IMF Executive Board Concludes Article IV Consultation with Lebanon

June 21, 2018

On May 11, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Lebanon.

Lebanon’s economic growth remains low, estimated at about 1-1.5 percent in 2017 and 2018. The traditional drivers of growth in Lebanon are subdued with real estate and construction weak and a strong rebound is unlikely soon. Going forward, under current policies growth is projected to gradually increase towards 3 percent over the medium term. Inflation spiked to 5 percent in 2017 as the cost of oil imports rose and U.S. dollar weakened.

The headline fiscal balance posted an improvement in 2017 to a deficit of 7.3 percent of GDP, partly due to one-off revenues from taxing higher bank profits arising from Banque du Liban’s (BdL) financial operations undertaken in 2016. Parliament approved the 2017 budget in October 2017 and the 2018 budget in March 2018, these being the first approved budgets in 12 years. Staff projects that the 2018 fiscal deficit will increase relative to 2017 and will contribute to a further increase in the already high public debt, which was over 150 percent of GDP at the end of last year.

Deposit inflows, which finance Lebanon’s twin deficits, slowed down in 2017 mostly due to some limited outflows during the November 2017 political crisis. The BdL has increased interest rates through its monetary and financial operations, especially on local currency products, to support inflows and arrest dollarization.

The upside potential for growth is significant. Early resolution of the conflict in Syria would benefit Lebanon. The outcome of the recent CEDRE investment conference, where international organizations and donors supported the government’s Capital Investment Program (CIP), represents an opportunity for growth-enhancing reforms and investment. But large vulnerabilities and downside risks remain, stemming from regional political developments as well as domestic events that might affect deposit flows.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that the economic situation in Lebanon continues to be difficult with high public debt, twin deficits, and tightening financial conditions. Spillovers from the conflict in Syria, including large numbers of refugees, have affected growth and strained public infrastructure and services. Directors commended the authorities for their generous efforts in hosting refugees and agreed that Lebanon needs continued international support to address this challenge. They encouraged the authorities to use the current political momentum and financial pledges secured at the recent investment conference to undertake ambitious policies and reforms to tackle internal and external imbalances, improve investor confidence, and raise growth prospects.

Directors stressed that an immediate and substantial fiscal adjustment is essential to improve debt sustainability, which will require strong and sustained political commitment. They noted that a well‑defined fiscal strategy, including a combination of revenue and spending measures, amounting to about 5 percentage points of GDP is ambitious but necessary over medium‑term to stabilize public debt and place it on a declining path. In this regard, they recommended increasing VAT rates, gradually eliminating electricity subsidies, and restraining public wages. Directors emphasized the need to strengthen public investment management to ensure successful implementation of the authorities’ Capital Investment Program. They welcomed the authorities’ request for a public investment management assessment (PIMA) from the Fund, and encouraged expeditious efforts to address the weaknesses identified in the PIMA before increasing public investment.

Directors commended the Banque Du Liban (BdL) for its critical role in attracting deposit inflows and effectively managing the difficult situation. They emphasized that the BdL should take a long‑term view in its policymaking and return to more conventional monetary policy tools. They encouraged BdL to raise interest rates as necessary while being vigilant of debt dynamics.

Directors emphasized the need to reduce financial sector vulnerabilities by strengthening buffers and taking steps to address rising credit risks. They also stressed the importance of strengthening the crisis management and AML/CFT frameworks in line with the 2016 FSAP recommendations which are based on the stricter 2012 FATF standards.

Directors encouraged the authorities to push forward the necessary structural reforms to remove growth bottlenecks and help external rebalancing. These reforms should include, in particular, the implementation of fundamental reforms in the electricity sector, including a gradual elimination of costly subsidies and expansion of production capacity, while minimizing the impact on the vulnerable population. Directors also encouraged the authorities to redouble their efforts to improve governance and reduce corruption, and called for further improvements to the statistical system.

It is expected that the next Article IV consultation with Lebanon will be held on the standard 12‑month cycle.

Table 1. Lebanon: Selected Economic Indicators, 2016 － 23

(Population: est. 4.5 million; 2014)

(Per capita GDP: est. US$11,112; 2014)

(Quota: SDR 266 million, 0.11 percent of total)

(Poverty rate: 28 percent; 2004-05)

(Unemployment: 11.0 percent; 2011) 1/

(Main products and exports: services, jewelry)

(Key export markets: UAE, Saudi Arabia, Switzerland)

2016

Proj.

Act.

