The International Monetary Fund (IMF) recently conducted a mission to Lebanon that spanned between March 15 and March 23 with the objective of drafting the Article IV consultation report, evaluating the economic situation and relaying policy priorities. The mission first mentioned Lebanon’s economic quagmire, the tragic depreciation of the local currency and the skyrocketing inflation. The mission also commented on the failure of the government to provide basic public services such as electricity, public health and public education, coupled with the “collapse” of the social support programs. Said factors have deeply affected people’s livelihoods with unemployment and emigration rates soaring, while the sizeable number of refugees is placing pressure on Lebanon’s already strained economy. In details, the IMF commented that the Lebanese economy contracted by about 40% since the start of the crisis but appears to have stabilized somewhat in 2022 due to recovery in tourism, deleveraging of the corporate sector, and strong remittance inflows. However, inflation remains in triple digits, according to the IMF, due to the large increases in money supply. The collapse of budget revenue has resulted in significant cuts in public spending. The government is relying on Central Bank funding and donor assistance to fund a budget deficit of over 5% of GDP. The IMF statement also commented that the current account deficit has widened considerably to more than 25% of GDP in 2022, driven by high oil and food prices and accelerating imports. Foreign reserves have declined consistently, reaching approximately $10 billion in December 2022, compared to $36 billion before the crisis, primarily due to weak external positions. The IMF added that despite the gravity of the situation, limited action has been taken to implement the pre-requisites set by the IMF in the staff-level agreement, putting Lebanon on a dangerous path. In details, and if prompt action is not taken, poverty and unemployment rates will remain high, and the country's economic potential will continue to decrease, keeping the economy in a state of depression, which will have irreversible consequences for the entire nation, especially low-to-middle-income households. The country's external position will continue to weaken and foreign currency reserves will be depleted. The informal sector of the economy will expand, reducing the opportunities for taxation and depressing budgetary spending. Large-scale emigration, especially of skilled workers, would intensify, further diminishing future growth prospects. Accordingly, the IMF has suggested an alternative to averting the aforementioned scenario, centering on the following reforms:

-      A medium term fiscal strategy: To achieve financial stability and make room for increased spending on social and developmental programs, the first step is to implement a 2023 budget that uses a consistent market exchange rate for customs and tax purposes, adjusts specific taxes to inflation, and begins to restore public administration. This budget should allocate funds for essential social spending and initiate reforms to improve the efficiency of the public sector. In the future, revenue mobilization reforms should aim to broaden the tax base, eliminate loopholes, and improve tax compliance. To complement this effort, there should be a focus on eliminating losses from state-owned enterprises, reducing transfers from the budget to the energy sector, improving public administration, and implementing sustainable pension system reforms.

-      A credible financial system restructuring: The IMF considered that it is inevitable to address the losses of the financial sector, protect small depositors, honor the hierarchy of claims, while adding that viable banks must be restructured and recapitalized, whereas unviable banks should exit the market. The strategy's effective implementation necessitates broadening the scope of the Banking Secrecy Law while legal and institutional frameworks must be updated to strengthen governance, accountability, and rebuild trust in institutions.

-      Other reforms: The IMF also advocated other reforms such as the unification of exchange rates, limiting central bank interventions and financing of the government, imposing temporary capital controls and strengthening the public finance framework. The IMF also stressed on the reform of state-owned enterprises, especially Électricité du Liban, and the need to audit them. Always on the reform front, the IMF stressed on the need to improve governance, anti-corruption, and anti-money laundering/combating financing of terrorism frameworks. The IMF added that the implementation of a new procurement law that meets international standards should also begin promptly.

Finally, the IMF reiterated its commitment to support Lebanon, being it in kind (via advice or technical assistance) or financially (via support from bilateral and multilateral partners). This support however, is contingent, on the implementation of the aforementioned reforms.