IMF Staff Concludes Visit to Lebanon

IMF News, September 15, 2023

Source details

Press Release No. 23/315; mission visit: September 11 to 14, 2023; end-of-mission statement dated September 15, 2023.
Statement by IMF team leader Mr. Ernesto Ramirez Rigo: “Lebanon has not undertaken the urgently needed reforms, and this will weigh on the economy for years to come.”
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.
The mission stands ready to continue to support the authorities with policy advice and technical assistance and expects the next Article IV discussions to take place in the first half of 2024 to take stock of progress on key reforms and policies.

Lebanon continues to face enormous economic challenges four years after the onset of the crisis: a collapsed banking sector, eroding public services, deteriorating infrastructure, worsening poverty and unemployment, and widening inequality.
Inflation remains in triple digits, further compressing real incomes.
Foreign exchange (FX) reserves continued to decline in the first half of the year, including due to Banque du Liban's (BdL’s) financing of quasi-fiscal operations and the large current account deficit.
Seasonal uptick in tourism increased FX inflows over the summer months, but:
- “While this is unlikely to persist, it gives the impression that the economy has bottomed out of the crisis and is leading to complacency.”
- Receipts from tourism and remittances fall far short of what is needed to offset a large trade deficit and lack of external financing.
The current trajectory of the external balance is unsustainable and underscores the urgency of action.

Recent BdL decisions noted as positive initial steps:
- Phase out the Sayrafa platform.
- Establish a reputable and transparent FX trading platform.
- End the drawdown of FX reserves.
- Curb monetary financing.
- Enhance financial transparency.
Recommended next steps for BdL:
- Strengthen BdL's governance, accounting, and FX operations in line with international best practices.
- Unify all official exchange rates at the market exchange rate to eliminate opportunities for arbitrage and rent-seeking that place a burden on public finances.
Temporary support measures: these steps should be supported temporarily by the capital and withdrawal restrictions law.
Complementary actions: policy action from the Government and Parliament to curb the twin deficits and address financial sector problems by recognizing losses and advancing the restructuring of banks.

Government needs to implement a coherent fiscal strategy to restore debt sustainability and create space for social and infrastructure spending.
Improving revenue mobilization is a critical priority.
Actions taken so far:
- Adoption of a more realistic rate for tax base valuation.
- Readjustment of tax schedules and fees to plausible values, which has resulted in notably higher revenues.
Remaining fiscal shortcomings:
- The 2023 budget remains lacking in terms of timeliness and coverage; it does not accurately reflect the true extent of the deficit and associated monetary financing.
- The proposed 2024 budget, while on time, should be consistent with the exchange rate unification process started by BdL, avoid preferential treatment of certain taxpayers, and include sufficient resources to rebuild the tax administration to strengthen compliance and improve tax fairness.
IMF guidance encouraged:
- Start implementing the key elements of the Fund’s tax policy reform recommendations, published in the2023 Technical Assistance Report on Putting Tax Policy Back on Track.
- Start rehabilitation plans of major SOEs.

No plan to restructure the banking sector is yet in place; inaction has led to a significant decline in recoverable deposits and impedes credit provision to the economy.
Ongoing work and outstanding legislative actions:
- Work is progressing well on a revised bank resolution law, which needs to be completed so it can be resubmitted to Parliament.
- Amendments to the Bank Secrecy Law, aimed at addressing deficiencies, are awaiting parliamentary approval.
- The draft Law on Capital Controls and Deposit Withdrawals is still awaiting parliamentary approval.

Urgency: mission impressed upon authorities and parliamentarians the urgency of implementing a comprehensive reform program.
Priority measures (as emphasized by IMF staff):
- Complete BdL reforms (governance, accounting, FX operations) and unify official exchange rates at the market rate.
- Support BdL measures temporarily with the capital and withdrawal restrictions law while Parliament and Government take complementary policy actions.
- Implement a coherent fiscal strategy focused on debt sustainability and revenue mobilization, including tax policy reforms and rebuilding tax administration.
- Advance banking sector restructuring by finalizing and adopting the revised bank resolution law, amending the Bank Secrecy Law, and approving the draft Law on Capital Controls and Deposit Withdrawals.
- Begin rehabilitation plans for major SOEs.

Source: IMF Staff Concludes Visit to Lebanon, Press Release No. 23/315, September 15, 2023.