IMF Staff Concludes Visit to Lebanon
IMF News, September 21, 2022
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Bibliographic details
- Published: September 21, 2022
Mission overview and context
- Press Release No. 22/314
- Mission led by Mr. Ernesto Ramirez Rigo visited Beirut, Lebanon from September 19 to 21, to discuss recent economic developments and progress in implementation of prior actions agreed under the April 7, 2022 Staff Level Agreement (SLA) for a Four-Year Extended Fund Facility.
- The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.
Key economic findings
- The Lebanese economy remains severely depressed against continued deadlock over much needed economic reforms and high uncertainty.
- GDP has contracted by over 40 percent since 2018.
- Inflation remains in triple digits.
- FX reserves are declining.
- The parallel exchange rate has reached 38,000 LBP per USD.
- Amid collapsing revenues and drastically suppressed spending:
- Public sector institutions are failing.
- Basic services to the population have been drastically cut.
- Unemployment and poverty are at historically high rates.
- The majority of prior actions agreed under the April SLA have not been implemented.
Prior actions, reforms, and implementation gaps
- 2022 budget:
- The 2022 budget is yet to be approved by parliament.
- The long delay implies macroeconomic focus should turn to preparing and approving a credible 2023 budget.
- The 2023 budget should be based on realistic macroeconomic assumptions, with necessary revenue raising measures, including use of a realistic exchange rate (i.e., the Sayrafa rate that should become the market rate with exchange rate unification) for all tax purposes.
- A credible budget should allow for a significant increase in social and investment spending and adjustment to public sector spending to re-start basic functioning of public administration.
- Multiple exchange rates:
- Existence of multiple exchange rates causes significant distortions to economic activity, undermines public sector operations, and creates opportunities for corruption and rent-seeking.
- Multiple exchange rates lead to excessive pressures on the central bank’s FX reserves.
- Adoption of the Capital Controls and Deposit Withdrawal Limits Law that was submitted to Parliament in March is crucial to tackle these issues and reduce pressures on the central bank’s foreign currency reserves.
- In the present context, intervention in the exchange rate market to stabilize the exchange rate has proven inefficient in the absence of much needed reforms.
- Banking secrecy and financial sector:
- Reform of the Banking Secrecy Law approved by parliament in July contained some positive steps but fell short of changes needed to bring it in line with best international practice.
- Parliament is reviewing key shortcomings fundamental to fighting corruption, eliminating impediments to effective banking sector supervision and restructuring, tax administration, investigating financial crimes, and recovering misappropriated assets.
- The financial sector rehabilitation strategy, approved by cabinet, should be implemented to allow a healthier banking system to function normally again, attract deposits, and support economic activity.
- The large losses in the banking sector need to be recognized and addressed upfront, while respecting the hierarchy of claims.
- Small depositors must be fully protected (the SLA envisioned protection of a vast majority of deposit accounts).
- Recourse to public resources—assets belonging to all Lebanese citizens, with or without a bank account—should be limited.
Policy recommendations and conditionality
- Complete prior actions agreed in the April SLA; completion is needed for the IMF Board to consider the request for a financial program with Lebanon.
- Prepare and approve a credible 2023 budget based on realistic macroeconomic assumptions and the Sayrafa rate for tax purposes.
- Adopt the Capital Controls and Deposit Withdrawal Limits Law submitted to Parliament in March to reduce pressures on FX reserves and address distortions from multiple exchange rates.
- Advance reforms to bring the Banking Secrecy Law in line with best international practice and proceed with parliamentary review of identified shortcomings.
- Implement the financial sector rehabilitation strategy approved by cabinet, recognize and address banking sector losses upfront while protecting small depositors and limiting recourse to public resources.
Engagement and next steps
- IMF staff will remain engaged with the authorities to advance the reform agenda.
- The IMF team thanked interlocutors for fruitful and deep discussions and reiterated that delaying implementation of agreed reforms only increases costs to the country and its population.
IMF Staff Concludes Visit to Lebanon — Press Release No. 22/314