Lebanon IMF Executive Board Concludes 2019 Article IV Consultation
October 17, 2019
On September 11, 2019, the Executive Board of the International Monetary Fund (IMF) concluded its 2019 Article IV consultation [1] with Lebanon.
Lebanon’s economic growth slowed to around 0.3 percent in 2018 on the back of low confidence, high uncertainty, tight monetary policy and a substantial contraction in the real estate sector. Most high-frequency indicators point towards a continuation of weak growth in 2019. Inflation spiked to 6 percent in 2018, up from 4.5 percent in 2017, partly due to high prices of imported fuel but slowed down in the second half of the year and into 2019.
The headline fiscal deficit increased significantly, reaching 11 percent of GDP in 2018, up from 8.6 percent of GDP in 2017, partly due to an increase in the public sector salary scale and new hiring despite the hiring freeze. The budget approved by Parliament in July 2019 targets a deficit of 7.6 percent of GDP based on various revenue and expenditure measures. Staff estimates that the deficit will likely be higher due to optimistic assumptions in the budget about growth and the impact of revenue measures. Public debt is projected to increase to 155 percent of GDP by the end of 2019.
Deposit inflows, which finance Lebanon’s twin deficits, slowed down in 2018. The BdL has continued its financial operations to facilitate banks offering high returns on USD deposits, with the aim of attracting USD deposits to the banking sector and maintaining a high level of foreign reserves.
During 2018–19, the authorities have also taken some important structural measures. Parliament has approved a plan to reform the electricity sector in April 2019, which is expected to contribute to a reduction of the fiscal deficit over the medium term. Other laws approved include a code of commerce and a law on judicial intermediation. These and other planned reforms could encourage donor disbursements of concessional financing for the Capital Investment Plan (CIP) committed at CEDRE in April 2018.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They acknowledged that Lebanon has shown unique resilience in the face of long-standing economic challenges, but noted that strong and steadfast efforts are critically needed to ensure macroeconomic stability against a difficult economic situation with high debt, twin deficits and a weak external position. Directors noted that the ongoing Syrian conflict has exacerbated Lebanon’s challenges. In this regard, they commended the authorities for their generous support in hosting the refugees and agreed that Lebanon needs continued international support.
Directors emphasized the need for a multi-year fiscal adjustment to reduce public debt to sustainable levels. While the approval of the 2019 budget by parliament is an important first step, Directors noted that achieving the authorities’ primary surplus goals and rebalancing the economy will require credible measures–both on the revenue and expenditure sides—and sustained implementation. They viewed that fiscal measures should include raising the VAT rate, broadening the tax base and removing exemptions, as well as increasing fuel excises and eliminating electricity subsidies. Directors noted that these measures should be complemented by a thorough expenditure review to achieve sustained fiscal savings. They noted that a successful implementation of the government’s Capital Investment Plan, financed on concessional terms, could help mitigate the contractionary effect of the adjustment on growth. To protect the most vulnerable people, Directors underscored the need for a stronger social safety net.
Directors commended the Banque du Liban (BdL) for maintaining financial stability while emphasizing the need to rebuild its financial strength. They encouraged the BdL to step back from quasi-fiscal operations, strengthen its balance sheet and require banks to build up their own buffers further. Directors highlighted the importance of implementing AML/CFT measures efficiently to continue to mitigate risks and ensure a positive MENA Financial Action Task Force assessment.
Directors noted that the fiscal adjustment effort needs to be complemented by fundamental structural reforms to raise growth and improve Lebanon’s fiscal and external position. While the approval of the new electricity sector plan and legislative process on the government’s CEDRE vision reforms are important first steps, they saw the need for decisive actions to remove growth bottlenecks and enable external adjustment in the context of the currency peg. Directors also called on the authorities to address governance weaknesses that increase Lebanon’s vulnerability to corruption.
