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: