An International Monetary Fund (IMF) team, led by Mr. Ernesto Ramirez Rigo, visited Beirut from September 11 to 14, to discuss recent economic developments and progress on key reforms. At the end of the mission, Mr. Ramirez Rigo made the following statement:
Lebanon’s failure to implement necessary reforms is causing long-term economic challenges. The lack of political determination to make tough decisions has led to problems like a troubled banking sector, inadequate public services, worsening infrastructure, increasing poverty and unemployment rates, and a growing income inequality gap. In addition, inflation is soaring, squeezing real incomes, and foreign exchange reserves are dwindling due to the central bank’s financing of non-standard fiscal activities and a substantial current account deficit.
Moreover, the seasonal uptick in tourism has increased foreign currency’ inflows over the summer months. While this is unlikely to persist, it gives the impression that the economy has bottomed out of the crisis and is leading to complacency. However, receipts from tourism and remittances fall far short of what is needed to offset a large trade deficit and lack of external financing. The current trajectory of the external balance is unsustainable and underscores the urgency of the situation.
Furthermore, IMF stated that the recent decisions taken by the BDL’s new leadership to phase out the Sayrafa platform, establish a reputable and transparent forex trading platform, end the drawdown of foreign currencies reserves, curb monetary financing, and enhance financial transparency are steps in the right direction. Building on this progress, there is now the opportunity for comprehensive reforms to strengthen BDL’s governance, accounting, and FX operations in line with international best practices. Moreover, all official exchange rates should be unified at the market exchange rate, which would help eliminate opportunities for arbitrage and rent-seeking that place a burden on public finances.
These steps should be supported temporarily by the capital and withdrawal restrictions law, and complemented with policy action from the Government and Parliament to curb the twin deficits and address the problems in the financial sector by recognizing the losses and advancing the restructuring of banks. Most importantly, the government needs to implement a coherent fiscal strategy to restore debt sustainability and create space for social and infrastructure spending. For this strategy to be effective, improving revenue mobilization is a critical priority.
Despite the government’s gradual action towards adjusting revenue collection to the exchange rate depreciation which has resulted in notably higher revenues, however, more needs to be done. The 2023 budget remains lacking in terms of timeliness and coverage as it does not accurately reflect the true extent of the deficit and associated monetary financing. While on time, the proposed 2024 budget should ensure that it is consistent with the exchange rate unification process, started by BDL, and that the preferential treatment of certain taxpayers over others is avoided. It should also include sufficient resources to rebuild the tax administration to strengthen compliance and improve tax fairness.
A plan to restructure the banking sector is still not in place. This inaction has led to a significant decline in recoverable deposits and impedes the provision of credit to the economy. While work is progressing well on a revised bank resolution law, it needs to be completed so that the law can be resubmitted to Parliament. Amendments to the Bank Secrecy Law, which are aimed at addressing deficiencies, and the draft Law on Capital Controls and Deposit Withdrawals, are still awaiting parliamentary approval.