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Lebanon: Selected Economic Indicators, 2018–24 |
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|
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
|
|
Est. |
Proj. |
Proj. |
Proj. |
Proj. |
Proj. |
Proj. |
|
|
Output and prices |
(Annual percentage change) |
||||||
|
Real GDP (market prices) |
0.3 |
0.2 |
0.9 |
2.3 |
2.6 |
3.1 |
2.7 |
|
GDP deflator |
5.3 |
3.7 |
2.3 |
2.1 |
2.1 |
2.1 |
2.1 |
|
Consumer prices (end-of-period) |
4.0 |
3.4 |
2.4 |
2.4 |
2.4 |
2.4 |
2.4 |
|
Consumer price (period average) |
6.1 |
3.1 |
2.6 |
2.4 |
2.4 |
2.4 |
2.4 |
|
Investment and saving |
(In percent of GDP) |
||||||
|
Gross capital formation |
22.0 |
21.5 |
22.5 |
23.0 |
21.9 |
19.3 |
18.2 |
|
Government |
1.6 |
1.6 |
2.7 |
3.6 |
3.5 |
3.4 |
3.3 |
|
Nongovernment |
20.4 |
19.9 |
19.9 |
19.4 |
18.4 |
15.9 |
14.9 |
|
Gross national savings |
-3.3 |
-4.0 |
-3.2 |
-2.3 |
-2.6 |
-4.9 |
-5.4 |
|
Government |
-9.5 |
-8.2 |
-9.0 |
-8.6 |
-9.1 |
-11.5 |
-12.1 |
|
Nongovernment |
6.1 |
4.2 |
5.8 |
6.3 |
6.5 |
6.6 |
6.7 |
|
Central government finances (cash basis) |
(In percent of GDP) |
||||||
|
Revenue (including grants) |
20.5 |
21.5 |
22.9 |
22.8 |
22.2 |
21.2 |
21.1 |
|
Expenditure |
31.5 |
31.2 |
34.4 |
34.9 |
34.7 |
36.0 |
36.4 |
|
Overall balance (including grants) |
-11.0 |
-9.8 |
-11.5 |
-12.1 |
-12.5 |
-14.8 |
-15.3 |
|
Primary balance (including grants) |
-1.4 |
-0.3 |
0.3 |
0.2 |
0.5 |
-1.3 |
-1.2 |
|
Total government debt 1/ |
151 |
155 |
162 |
167 |
172 |
178 |
185 |
|
Monetary sector |
(Annual percentage change, unless otherwise indicated) |
||||||
|
Broad money 2/ |
3.6 |
4.0 |
6.0 |
5.0 |
4.0 |
3.0 |
3.0 |
|
Deposit dollarization (level) |
70.7 |
70.0 |
68.0 |
68.0 |
69.0 |
70.0 |
70.0 |
|
Interest rates (period average, in percent) |
|||||||
|
Three-month treasury bill yield |
9.0 |
10.2 |
9.3 |
9.1 |
9.7 |
10.2 |
10.5 |
|
Five-year treasury bill yield |
6.8 |
8.0 |
8.0 |
8.0 |
8.0 |
8.0 |
8.0 |
|
External sector |
(In percent of GDP, unless otherwise indicated) |
||||||
|
Exports of goods and services (in US$, percentage change) |
2.3 |
7.3 |
5.1 |
4.9 |
5.2 |
5.6 |
5.6 |
|
Imports of goods and services (in US$, percentage change) |
3.2 |
1.5 |
3.3 |
2.8 |
2.2 |
3.9 |
3.4 |
|
Balance of goods and services |
-24.3 |
-21.8 |
-21.2 |
-20.1 |
-18.6 |
-17.7 |
-16.7 |
|
Current account |
-25.6 |
-26.4 |
-26.3 |
-25.6 |
-24.5 |
-23.9 |
-23.1 |
|
Foreign direct investment |
2.4 |
3.0 |
3.8 |
4.6 |
4.6 |
4.1 |
3.5 |
|
Total external debt 3/ |
191 |
196 |
207 |
215 |
219 |
219 |
219 |
|
Gross reserves (in billions of U.S. dollars) 4/ |
36.5 |
31.7 |
30.2 |
29.1 |
27.0 |
23.4 |
19.2 |
|
In months of next year imports of goods and services |
12.9 |
10.9 |
10.1 |
9.5 |
8.5 |
7.1 |
8.7 |
|
In percent of short-term external debt 5/ |
44.2 |
36.1 |
32.1 |
28.6 |
24.9 |
20.3 |
15.9 |
|
In percent of banking system foreign currency deposits |
29.6 |
25.0 |
23.1 |
21.2 |
18.6 |
15.4 |
12.3 |
|
In percent of total banking system deposits |
20.9 |
17.5 |
15.7 |
14.4 |
12.9 |
10.8 |
8.6 |
|
Memorandum items |
|||||||
|
Nominal GDP (in billions of U.S. dollars) |
56.4 |
58.6 |
60.5 |
63.1 |
66.1 |
69.6 |
73.0 |
|
Non-resident deposits (staff estimate, percent change) |
4.2 |
5.1 |
6.1 |
5.1 |
4.0 |
3.0 |
3.0 |
|
Commercial bank total assets (percent of GDP) |
443 |
443 |
455 |
458 |
455 |
445 |
438 |
|
Real effective exchange rate (annual average, percent change) |
2.2 |
... |
... |
... |
... |
... |
... |
|
Sources : Lebanese authorities; IMF staff estimates. |
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|
1/ Does not include the bridge loan from the central bank. |
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2/ Defined as currency in circulation plus resident and nonresident deposits. |
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|
3/ Includes nonresident deposits. |
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|
4/ Excluding gold and encumbered assets. |
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5/ Short-term debt on a remaining maturity basis, including short-term nonresident deposits. |
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[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.
[2] 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. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
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