2017

2018

2019

2020

2021

2022

2023

Output and prices

(Annual percentage change)

Real GDP (market prices)

1.0

1.2

1.5

1.8

2.2

2.6

2.9

2.9

GDP deflator

-0.7

2.5

2.7

3.3

2.4

2.3

2.1

2.1

Consumer prices (end-of-period)

3.1

5.0

3.5

2.5

2.5

2.5

2.5

2.5

Consumer prices (period average)

-0.8

4.5

4.3

3.0

2.5

2.5

2.5

2.5

Investment and saving

(In percent of GDP)

Gross capital formation

20.4

22.7

21.4

20.4

19.4

18.4

18.4

17.8

Government

1.4

1.4

1.4

1.4

1.4

1.4

1.4

1.4

Nongovernment

19.0

21.3

20.0

18.9

18.0

17.0

17.0

16.4

Gross national savings

-2.1

-2.2

-4.3

-4.8

-5.2

-5.8

-5.3

-5.5

Government

-7.7

-5.9

-9.1

-9.6

-9.9

-10.3

-11.0

-11.6

Nongovernment

5.6

3.6

4.8

4.8

4.6

4.5

5.7

6.1

Central government finances (cash basis)

(In percent of GDP)

Revenue (including grants)

20.0

22.1

23.0

23.2

23.3

23.1

23.0

23.0

Expenditure

29.2

29.4

33.6

34.2

34.6

34.9

35.4

36.0

Budget balance (including grants)

-9.2

-7.3

-10.6

-11.0

-11.3

-11.7

-12.4

-13.0

Primary balance (including grants)

0.1

2.5

0.2

0.3

0.5

0.4

0.3

0.3

Total government debt

151

153

157

161

165

169

173

178

Monetary sector

(Annual percentage change, unless otherwise indicated)

Credit to the private sector

6.1

6.1

4.2

5.1

4.7

4.9

5.0

5.0

Reserve money

27.7

32.0

-11.5

2.2

2.2

2.2

2.1

2.0

Broad money 2/

7.6

4.1

5.0

5.0

5.0

5.0

5.0

5.0

Deposit dollarization (level)

65.9

68.8

69.0

69.0

69.0

69.0

69.0

69.0

Interest rates (period average, in percent)

Three-month treasury bill yield

4.4

5.1

5.8

6.1

6.2

6.3

6.4

6.4

Five-year treasury bill yield

6.8

7.9

8.2

8.4

8.5

8.6

8.7

n.a.

External sector

(In percent of GDP, unless otherwise indicated)

Exports of goods and services (in US$, percentage change)

-4.5

2.6

6.0

5.2

5.3

5.2

5.5

5.6

Imports of goods and services (in US$, percentage change)

0.4

6.9

7.0

3.0

3.1

4.0

4.3

4.4

Balance of goods and services

-24.0

-26.3

-27.4

-26.1

-24.9

-24.2

-23.6

-23.0

Current account

-22.5

-25.0

-25.8

-25.2

-24.7

-24.2

-23.7

-23.3

Foreign direct investment

4.0

4.6

4.0

4.0

4.0

4.0

4.0

4.0

Total external debt 3/

190

198

202

205

208

211

213

216

Gross reserves (in billions of U.S. dollars) 4/

40.2

40.6

37.5

33.7

29.9

26.1

22.4

18.6

In months of next year imports of goods and services

14.7

13.9

12.4

10.8

9.2

7.7

6.3

5.1

In percent of short-term external debt 5/

48.0

44.8

38.8

32.7

27.3

22.4

18.1

14.1

In percent of banking system foreign currency deposits

37.6

35.1

30.7

26.2

22.2

18.4

15.0

11.9

In percent of total banking system deposits

24.8

24.1

21.2

18.1

15.3

12.7

10.4

8.2

Memorandum items:

Nominal GDP (in billions of U.S. dollars)

49.6

51.5

53.6

56.4

59.0

61.9

65.0

68.3

Non-resident deposits (staff estimate, percent change)

11.7

3.8

5.0

5.0

5.0

5.0

5.0

5.0

Commercial bank total assets (percent of GDP)

394

396

394

394

392

389

385

n.a.

Imports of petroleum products (in millions of U.S. dollars)

-4,107

-4,760

-5,700

-5,424

-5,287

-5,281

-5,378

-5,535

Local currency per U.S. dollar (period average)

1,508

1,508

...

...

...

...

...

...

Real effective exchange rate (annual average, percent change)

-0.4

3.0

...

...

...

...

...

...

Sources: Lebanese authorities; and IMF staff estimates.

1/ According to a labor force survey conducted by the World Bank in April 2011. The latest official unemployment rate is 9.7 percent in 2007.

2/ Defined as currency in circulation plus resident and nonresident deposits.

3/ Includes nonresident deposits.

4/ Excluding gold and encumbered assets.

5/ Short-term debt on a remaining maturity basis, including short-term nonresident deposits.

[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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