Lebanon: IMF Executive Board Concludes Article IV Consultation
IMF News, January 24, 2017
Source details
- Canonical URL
- Lebanon: IMF Executive Board Concludes Article IV Consultation
Other formats
Bibliographic details
- Published: January 24, 2017
Context and political background
- On December 12, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lebanon.
- The protracted conflict in Syria continues to dominate Lebanon’s outlook, with registered refugees now comprising over one-quarter of the population.
- Following a two-and-a-half-year impasse, Lebanon elected a president on October 31, 2016, and appointed a new prime minister soon thereafter; consultations to form a new government are ongoing.
Growth and inflation
- Growth dynamics
- Growth remains subdued after a sharp drop in 2011; it edged upward briefly to 2–3 percent but has slowed again.
- IMF staff estimate that GDP increased by 1 percent in 2015 and project a similar growth rate in 2016.
- Lebanon’s potential growth is about 4 percent; in the absence of a turnaround in confidence or a resolution of the Syrian conflict, growth is unlikely to return to potential soon.
- Inflation
- Inflation declined sharply in 2016 on the back of lower oil prices, but should return to trend (about 2 percent) by early-2017.
Fiscal position and public debt
- Primary and overall fiscal balances
- Low oil prices helped secure a primary surplus of 1.4 percent of GDP in 2015.
- Staff project a similar primary surplus of 1.1 percent in 2016.
- Public debt
- Public debt was 138 percent of GDP in 2015.
- Without decisive corrective action, Lebanon’s debt burden will increase further.
- Fiscal recommendations highlighted by Directors
- A sustained and balanced fiscal adjustment is essential to place public debt on a sustainable downward path.
- Urged passage of a budget for 2017.
- Immediate need for reform in the electricity sector, which is a large drain on the budget and a key bottleneck to competitiveness and equity.
- Significant scope to increase revenue equitably, including by improving compliance and broadening the tax base, starting with fuel taxation.
Monetary policy, BdL operations, and banking sector
- Exchange rate and reserves
- In the context of Lebanon’s fixed exchange rate regime, foreign exchange inflows slowed in the first half of 2016, resulting in a drop in official international reserves.
- During May–October the Banque du Liban (BdL) engaged in an unconventional financial operation which helped boost reserves to above 2015 levels.
- The operation also created sizable excess Lebanese pound liquidity and increased commercial banks’ exposure to the sovereign.
- Monetary policy guidance
- Directors noted the challenges faced by monetary policy in tighter international financial conditions and slowing inflows.
- Monetary policy should remain geared to supporting the peg.
- Directors commended the BdL for maintaining adequate international reserves.
- The BdL’s recent financial operation bolstered gross international reserves and banks’ capital but was not considered a sustainable solution to Lebanon’s funding needs.
- Call for a medium-term strategy to improve the BdL’s balance sheet.
- Banking system and financial stability
- Directors stressed the critical role of Lebanon’s banking system in securing sustained, broad‑based economic growth.
- Noted benefits of measures to introduce forward-looking capital planning; strengthen regulation and supervision by aligning loan classification rules and sovereign risk weights with international good practice; and support liquidity risk management.
- Progress noted since the last full assessment of Lebanon’s AML/CFT framework, but some gaps remain and further enhancement is needed.
- Directors appreciated authorities’ close oversight and highlighted the need for continued vigilance.
Downside and upside risks
- Upside scenarios
- If remaining political milestones are met quickly, the recent election of a president and appointment of a prime minister could pave the way for reform and adjustment, boost the economy, and help correct macroeconomic imbalances.
- A resolution of the Syria conflict would significantly boost Lebanon’s economy.
- Downside scenarios
- Foreign exchange inflows could decelerate.
- Excess Lebanese pound liquidity and reduced banks’ foreign exchange liquidity could put pressure on foreign exchange reserves.
- Growth might remain subdued and fiscal imbalances could widen.
Structural reforms and statistics
- Structural priorities urged by Directors
- Electricity sector reform.
- Legislation to reinvigorate private investment, including in the oil and gas sector.
- Better service provision and stronger safety nets.
- Increased growth to help cope with refugee inflows.
- Statistics
- Directors urged decisive steps to improve Lebanon’s statistical system, building on ongoing progress.
Executive Board Assessment (summary of Directors’ views)
- Commended authorities for preserving macroeconomic stability and market confidence amid significant spillovers from the conflict in Syria, including refugee inflows.
- Recognized that hosting Syrian refugees constitutes a global public good and called for greater international support for Lebanon’s efforts.
- Noted rising vulnerabilities and underscored the need for a change in policy direction to anchor confidence and improve economic performance.
- Emphasized that without further adjustment Lebanon’s public debt burden will continue to rise, crowding out essential public investment and social spending.
Selected economic indicators, 2014–18 (key figures from table)
- Output and prices (Annual percentage change)
- Real GDP (market prices): 2014 Act. 2.0; 2015 1.0; 2016 Projections 2.5
- GDP deflator: 2014 2.8; 2015 0.9; 2016 1.6
- Consumer prices (period average): 2014 1.9; 2015 -3.7; 2016 -0.7
- Central government finances (cash basis) (In percent of GDP)
- Revenue: 2014 21.8; 2015 18.8; 2016 19.0; 2017 19.2
- Expenditure: 2014 27.8; 2015 26.2; 2016 26.9; 2017 27.5; 2018 28.3
- Budget balance: 2014 -6.0; 2015 -7.3; 2016 -7.9; 2017 -8.4; 2018 -9.1
- Primary balance: 2014 2.4; 2015 1.4; 2016 1.1; 2017 1.5
- Total government debt: 2014 133; 2015 138; 2016 144; 2017 148; 2018 151
- Monetary sector (Annual percentage change, unless otherwise indicated)
- Credit to the private sector: 2014 9.3; 2015 5.9; 2016 3.0; 2017 4.2
- Broad money 1/: 2014 6.0; 2015 4.8; 2016 5.5; 2017 4.0
- Interest rates (period average, in percent): Three-year Treasury bill yield 2014 6.6; Five-year Eurobond yield 2014 5.3; 2015 5.7
- External sector (In percent of GDP, unless otherwise indicated)
- Exports of goods (in US$, percentage change): 2014 -7.8
- Imports of goods (in US$, percentage change): 2014 -2.2; 2015 -6.4; 2016 7.0; 2017 3.8
- Current account balance: 2014 -25.3; 2015 -18.2; 2016 -17.5; 2017 -17.4; 2018 -17.1
- Foreign direct investment: 2014 -3.5; 2015 -3.4; 2016 -4.5; 2017 -4.4; 2018 -4.7
- Total external debt 2/: 2014 170; 2015 175; 2016 179; 2017 180
- Gross reserves (in billions of U.S. dollars) 3/: 2014 37.3; 2015 36.7; 2016 40.9; 2017 39.4; 2018 37.4
- In percent of short-term external debt 4/: 2014 50.0; 2015 46.8; 2016 49.4; 2017 46.1; 2018 42.2
- In percent of total banking system deposits: 2014 25.8; 2015 24.2; 2016 25.6; 2017 23.8; 2018 21.6
- Exchange rate: 2014 1507.5
- Real effective exchange rate (annual average, percentage change): 2014 1.2; 2015 10.0
IMF Executive Board conclusion of Article IV consultation with Lebanon (press release).