In its annual executive summary, the IMF team that recently visitedLebanon to assess the fiscal performance of the state reiterated that the authorities should find new alternatives to increase revenues and reduce spending.
The IMF directors stressed that a sustained fiscal adjustment is essential and welcomed the primary surplus in 2014, but noted that it mostly reflected one-off factors.
They cautioned that without further adjustment the public debt ratio would continue to rise and add to existing vulnerabilities, crowding out essential public investment and social spending.
As a first step, directors encouraged the authorities to pass an appropriately ambitious budget for 2015. They also stressed the urgent need to reform the electricity sector to remove the large drain on public finances.
“On the fiscal side, exceptional factors allowed for a primary surplus in 2014, but without decisive action fiscal deterioration will continue in 2015. The 2014 primary surplus of about 2.5 percent of GDP largely resulted from exceptional telecom transfers and, to some extent, from withheld and delayed payments,” the IMF explained.
The IMF warned, however, that the primary balance is expected to return to a deficit of almost 1.25 percent of GDP in 2015, with public debt remaining high at 132 percent of GDP.
“Foreign-exchange and financial markets continue to be resilient, despite Lebanon’s sizable external financial requirements. Inflows remain large, particularly from non-resident deposits; and in the context of Lebanon’s currency peg to the U.S. dollar, the Banque du Liban has maintained an adequate level of gross foreign-exchange reserves,” the report said.
The directors agreed that monetary policy should remain geared to supporting the U.S. dollar peg, which has served Lebanon well.
They underscored that fiscal adjustment would help reduce the financial and institutional burden on the Central Bank related to quasi-fiscal activities.
The IMF praised the positive role played by Lebanon’s banking system in securing sustained, broad-based economic growth. It commended the authorities’ close oversight of the financial system, and stressed the need for continued vigilance and efforts to strengthen the regulatory framework.
The directors also highlighted the importance of increasing capital buffers, improving loan classification and restructuring rules, and further enhancing the framework to counter money laundering and terrorism financing. Directors welcomed the authorities’ recent request for an update assessment under the Financial Sector Assessment Program.
The IMF pointed to significant scope to increase revenue equitably, including by improving compliance and broadening the tax base, starting with fuel taxation.
“Further, directors observed that changing the spending mix toward capital and social spending would help mitigate the procyclical impact of fiscal adjustment. They also considered that strengthening the safety nets and reforming the pension system could improve equity and fiscal sustainability,” the report said.
The IMF renewed warnings that the presence of a large number of Syrian refugees is straining the Lebanese economy and adding more financial burdens on the state.
“The refugee crisis is straining local communities, adding to poverty and unemployment, and placing further pressure on the economy’s already-weak public finances and infrastructure. Moreover, Lebanon faces a difficult domestic political situation. The presidency has been vacant since May 2014 and a lack of consensus between the major parties is hindering [the] passage of key legislation,” the report said.
It added that in light of this reality, growth remained subdued.
“Following a sharp drop in 2011, growth has crawled upward to about 2–3 percent but remains well short of potential. IMF staff estimate that GDP increased by only 2 percent in 2014 and project a similarly modest growth rate in 2015,” the report said.