The International Monetary Fund (IMF) released its “Staff Concluding Statement of the 2019 Article IV Mission” in Lebanon, praising the recent passing of the electricity reform plan and the government’s approval of a new budget law for 2019, which is currently being discussed at the Parliament. The report mentioned some of the measures included in the proposed budget law, of which a hike in interest income tax from 7% to 10%, a possible 2% increase in customs on imported products, a suspension of hiring and the initiation of early retirement in the public sector, and the introduction of additional fees on certain car plates and general security paperwork, only to name a few. These measures aim primarily at reducing the country’s budget deficit to GDP ratio to 7.6% by the end of this year, a level deemed far-fetched by the IMF and insufficient to put Lebanon’s hefty debt burden on a sustainable path. In fact, the IMF took into account the blurriness surrounding the final version of the budget law once it is officially passed by the Parliament and the harsh economic conditions that have been prevailing for quite some time to foresee instead a 9.75% deficit-to-GDP ratio for 2019. It also went on to declare that Lebanon needs to register a primary surplus of about 4.5% of GDP in the medium to long term to achieve the long awaited debt sustainability. In this vein, the report stressed on the crucial need to effectively begin implementing drastic structural reform measures and projects and to adopt more stringent fiscal adjustment measures, all of which would send positive signals to the international community and allow for the disbursement of the pledged CEDRE funds. The report noted that these funds are meant to be mostly geared towards financing the country’s Capital Investment Plan (CIP), which would enhance Lebanon’s ailing infrastructure on the one hand, while diluting any temporary “contractionary effect” of the envisaged fiscal adjustment measures on the other. Among the aforementioned fiscal adjustment measures, the report suggested improving tax collection and tax administration, raising fuel excises, and increasing the VAT while eliminating some of the currently applicable exemptions. On the expenditures front, the IMF reiterated the importance of implementing the newly-approved electricity reform plan without any delay, including the envisioned tariff increase, which would not only imply sizeable savings for the government, but would also improve Lebanon’s overall business environment. In parallel, the IMF encouraged authorities to continue their current work to find the best alternative for the public salary bill and called for a more efficient allocation of public expenditures on the medium run to support growth-inducing activities and less fortunate social classes. It also welcomed the recent success in passing several bills that should help combat corruption, enhance transparency, and foster good governance, which, if properly implemented and regularly upgraded, would undoubtedly improve the country’s investment climate and business environment.

 

As far as the banking sector is concerned, the IMF applauded Lebanese authorities and the Central Bank’s cooperation to further strengthen the AML/CFT framework and encouraged them to maintain their efforts in that area. It also urged banks to further grow their capital buffers as per Basel III requirements and to raise their deposit insurance coverage levels as per the recommendations of the 2016 Financial Sector Assessment Program (FSAP). Moreover, the report pointed to the increasing interest rates offered by banks to attract new deposits and curb any deposit outflows, with the rates on lending following suit, which has further sharpened the contraction in loans to the private sector and the rise in non-performing loans (NPLs) that were initially triggered by the prevailing harsh economic conditions. From another standpoint, the IMF recognized Banque Du Liban (BDL)’s role in nurturing financial stability and shielding the peg of the Lebanese Pound against the U.S. Dollar, which, however, came at the expense of its own balance sheet. It accordingly considered that BDL should begin retracting from its “financial operations” when the time is right and should refrain from participating in the upcoming low-yielding government bonds, and advised that the market should instead determine the yields on these bonds. It similarly noted that banks should not be pressured into participating in the aforementioned bonds, underlining the already high exposure of the banking sector as a whole to the sovereign. In figures, the report unveiled that government securities and deposits at BDL constituted about 68.5% of banks’ total balance sheet, accounting for over 8 times their Tier 1 capital.

 

According to the report, all of the above-mentioned recommendations come at a time when Lebanon is in dire need to “rebalance” its economy. More particularly, it cited the large twin deficits suffered by the country for quite some time, with a budget deficit of about 11% of GDP and a current account deficit of 25% of GDP by end of 2018. It named as well the swelling public debt burden (surpassing 150% of GDP) and sluggish economic growth rates since the outbreak of the Syrian war.