In its staff concluding statement of the 2019 Article IV mission, the International Monetary Fund (IMF) presented the current Lebanese economic outlook and discussed the different fiscal and structural reforms that could be implemented in order to improve the situation.
According to the IMF, the Lebanese economy has been struggling during 2018 over a stagnating economy and uncertainty around the operating environment. The pressure has been rising to handle the large twin deficits, the very high level of public debt at over 150% of GDP and an account deficit of over 25% of GDP. Average inflation reached over 6% in 2018 partly due to high prices of imported fuel. Although the banking sector is considered to be resilient, it’s performance was affected in 2018 by the difficult conditions. Growth in private-sector deposits (including resident and nonresident) has been softening since 2018 and non-performing loans (NPLs) increased despite BdL’s continued financial operations.
The IMF considers that Lebanon is in need of a reform agenda that “achieve” tangible progress on the economic front and restore investors’ confidence. In addition, significant improvement of Lebanon’s business climate and governance can boost investment, growth and exports. The Lebanese cabinet has approved the 2019 state budget in May and sent it to the parliament for final ratification. Government’s main target is to unlock $11 billion in soft loans and grants pledged by the international community at CEDRE conference. In fact, the new budget seeks to lower Lebanon’s fiscal deficit to GDP from an estimated 11% in 2018 to 7.6% in 2019 through different measures such as increase the tax on interest from 7% to 10%, a 2 percent tax on imported goods and a freeze of public sector hiring and early retirement. According to the IMF budget measures will reduce the cash-basis fiscal deficit to around 9¾ percent of GDP noting that the budget has not yet been approved and there is uncertainty about what form the approved budget will take. In addition, the IMF estimates a 2.3% of GDP reduction in the primary deficit after a full-year effect of measures and the primary balance will be slightly positive in 2020. Moreover, IMF staff projects that in order to reduce the debt-to-GDP ratio over the medium to long run, a primary surplus of around 4.5% of GDP would be required of which 2% contributed by the electricity plan.
In this context the IMF provided the following recommendation:
- On the expenditure side, the electricity plan which is considered the most significant potential expenditure saving should include a tariff increase that is sufficient to close EdL’s deficit. Moreover, further studies should be conducted to identify other possible areas for savings such as reforms for the wage bills and pensions in addition of improving the education sector to enable higher growth.
- In terms of revenues, the IMF considers that an increase of interest income could be permanent and suggests a raise on existing tax collection infrastructure, such as the VAT and fuel excises and improving tax administration.
- Concerning the structural reforms, the IMF proposes the execution of already-approved reform laws such as the code of commerce, the law on judicial intermediation as well as the approval of a new customs law, regulation on closing a business, bankruptcy law, insolvency practitioner law and law on secured lending. Moreover, incorporating Council for Development and Reconstruction (CDR) spending in the budget and passing a public procurement law should be done before the execution of most of Capital Investment Plan (CIP) in order to maximize the growth benefits of the planned investments. Furthermore, fighting Corruption has become vital in Lebanon since it’s preventing its development and affecting several business-related areas. This could be done through the prompt implementation of anti-corruption legislation.
- On the monetary side the IMF considers that the BDL should stop purchasing government bonds and let the market determine different yields noting that buying the proposed low-interest government debt would worsen the BdL’s balance sheet and undermine its credibility. Moreover, authorities should consider implementing other tools to strengthen the financial sector such as increasing deposit insurance coverage and continue in applying an effective of AML/CFT measures.