IMF Executive Board Concludes 2011 Article IV Consultation with Lebanon

Public Information Notice (PIN) No. 12/11
February 8, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Lebanon is also available.

On January 23, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lebanon.1


Lebanon’s economy lost momentum after four years of impressive economic growth. The fall of the coalition government in January 2011, and prolonged talks over the make-up of the new government until its formation in June, shook market confidence. Compounded with the regional unrest, this led to an economic downturn. Growth is expected to drop to 1–2 percent in 2011 from 8 percent on average during 2007–10, with real estate, tourism, retail and wholesale trade—key drivers of recent high growth—having been hit hard. Headline inflation averaged 5 percent in 2011, though core inflation remained moderate. Real Gross Domestic Product (GDP) could grow at 3–4 percent in 2012 but this hinges on strong domestic policies and an improved regional environment. Downside risks are large, mostly because of the uprising in Syria, further escalation of which could have serious political and economic repercussions on Lebanon. Lebanon is also facing risks related to the worsening outlook in Europe, primarily through second-round effects.

The authorities have so far managed the downturn skillfully, using buffers built up during the upswing. The Banque du Liban (BdL) relied on its large foreign reserves to intervene forcefully when the Lebanese pound came under pressure from deposit outflows and currency conversions in January 2011. Despite these interventions, gross foreign reserves increased to $32 billion by end-November 2011 as the BdL issued foreign currency Certificates of Deposit and banks placed large foreign currency excess reserves with the BdL. The improved fiscal position—thanks to the marked decline in the debt-to-GDP ratio since 2006 and the sizeable primary surplus in 2010—freed up room for an accommodative fiscal stance in 2011. Tax revenue dropped in 2011, reflecting the downturn and a reduction in the fuel excise. Overall revenue though should increase slightly as a share of GDP because of the transfer of telecommunications revenues to the budget. With primary spending up, the primary surplus is expected to fall to about one percent of GDP from 2.7 percent of GDP in 2010. The government continues to have favorable access to the foreign currency debt market, but the BdL covered shortfalls in demand for domestic T-bills.

The banking sector has accumulated buffers but is facing an increasingly challenging environment. Thanks to prudent management and conservative regulation, banks report capital above the regulatory minimum, high liquidity buffers, low levels of nonperforming loans and stable profits. However, the recent expansion abroad exposes banks to heightened risks from the regional turmoil. Deposit inflows resumed in March following outflows and currency conversions after the fall of the government in January 2011, and are growing at an annualized rate of 9 percent. With pound deposits picking up recently, deposit dollarization is on a downward trend though still above its end-2010 level. Sovereign and Credit Default Swaps (CDS) spreads have risen broadly in line with emerging market averages.

The economy became more resilient in recent years thanks to a marked reduction in the government debt-to-GDP ratio and a build-up of large foreign reserves. Still, government debt at 134 percent of GDP at end-October 2011 remains among the highest in the world and gives rise to large recurrent financing needs. The large banking sector funds itself from short-term deposits to roll over its large exposure to the sovereign, exposing itself to a maturity mismatch. Continued nonresident deposit inflows are also needed to finance persistent and large current account deficits. At the same time, the ongoing unrest in the region brought to fore the need to address the important issues of unemployment and social inequality.

Executive Board Assessment

Executive Directors noted that domestic political uncertainty and regional unrest eroded market confidence in 2011, bringing an end to Lebanon’s four-year spell of impressive economic growth. They commended the authorities for skillfully managing the downturn using buffers built during the upswing.

Looking ahead, Directors noted that downside risks are high due to the uprising in Syria, the uncertain outlook for the region, and the financial crisis in Europe. Also, underlying vulnerabilities remain large, especially those stemming from the high government debt and the continuing current account deficit. Against this background, Directors agreed that near-term policies should aim at instilling confidence and preserving macroeconomic stability. Over the medium term, the main challenge is to generate sustained and inclusive growth while reducing vulnerabilities.

Directors underscored the need to maintain fiscal discipline in 2012 and beyond. They suggested that contingency measures be incorporated in the 2012 budget in case downside risks materialize. Directors supported the authorities’ intention to embed the 2012 budget into a medium-term agenda so as to facilitate prioritization. They agreed that the medium-term fiscal strategy should target a significant reduction in the debt-to-GDP ratio, while creating space for higher social and capital spending and making fiscal policy more equitable. This will require effective implementation of revenue administration and tax measures, tighter expenditure controls and better targeted social spending, and expenditure rationalization with improved public financial management.

Directors noted that the government needs to reduce its reliance on central bank financing and to finance itself fully from the market. To this end, they supported greater but prudent use of foreign currency borrowing by the government in the near term. Directors also noted that increasing interest rates on T-bills with maturities of less than 7 years would make them more attractive to banks. Some Directors, however, cautioned about the fiscal and economic impact of higher interest rates.

Directors agreed that the currency peg is central to the financial stability of Lebanon’s highly dollarized economy, and should be backed by strengthening competitiveness. They cautioned that wage increases beyond productivity gains could pose problems for competitiveness. Directors also underscored the need for a medium-term plan to improve the central bank’s balance sheet.

Directors noted that the banking sector has accumulated buffers, and that banking indicators appear to be sound. Nevertheless, large cross-border exposures and an increasingly challenging domestic and regional environment have heightened banking risks. Directors recommended continued vigilance, and welcomed plans to further strengthen bank regulation and supervision, including cross-border supervision, and to implement Basel III regulations. They encouraged the authorities to focus on early problem detection through enhanced stress-testing and improved loan classification and provisioning, and to continue strengthening the regime against money laundering and terrorism financing.

Directors recommended that the authorities implement a medium-term strategy that aims at sustained, broad-based growth and employment generation. This would require launching long-delayed reforms to develop the infrastructure, improve the business climate, and remove labor market inefficiencies. In this regard, Directors welcomed the planned investment in the electricity sector, but stressed that reforms should proceed in parallel to reduce the large budgetary transfers to the sector.

Directors urged the authorities to move decisively to improve Lebanon’s statistical system.

Lebanon: Selected Economic Indicators, 2009–12
  2009 2010 Proj.
  Act. Prel. 2011 2012

Output and prices

(Annual percentage change)

Real GDP (market prices)

8.5 7.0 1.5 3.5

GDP deflator

7.0 3.0 3.7 5.1

Consumer prices (period average) 1/

1.2 4.5 5.4 5.3

Central government finances (cash basis)

(In percent of GDP)

Revenue (including grants)

24.3 22.0 22.4 24.3


32.5 29.4 30.7 32.6

Budget balance (including grants)

-8.2 -7.5 -8.3 -8.3

Primary balance (including grants)

2.8 2.7 1.0 0.4

Total government debt

146 137 134 132

Monetary sector

(Annual percentage change, unless otherwise indicated)

Credit to the private sector

15.1 24.8 11.0 10.0

Broad money 2/

23.2 12.2 9.0 10.0

Interest rates (period average, in percent)


Three-month treasury bill yield

4.9 4.2 ... ...

Three-year treasury bill yield

8.4 6.4 6.0 6.5

External sector

(In percent of GDP, unless otherwise indicated)

Exports of goods and services (in US$, percentage change)

0.3 9.0 3.5 7.2

Imports of goods and services (in US$, percentage change)

1.2 9.0 7.7 6.9

Current account

-9.7 -10.6 -14.1 -13.9

Foreign direct investment

10.5 9.9 8.3 9.3

Total external debt 3/

175 161 158 159

Gross reserves (in billions of U.S. dollars) 4/

27.4 30.2 30.6 34.4

In percent of short-term external debt 5/

52.6 56.4 55.4 56.9

In percent of total banking system deposits

28.6 28.1 26.0 26.5

Memorandum items:


Nominal GDP (in billions of U.S. dollars)

34.9 38.5 40.5 44.0

Commercial bank total assets

330 335 351 355

Local currency per U.S. dollar (period average)

1507.5 1507.5 ... ...

Real effective exchange rate (annual average, percent change)

3.2 2.6 ... ...

Sources: Lebanese authorities; and IMF staff estimates.

1/ Through 2008: based on the CPI index by Consultation and Research Institute; from 2009: based on the CPI index by Central Administration of Statistics.

2/ Defined as currency in circulation plus resident and nonresident deposits.

3/ Includes nonresident deposits.

4/ Excluding gold and encumbered assets.

5/ Short-term debt on a remaining maturity basis, including short-term nonresident deposits.

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. 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:


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