The International Monetary Fund (IMF) concluded on September 11 its Article IV Consultation with Lebanon based on the staff report that was prepared on August 21. In details, the report pointed out to a slowdown in Lebanon’s real economic growth to 0.3% during the year 2018 with the slowdown projected to pursue its trend in 2019 dragged by the lackluster performance of most economic indicators. In figures, the report cited the 16% drop in the value of cleared checks and the 31% contraction in the number of construction permits during H1-2019, with tourism activity being an exception, rising by 12% on an annual basis. The report revealed that the budget deficit worsened during the year 2018 to attain 11% of GDP, with the primary balance settling at a negative 1.4% of GDP, mainly as a result of the salary scale-related spending which turned out to be more expensive than previously anticipated. The IMF, however, pointed out that the Lebanese government that was formed in early 2019 has taken “important” steps aiming at boosting investor confidence such as the passing of the electricity sector reform plan and the approval of the year 2019 budget that targets a deficit of 7.6% of GDP. The government aims to achieve said target through a series of taxes and cost-cutting measures such as raising the tax on interest income from 7% to 10%, imposing a 3% tax on some imported goods and implementing a freeze on public sector hiring and early retirement. As a result, expenditures contracted by an annual 28% by the month of April, although part of this reduction may be explained by the accumulation of arrears as per the report. Moreover, the IMF projects the budget deficit to attain a wider 9.6% of GDP in 2019, as opposed to the 7.6% target, based on some more conservative revenue assumptions. The report also highlighted Lebanon’s large current account deficit which stood at 25% of GDP in 2018, and which further widened during the first five months of 2019, exerting additional external financing pressures, bearing in mind that deposit inflows have dropped despite the high-yielding financial operations conducted by BDL. Notwithstanding the bleak situation, the IMF revealed that some events might improve Lebanon’s medium-term outlook such as the possible return of refugees and the reconstruction of Syria once the situation is resolved, in addition to the potential discovery of a natural gas field in Lebanon’s territorial waters, bearing in mind that the exploration phase has already started.

In addition, the IMF issued recommendations to the Lebanese government on three main fronts namely fiscal consolidation, improvement of growth & export levels and monetary & financial stability. On the fiscal consolidation front, the IMF considered that sizeable and credible fiscal adjustments and structural reforms must be implemented in an attempt to maintain confidence, and that a primary surplus of 4-5% is required to reverse the upward path of the debt to GDP ratio. In this context, the IMF recommended raising the VAT and excise taxes as well as improving tax compliance, lauding in this context BDL’s recent decision for banks to only use Ministry of Finance approved financial statements used for tax filing purposes in the loan approval process of credit assessment by banks. Always in the same vein, the IMF recommended eliminating electricity subsidies by adhering to the electricity sector reform plan as well as conducting a thorough review for potential areas for expenditure saving in the public sector, citing the sizeable burden of the wage bill and pensions as a potential target. As far as growth enhancing reforms are concerned, the IMF recommended reducing the cost of doing business by accelerating the implementation of already approved laws (code of commerce and law on judicial intermediation) as well as the adoption of new laws related to closing a business and bankruptcy. In addition, the IMF stressed on the need to pass a public procurement law and incorporating Council for Development and Reconstruction (CDR) spending in the budget, while calling for urgent steps aimed at reducing corruption levels such as enacting illicit enrichment and asset declaration legislation. Finally, and on the monetary policy and fiscal stability fronts, the IMF recommended a gradual reduction in BDL’s quasi-fiscal operations, advising in this regard against any potential BDL involvement in purchasing 1% interest rate treasury bills. The IMF also stressed on the importance of pursuing the strengthening of banks’ capital buffers by gradually aligning capital requirements on their holdings of BDL foreign currency denominated instruments with Basel III requirements. Furthermore, the IMF called for increasing deposit insurance coverage levels. Always on the monetary policy and fiscal stability front, the IMF report revealed that the Lebanese authorities have strengthened the Anti Money Laundering (AML) and Combating the Financing of Terrorism (CFT) framework, and that the authorities must continue said improvements.