This is a summary of the report published by Lebanon Opportunities (IMF’s Crystal Ball: A Report by Lebanon Opportunities (Jan 2022)). It evaluates the Article IV Consultation reports about Lebanon published by the IMF over the period of 2011-2019.
According to the Report, the financial crisis in Lebanon that started in 2019 has raised some questions on the reliability of the IMF reports issued about Lebanon during the period of 2011 to 2019, as any of those reports has failed to predict the upcoming catastrophic economic collapse that struck Lebanon on October 2019. However, the IMF said the vision was not clear due to missing statically economic data. More specific points are raised below.
Losses in BDL balance sheet
The IMF has failed to detect the losses of BDL, as those losses were being hidden in an asset account. Furthermore, the IMF didn’t seem to warn enough the BDL about the massive depletion of BDL’s foreign currency reserves that led to a huge deficit in net reserves.
Peg and lira valuation
The IMF believed that keeping the peg fixed is essential for stability despite the high costs of it. In fact, the IMF supported the policy of BDL that consists of attracting foreign deposits in order to maintain the peg stable as they advised to proceed with this policy by increasing confidence and stability.
Borrowing in FX
The IMF encouraged Lebanon to borrow in foreign currency, as they assumed that this step will reduce the pressure on BDL. More precisely, the report issued by the IMF on 2015 has described the Parliament’s decision to pass a law allowing for new Eurobond issuances as a “positive” step.
The famous financial engineering operations adopted by BDL prior to the financial crisis were one of the reasons of economic collapse in Lebanon. The BDL was literately inventing FX reserves backed by unreasonable high interest rates in order to attract foreign depositors so as to finance government expenses and maintain the peg. While the IMF was of the opinion in 2016 that “the financial engineering operation has successfully bolstered its foreign exchange reserves, borrowing cost, and provided liquidity for domestic lending”; however, in 2019, the IMF declared that these operations are not sustainable.
IMF believed that the banking sector in Lebanon is resilient specifically during the global crisis in 2008, as the banking sector was a source of security and confidence in the region and they were never affected by the economic and political turbulence. More precisely in 2015 the IMF said: “Deposit inflows remain strong, foreign exchange reserves at a comfortable level, and the banking system robust”
Fiscal and twin deficits
The IMF has warned Lebanon in 2019 that it needs to achieve primary surplus on its fiscal deficit for a few years in order to regain fiscal and current account or external sustainability. In details, the IMF was against the increasing of public wages, without any additional fiscal revenues, and they warned the government from the negative impact of this step. Furthermore, the IMF has suggested increasing VAT rates, fuel tax, and tax on earned interest, while keeping expenses stable as a percentage of GDP.
Rise in public debt
The IMF has criticized the government regarding the high debt level, and has urged to achieve primary surpluses of four to five percent of GDP for several years in order to reduce government debt-GDP ratio. In fact, the IMF stated in their reports about Lebanon in 2011, that an ambitious fiscal strategy could bring the debt to ratio below 100 percent of GDP by 2020.
The IMF urged Lebanon to have a clear plan and apply reforms of electricity sector, taxes, and social services. Furthermore, IMF has criticized the economic plan of the government in 2019, and stated that those reforms suggested in 2019, were not enough and they will have minimal effect on current account deficit.
Spillovers of the Syrian crisis
It was in 2014 that IMF warned that the influx of refugees has deeply impacted the labor market, as the unemployment has increased to about 20 percent. But in their 2016 report the IMF saw some positive impact, as they believed that Lebanon can participate in the reconstruction process in Syria after the end of the war, which will reflect positively on the economy.
Serious statistical flaws
The IMF may have a good excuse for not perceiving the financial crisis in Lebanon as they have stated that the data about Lebanon are not enough especially national accounts and external sector statistics. Adding to that, the IMF reiterated that the data are not timely, which bias accountability and economic analysis.
Of course, to conclude, the IMF does not have a crystal ball as to what happens and what will happen economically in Lebanon. And to err in terms of predictions and some analysis is only human. But the IMF’s view of Lebanon’s economic problems has definitely been enriched by the crisis, and this learning experience is bound to affect positively any economic reform program that the Fund ultimately designs with the Lebanese authorities for the country.