Press Release: IMF Deputy Managing Director Agustín Carstens's Statement at the Conclusion of His Visit to Lebanon
December 12, 2003
"Allow me to thank the Lebanese authorities for their invitation to visit Lebanon and for their warm welcome. My visit is part of a continuing close dialogue that the IMF has had with Lebanon over the years. As the newest member of management at the IMF, this visit has enabled me to more fully appreciate the economic and financial policy challenges facing the authorities and the people of Lebanon. I have also had an opportunity to hold a frank and open exchange of views with the authorities, members of parliament, and representatives of the banking community.
"Over the last 10 years, Lebanon has made remarkable strides to rebuild itself into an open, service-oriented economy. It has successfully re-established itself as a major banking center, tourist destination, and as a provider of higher education and health services for the region. The government has supported this recovery through its own reconstruction efforts, and by adopting open-market policies, such as a liberal trade regime.
"Over the same period, Lebanon has, however, also witnessed a considerable buildup of public debt. In the event, high budget deficits and high interest rates have over time dampened growth and are preventing the economy from realizing its full potential. It is widely recognized that the government debt burden poses risks for the economy. Because most of the debt is held domestically, Lebanon has been shielded in part from the financial pressures experienced by other emerging market economies. However, the ability of the government to place its debt with investors depends on continued confidence.
"At the Paris II conference in November 2002, Lebanon presented a strategy to address the debt overhang. This strategy envisioned a steady reduction of the debt-to-GDP ratio through a combination of privatization and budget deficit reduction, supported by soft financing from external sources and from domestic banks. Most of the financing has come through, but the pace of deficit reduction is slowing down and the privatization program has been delayed.
"During our discussions, I encouraged the authorities to take advantage of the improved confidence that followed Paris II, and the favorable global interest rate environment, to strengthen the reform efforts and restore the basis for solid economic growth and job creation. Considerable deficit reduction has already been achieved, but not enough to put the debt-to-GDP ratio on a downward path. A redoubling of political efforts to place the government fiscal strategy on a stronger track is needed. A key signal of the country's commitment to the Paris II strategy would be the adoption of a 2004 budget which achieves a significant increase in the primary surplus. This would require additional expenditure tightening and new revenue measures. On the revenue front, I have commended the authorities for the measures already taken to modernize the tax system, most notably with the introduction of the VAT. Additional revenue measures are needed over the medium term, including an expansion of the tax base. On the expenditure side, the authorities should find ways to generate additional savings while protecting priority social sectors. This will need to be achieved by rationalizing government spending and reforming loss-making public enterprises, in particular Electricité du Liban.
"The IMF believes that the government's privatization program should remain a key element of the strategy. I shared with the authorities the international experience with privatization. Most successful privatizations have been accomplished through a transparent process and within a strong regulatory framework. This not only has the advantage of enhancing the return to the state but, most importantly, promotes private-sector participation in the economy in a competitive environment and fosters higher growth.
"I also noted the importance of strengthening budgetary, monetary, and financial supervisory institutions. This approach would serve to anchor expectations about the future direction of policies and promote investor confidence. The required actions could take the form of legislation that sets clear rules of accountability and transparency, along with a framework for medium-term economic policy planning. On the fiscal side, this should include limits on deficit financing. Moreover, in terms of enhancing the efficiency of fiscal and monetary policies, I pointed out the importance of enhancing coordination between the central bank and the finance ministry.
"Overall I was very satisfied with the substance and spirit of discussions. We agreed to remain in close contact. The policy dialogue between the IMF and the authorities has strong foundations, and the IMF stands ready to build on this relationship with Lebanon as a trusted advisor, and as a provider of technical assistance in the areas of IMF expertise," Mr. Carstens stated.