Public Information Notice: IMF Concludes Article IV Consultation with Lebanon
IMF News, October 29, 2001
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- Published: October 29, 2001
Background
- On October 17, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lebanon.
- Economic conditions have worsened in Lebanon in the past few years:
- Growth has stagnated, leading to a fall in per capita real GDP.
- Contributing factors: slowdown in residential housing construction, slowdown in the government's reconstruction program, very large and persistent macroeconomic imbalances, loss of competitiveness, and structural and administrative impediments.
- Competitiveness was adversely affected by a substantial appreciation of Lebanon's real effective exchange rate—mainly a consequence of de facto peg of the Lebanese pound to the U.S. dollar since late 1998 and the latter's strength vis-à-vis world currencies—and rapid growth in unit labor costs.
- Fiscal and debt developments:
- Fiscal deficit widened substantially in 2000 to about 25 percent of GDP.
- Deficit is expected to decline to about 18½ percent of GDP in 2001.
- Gross public debt rose by almost 20 percentage points a year since the end of 1998 and reached 160 percent of GDP at the end of June 2001.
- Interest obligations on this debt exceed 90 percent of government revenue.
- The bulk of the debt is held by Lebanese banks and is denominated in Lebanese pounds, although the share of foreign currency loans is growing.
- Banking and monetary developments:
- Banks financed deficits through robust growth in the deposit base; since early 2000, growth in money demand and the demand for claims on the government have softened.
- Government financing needs have increasingly been met by the central bank.
- Expansion in central bank financing, within a fixed exchange rate regime and unchanged interest rates, resulted in a substantial loss of international reserves of Banque du Liban.
- Gross international reserves (excluding gold) were US$5.1 billion at the end of June 2001, down by US$2.6 billion since December 1999.
- Net international reserves stood at US$1.2 billion at the end of June 2001, compared with US$5.1 billion at end-1999.
- Financial Sector Stability Assessment (FSSA) update:
- Found the banking system to be profitable, liquid, well capitalized, and well-hedged against several important sources of risks, though the zero risk weight attached to government securities denominated in Lebanese pound overstates the strength of the system.
- Interest rate risk is the main risk for banks, relating to the large and growing maturity mis-match between bank assets and liabilities.
- Authorities’ planned fiscal effort:
- Government preparing for a major fiscal effort starting in 2002 to halt the growth in public debt.
- Objective: turn the primary deficit of 1½ percent of GDP in 2001 into a surplus of 1 percent of GDP in 2002 and 4 percent in 2003, and reduce the overall deficit to 15 percent of GDP by 2003.
- Main measures: introduction of a VAT and expenditure cuts.
- Structural priorities: privatization, tariff reductions, and improvements in the business environment.
Executive Board Assessment
- Overall view:
- Lebanon faces formidable economic challenges amid severe fiscal imbalances and a difficult external environment.
- Directors considered that a major and sustained adjustment effort in public finances in the short and medium term is required to restore confidence, lower real interest rates, and address debt dynamics.
- Structural reforms:
- Implementation of structural reforms is critical.
- Directors welcomed authorities' efforts in the past twelve months to develop wide-ranging reforms to reduce the cost of doing business and encourage private investment.
- Emphasized the key role of privatization and the urgency of establishing appropriate regulatory frameworks for activities to be privatized.
- Stressed importance of good governance and transparency in implementation.
- Immediate concerns and priorities:
- Vulnerabilities noted: economic slowdown, size of fiscal deficit, real appreciation of the local currency, deterioration in external reserve position, negative perception of rating agencies, and difficulties in placing domestic currency debt with banks.
- Essential near-term actions: stepped-up efforts to reduce fiscal imbalances, parliamentary approval and full implementation of the fiscal adjustment envisaged for 2002.
- Directors welcomed recent measures to strengthen fiscal performance for the remainder of the year and measures in the 2002 budget, in particular the cabinet decision to introduce the VAT.
- Urged timely passage and swift implementation of the VAT law.
- Welcomed planned cuts in non-interest expenditure and containment of public sector wages and capital spending.
- Highlighted timely steps to strengthen management of the electricity company to phase out reliance on budget transfers.
- Debt and exchange rate considerations:
- Even if fully implemented, envisaged fiscal adjustment would stabilize the debt ratio at a still extremely high level.
- Risk noted that a more manageable ratio was expected to be achieved mainly through realization of uncertain privatization proceeds.
- Directors urged authorities to develop rapidly a convincing strategy to bring down the debt ratio.
- Some Directors recommended keeping open the option of an exchange rate adjustment, coupled with appropriate fiscal and monetary policies and ambitious structural reforms; other Directors saw little merit in exchange rate action given Lebanon's circumstances and risks.
- Banking sector and supervision:
- Commended authorities for addressing previously identified issues in banking supervision.
