On June 29, and after an absence spanning five years, the IMF published its Lebanon 2023 Article IV Consultation Report. In terms of context, it indicated that “Lebanon’s severe and multifaceted crisis, triggered by sizable deposit outflows and followed by the country’s first ever external public debt default, has been raging for more than three years. It was aggravated by the COVID-19 crisis and the Beirut port explosion in August 2020, but also allowed to persist and deepen by a failure to take much needed policy action, hampered by a lasting political crisis and resistance from vested interests to reforms. The economic and social impact of the crisis has been staggering: output contracted by an estimated 40 percent over 2019–22, the lira lost about 98 percent of its value in the parallel market, triple digit inflation has decimated real incomes, and unemployment and poverty have increased sharply. After three years, the public sector is failing, the provision of public services is almost nonexistent, and the banking sector has collapsed. Informality and the shadow economy have increased shrply”.
In terms of outlook and risks, it argued that “uncertainty is very high and the outlook hinges on the authorities’ willingness to implement overdue reforms. Without reforms, the economy will remain depressed with irreversible consequences for the country”.
In terms of policy implications, it reiterated that the “focus should be on policies to restore domestic and external sustainability, promote greater transparency and accountability, and strengthen the social safety net to support the most vulnerable in a targeted manner. In particular, the reforms should be based on the following pillars:
- Credible financial sector restructuring. Actions are urgently needed to restructure and rehabilitate the banking system, by addressing the large losses in the sector, while respecting the hierarchy of claims, protecting small depositors to the extent possible, and minimizing recourse to public financing, given the need to restore debt sustainability. Viable banks should be recapitalized under credible and time-bound plans, and unviable banks should exit the market.
- Medium-term fiscal strategy consistent with debt sustainability. A restructuring of Eurobonds together with an ambitious but feasible improvement in the primary balance should aim to reduce the debt-to-GDP ratio and the gross financing needs to sustainable levels. The tax base should be broadened to create space for higher social and reconstruction spending, while expenditure policy reforms should create a more efficient public administration. Strong international donor financing on concessional terms would be needed to support the authorities’ efforts.
- Monetary policy and unification of the exchange rate. The unification of the official exchange rates for current account transactions is critical to restore credibility and external viability. This needs to be supported temporarily by capital and deposit withdrawal restrictions. Foreign exchange interventions should be limited given the need to rebuild reserves.
- Reforming state-owned enterprises (SOEs). Wide-raging SOEs reforms are needed to improve their governance, operational viability and limit fiscal risks, particularly, the energy sector to provide better and fairly priced services without draining public resources.
- Governance, anticorruption, and AML/CFT efforts. Reforms should aim at strengthening transparency and accountability, addressing governance vulnerabilities, and generating a strong buy-in from the population, which views the crisis as the result of systemic corruption. This requires institutional reforms, including removing bank secrecy where needed, mandatory publication of high-level public officials’ asset declarations, modernization of the legal framework and governance of the central bank and other banking authorities, and publication of the special audit of BdL, large SOEs, and the port of Beirut”.
