IMF: Lebanon at a Dangerous Crossroad

IMF’s Staff Concluding Statement of the 2023 Article IV Mission, stated clearly that “Lebanon is at a particularly difficult juncture. For over three years, it has been facing an unprecedented crisis, with severe economic dislocation, a dramatic depreciation of the Lebanese lira and triple-digit inflation that have had a staggering impact on people’s lives and livelihoods. Unemployment and emigration have increased sharply , and poverty is at historically high levels. The provision of basic services, like electricity, public health, and public education, have been severely disrupted, and essential social support programs and public investment have collapsed. More broadly, capacity in public administration has been critically weakened. Banks are unable to extend credit to the economy and bank deposits are mostly inaccessible to customers. The presence of a large number of refugees exacerbates Lebanon’s challenges”.

In addition, “despite the severity of the situation, which calls for immediate and decisive action, there has been limited progress in implementing the comprehensive package of economic reforms, set out in the Staff Level Agreement, notwithstanding some efforts by the government. This inaction disproportionately harms the low-to-middle-income population and undermines Lebanon’s long-term economic potential. The Government, Parliament, and the Central Bank (BdL) must act together, rapidly and decisively to tackle longstanding institutional and structural weaknesses to stabilize the economy and pave the way for a strong and sustainable recovery”.

As to the economy, the IMF said that it “remains deeply depressed. After contracting precipitously by about 40 percent since the start of the crisis, economic activity appears to have stabilized somewhat in 2022, driven by some recovery in tourism, further deleveraging of the corporate sector, and continued strong remittances inflows, which have supported consumption. However, many economic trends remain negative:

• Inflation is in triple digits, driven by a dramatic depreciation of the Lebanese lira, reflecting a lack of confidence in the Lebanese financial system, large increases in money supply, and the complex interplay of BdL circulars that gives rise to multiple exchange rates and speculative arbitrage.
• The collapse in budget revenue has forced a drastic and disorderly cut of public spending to minimal levels. Still, the government relies on central bank financing, accumulation of arrears and some donor assistance to support a budget deficit of over 5 percent of GDP. The deficit could be even higher, if the ongoing quasi-fiscal operations by the central bank—such as provision of FX at subsidized rates—are included.

• The banking sector is under enormous strain with an eroding capital position and substantial unrealized losses looming ahead.
• After sharply improving in 2020-21, the current account deficit is estimated to have widened significantly to over 25 percent of GDP in 2022, mainly due to high oil and food prices and accelerating imports ahead of an expected exchange rate adjustment for tax purposes. The weak external position and ad hoc monetary policy decisions have led to a steady decline in foreign reserves to about US$ 10 billion as of December 2022 (excluding gold), compared to US$36 billion prior the crisis”.

As such, “Lebanon is at a dangerous crossroads, and without rapid reforms will be mired in a never-ending crisis”

And as to what is to be done, the IMF argued “there is an alternative path that would lead to stability and growth. The mission emphasized the urgency of implementing the following package of comprehensive reforms:

. A medium-term fiscal strategy, so as to restore debt sustainability and to create space for increasing social and development spending.

. Credible restructuring of the financial system to restore its viability and support economic recovery.

. Unification of exchange rates and tightening monetary policy to rebuild credibility and improve the external position of the economy.

. Ambitious structural reforms to supplement economic policies and create an enabling environment for stronger growth.

The statement concludes by saying that “the IMF remains committed to supporting Lebanon, and to continue its close engage with the authorities through policy advice and technical assistance. Collaboration and support from multilateral and bilateral partners are also critical for the successful implementation of the authorities’ reform efforts. However, this support will also hinge on Lebanon’s commitment and steadfast implementation of a comprehensive and ambitious reform program. In this regard, we welcome the authorities’ commitment to work with the IMF and other international partners for the implementation of policies to address current challenges and place Lebanon’s economy on a sustainable path, including under an IMF-supported program”.