- Encouraged by FSSA update that banks are relatively well capitalized, liquid, and profitable, and that growth of private financial savings reflects the emphasis on banking soundness and credibility.
- Noted reforms on bank secrecy and steps to meet Financial Action Task Force recommendations for money laundering.
- Concurred that the banking system remains vulnerable to interest rate risk and large exposure to government debt until macroeconomic imbalances are addressed.
- Data and technical assistance:
- Regretted paucity of hard economic data hindered Fund surveillance and policy design and could affect market confidence.
- Welcomed administrative rehabilitation of the Central Administration of Statistics; noted need for quick progress, particularly in national accounts and balance of payments data.
- Urged productive use of IMF technical assistance to enhance data quality.
- External support:
- Financial support from the international community for Lebanon's adjustment would need to be predicated on implementation of a strong fiscal and structural adjustment strategy, measures to enhance competitiveness, and a medium-term policy framework to reduce the debt ratio.
- Directors recommended intensifying close cooperation with the Fund.
Key Findings and Policy Recommendations
- Fiscal policy and public finances:
- Implement major and sustained adjustment in public finances to restore confidence and address debt dynamics.
- Pass and implement VAT law promptly; use VAT proceeds as part of fiscal consolidation.
- Cut non-interest expenditure; contain public sector wages and capital spending.
- Strengthen management of state-owned enterprises (notably the electricity company) to reduce budget transfers.
- Develop a convincing, rapid strategy to bring down the debt ratio; do not rely solely on uncertain privatization proceeds.
- Structural reforms and competitiveness:
- Pursue privatization with appropriate regulatory frameworks and strong governance/transparency.
- Emphasize tariff reductions and broader improvements in business environment to spur private investment.
- Continue progress on regional trade agreements and negotiating an association agreement with the European Union.
- Advance reform of the National Social Security Fund.
- Banking and financial sector:
- Maintain focus on banking supervision and address interest rate risk and large exposure to government debt.
- Continue reforms relating to bank secrecy and anti–money laundering measures.
- Data and technical assistance:
- Improve provision and quality of national accounts and balance of payments data via the Central Administration of Statistics.
- Make productive use of IMF technical assistance.
- External cooperation:
- Seek financial support from international community conditional on strong fiscal and structural adjustment and a medium-term policy framework to reduce the debt ratio.
- Intensify close cooperation with the IMF.
Lebanon: Selected Economic Indicators (selected series and values as reported)
- Domestic economy (In percent)
- Change in real GDP: 1995: 6.5; 1996: 4.0; 1997: 3.0; 1998: 1.0; 1999: 0.0; 2000: (not listed in the table)
- Change in consumer prices (period average) 1/: 1995: 10.6; 1996: 8.9; 1997: 7.7; 1998: 4.5; 1999: 0.2; 2000: -0.4
- External economy (In billions of U.S. dollars)
- Exports, f.o.b.: 1995: 0.8; 1996: 0.6; 1997: 0.7; (other years not listed)
- Imports, f.o.b.: 1995: -6.8; 1996: -7.0; 1997: -6.9; 1998: -6.6; 1999: -5.8
- Current account balance (In percent of GDP): 1995: -41.9; 1996: -37.1; 1997: -29.4; 1998: -27.1; 1999: -20.0; 2000: -18.6
- Capital account balance: 1995: 4.9; 1996: 5.6; 1997: 4.8; 1998: 3.9; 1999: 3.6; 2000: (not listed)
- Overall balance: 1995: 0.3; 1996: 0.4; 1997: -0.5; 1998: -0.3; 1999: (not listed)
- Gross official reserves 2/: 1995: 8.1; 1996: 9.3; 1997: 8.6; 1998: 9.2; 1999: 10.4; 2000: 8.4
- Change in real effective exchange rate (in percent): 1995: 12.2; 1996: 18.1; 1997: 1.8; 1998: 6.2
- Financial variables
- Central government balance 3/: 1995: -18.4; 1996: -21.7; 1997: -27.6; 1998: -18.5; 1999: -16.1; 2000: -24.5
- Gross public debt: 1995: 79.8; 1996: 100.0; 1997: 105.2; 1998: 118.6; 1999: 138.4; 2000: 153.2
- Of which: in foreign currency: 1995: 12.0; 1996: 14.5; 1997: 16.2; 1998: 25.5; 1999: 35.5; 2000: 45.9
- Change in broad money 4/: 1995: 16.4; 1996: 27.8; 1997: 19.3; 1998: 16.1; 1999: 11.1; 2000: 9.6
- Yield on 24-month Lebanese pound treasury bills 4/: 1995: 23.4; 1996: 20.5; 1997: 16.7; 1998: 14.1
Public Information Notice: IMF Concludes Article IV Consultation with Lebanon — October 29, 2001; IMF EXTERNAL RELATIONS DEPARTMENT