Press Release No. 23/315

IMF Staff Concludes Visit to Lebanon

September 15, 2023

• Lack of action on urgently needed reforms weighs heavily on the economy. Four years after the onset of the crisis, Lebanon continues to face enormous economic challenges, with a collapsed banking sector, eroding public services, deteriorating infrastructure, worsening poverty and unemployment conditions, and widening inequality.
• Despite some recent stability driven by a deleveraged private sector and seasonal tourism, the outlook remains difficult and unstable. While the recent policy decisions by the Banque du Liban are a welcome initial step, a permanent solution requires comprehensive policy decisions from Parliament and Government to contain the external and fiscal deficits and start the restructuring of the banking system and major SOEs.
• The mission impressed upon the authorities and parliamentarians the urgency of implementing a comprehensive reform program.

Beirut, Lebanon: An International Monetary Fund (IMF) team, led by Mr. Ernesto Ramirez Rigo, visited Beirut from September 11 to 14, to discuss recent economic developments and progress on key reforms. At the end of the mission, Mr. Ramirez Rigo made the following statement:

“Lebanon has not undertaken the urgently needed reforms, and this will weigh on the economy for years to come. The lack of political will to make difficult, yet critical, decisions to launch reforms leaves Lebanon with an impaired banking sector, inadequate public services, deteriorating infrastructure, worsening poverty and unemployment conditions, and a further widening of the income gap. Inflation remains in triple digits, further compressing real incomes, and 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.”

“The seasonal uptick in tourism has increased FX inflows over the summer months. While this is unlikely to persist, it gives the impression that the economy has bottomed out of the crisis and is leading to complacency. However, 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 the situation.”

“The recent decisions taken by the BdL’s new leadership to phase out the Sayrafa platform, establish a reputable and transparent FX trading platform, end the drawdown of FX reserves, curb monetary financing, and enhance financial transparency are steps in the right direction. Building on this progress, there is now the opportunity for comprehensive reforms to strengthen BdL's governance, accounting, and FX operations in line with international best practices. Moreover, all official exchange rates should be unified at the market exchange rate, which would help eliminate opportunities for arbitrage and rent-seeking that place a burden on public finances.”

“These steps should be supported temporarily by the capital and withdrawal restrictions law, and complemented with policy action from the Government and Parliament to curb the twin deficits and address the problems in the financial sector by recognizing the losses and advancing the restructuring of banks.”

“The government needs to implement a coherent fiscal strategy to restore debt sustainability and create space for social and infrastructure spending. For this strategy to be effective, improving revenue mobilization is a critical priority. The government has taken gradual action towards adjusting revenue collection to the exchange rate depreciation by adopting a more realistic rate for tax base valuation and readjusting tax schedules and fees to plausible values, which has resulted in notably higher revenues. However, more needs to be done. 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. While on time, the proposed 2024 budget should ensure that it is consistent with the exchange rate unification process, started by BdL, and that the preferential treatment of certain taxpayers over others is avoided. It should also include sufficient resources to rebuild the tax administration to strengthen compliance and improve tax fairness. In this respect, we encourage the authorities to start implementing the key elements of the Fund’s tax policy reform recommendations, published in the 2023 Technical Assistance Report on Putting Tax Policy Back on Track , and start rehabilitation plans of major SOEs.”

“A plan to restructure the banking sector is still not in place. This inaction has led to a significant decline in recoverable deposits and impedes the provision of credit to the economy. While work is progressing well on a revised bank resolution law, it needs to be completed so that the law can be resubmitted to Parliament. Amendments to the Bank Secrecy Law, which are aimed at addressing deficiencies, and the draft Law on Capital Controls and Deposit Withdrawals, are still awaiting parliamentary approval.”

“The mission team would like to thank the Lebanese authorities and all other interlocutors for the frank and constructive discussions and stands ready to continue to support the authorities with policy advice and technical assistance. We expect the next Article IV discussions to take place in the first half of 2024 to take stock of progress on key reforms and policies.”