the 2004 budget.

Directors stressed that institutional reforms would enhance policy credibility. Adoption of an organic budget law, complemented by a fiscal accountability law, would increase transparency, efficiency, and budget control. Directors also encouraged governance reforms in public enterprises to improve their efficiency. These will help prepare the enterprises for privatization, whose resumption Directors considered to be a key element of institutional reforms going forward. They commended the authorities for the transparency of the recent tender for managing the two mobile phone networks. Directors urged the authorities to address structural problems in the electricity company, so as to stem its financial losses and prevent the need for additional budgetary transfers. Directors welcomed the authorities' decision to carry out a fiscal Reports on the Observance of Standards and Codes.

Directors commended the authorities for their open trade regime, the progress made toward WTO membership, and the steps taken to accelerate trade integration with Europe and within the region. They called on the authorities to complement these steps with measures to strengthen domestic competition in order to realize the full benefits of trade liberalization, in particular by eliminating inefficient monopolies and barriers to market entry, establishing bankruptcy laws, and improving regulatory oversight over uncompetitive practices.

Directors noted that gaps in the statistical systems in Lebanon hamper policy analysis and formulation. They called on the authorities to complement the work under way to establish national accounts and strengthen balance of payments statistics with steps to undertake a new household budget survey and to address gaps in price and labor market statistics. They noted that a data ROSC could help focus attention on data improvement needs.

Lebanon: Selected Economic Indicators





















Domestic economy


(In percent)


Change in real GDP










Change in consumer


prices (period average) 1/









External economy


(In billions of U.S. dollars; unless otherwise indicated)


Exports, f.o.b.










Imports, f.o.b.










Current account balance









In percent of GDP










Capital account balance









Overall balance










Gross official reserves 2/









Change in real effective


exchange rate (in percent)









Financial variables


(In percent of GDP; unless otherwise indicated)


Central government


fiscal balance 3/










Gross government debt









Of which in foreign currency









Change in broad money 4/









Yield on 24-month Lebanese


pound treasury bills 5/




















Sources: Data provided by the Lebanese authorities; and IMF Staff estimates.


1/ For Beirut and suburbs.

2/ Excluding gold.

3/ Overall balance, after grants, on a checks issued basis.

4/ In percent, end of period.

5/ In percent, end of period. Primary market rate.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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