São Paulo – Lebanon needs to fight high public debt and weak economic growth through a fiscal plan conducive to a substantial, sustainable surplus, growth-inducing structural reforms and measures designed to strengthen the financial sector.
In general lines, these were the main recommendations in a report issued by the International Monetary Fund (IMF) following a staff mission to Lebanon lasting from June 19 to last Tuesday (2).
The organization notes that Lebanon’s economy is at a critical, difficult juncture, with back-to-back fiscal deficits causing public debt to exceed 150% of Gross Domestic Product (GDP) and a current account deficit of over 25% of GDP. Growth has been weak since the crisis erupted in neighboring Syria.
According to the IMF, the government has the chance to rebalance the economy through reforms. An electric power industry overhaul plan has been approved and a budget is in the making to rein in the fiscal deficit. The goal is to prevent expenditures from exceeding revenue.
“These are very welcome first steps on a long road towards sustainability and growth that will have to involve further substantial fiscal adjustment and structural reforms to improve Lebanon’s business environment and governance,” the report reads.
The IMF staff team argues that work must be done in three major fronts to spark growth. One is a “credible medium-term fiscal plan aiming for a substantial and sustained primary fiscal surplus that would steadily reduce the public debt-to-GDP ratio over time.”
It also calls for “fundamental structural reforms to boost growth and external competitiveness, starting with improving governance as well as implementation of the electricity sector reform plan and recommendations of the Lebanon Economic Vision,” a strategy designed to improve economic performance. Another requirement are measures to “increase the resilience of the financial sector through a stronger Banque du Lebanon balance sheet and continuing to build bank capital buffers.”
The IMF believes reforms “would encourage donors to disburse USD 11 billion in pledged concessional funding the authorities have secured for their Capital Investment Plan (CIP) at the CEDRE conference in April 2018.” That CIP funding aims to “upgrade Lebanon’s infrastructure while providing employment opportunities for host communities and Syrian refugees.”
According to the IMF, economic growth slowed in Lebanon last year to a meager 0.3%, on the back of low confidence, high uncertainty, a tight monetary policy, and substantial real estate sector contraction. Although there was improvement during the second half, whole-year inflation was higher than 6%, primarily due to imported fuel prices. Revenue fell short of expectations, and debt interest payments exceed 9% of GDP.
Last year saw a wide current account deficit, mainly due to weak export growth, bigger fuel imports, and weaker expatriate remittances to Lebanon.
According to the IMF, Lebanon’s economic outlook hinges on the progress of reforms, as well as on external events. The potential is in place to “shore up confidence, give breathing space to the economy, and encourage donor disbursements of concessional financing,” but “the government’s failure to achieve its targets and advance reforms or a breakdown in political and social consensus could erode confidence. Resolution of the Syrian conflict and normalization of relations would benefit Lebanon through involvement in Syrian reconstruction,” the report reads.
Translated by Gabriel Pomerancblum
