IMF Says: “Policy Inertia Is Taking a Growing Toll on the Economy”

In its concluding statement of the 2015 Article IV mission, the International Monetary Fund (IMF) stated that the indolent policy along with the continued presence of refugees weigh heavily on the Lebanese economy and affect the country’s resilience.

The political deadlock, in addition to the vacant presidential position for almost a year now, is undermining confidence in the country. The IMF estimated growth in 2014 to be below its potential, at 2%, and projected a similar rate for 2015.

This is due to the economy’s major drivers: tourism, construction and real estate, performing poorly during 2014, and are unlikely to recover in the short term. Moreover, inflation declined sharply in 2014 on the back of lower oil prices, however it should return to a trend rate of about 3% by end of 2015.

On the fiscal front, Lebanon recorded a primary surplus, in 2014, of about 2.5% of GDP, resulting from exceptionally high telecom revenues. Nevertheless, this balance is expected to deteriorate to 1.25% of GDP in 2015, with public debt standing at a high level of 132% of GDP.

After its findings, the IMF advised Lebanon to resolve the policy paralysis, based on increasing revenues and changing spending strategy. The proposed solution recommends a fair increase in taxation: introducing capital gains tax on real estate, increasing withholding tax on interest income and corporate income, increasing gasoline excises and removing VAT exemption on diesel. As for expenditures, more spending should be allocated to capital projects. Moreover, if the salary scale were implemented, it should be funded by credible revenue measures and without retroactive payments.

The IMF calls for implementing a wide range of structural reforms, like improving the electricity sector, labor market, public services, and data reliability.

Finally, passing a budget for 2015 would be a stepping stone in anchoring confidence in the Lebanese economy.

IMF Estimates for Lebanon

Source: IMF