IMF: Economy has stabilized but progress on reform too slow. To revisit $3 billion funding level

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IMF: Economy has stabilized
but progress on reform too slow

To revisit $3 billion funding level

In its first ‘Article IV’ mission report since 2019, the International Monetary Fund (IMF) said that the $3 billion funding – that the IMF would provide if reforms were implemented – must be revisited because the economic situation in the country has changed. In April 2022, the government and an IMF delegation reached a staff-level agreement on a 46-month Extended Fund Arrangement (EFF) equivalent to about $3 billion.

The policy of inaction is going to leave the country in a never-ending crisis, said Ernesto Ramirez Rigo, head of an IMF staff delegation after completing a mission to Lebanon.

The ‘Article IV’ mission is a periodic exercise undertaken by the IMF at the request of the government. In its previous missions , the IMF had warned from the consequences of continuous public deficits, but had not foreseen the large deficit in the balance sheet of the Central Bank (BDL) and it saw the banking sector as resilient. The previous reports also described the peg as vital for the economy, advocated for higher interest rates and advised against the immediate cessation of BDL’s financial engineering operations which it also labeled as “unconventional.”

During the 2023 visit, Rigo said that the progress achieved so far is very slow while a lot more was expected but the IMF is not considering walking away from a deal with Lebanon.

The country is at a dangerous crossroads but there is an alternative path to stability and growth that could be achieved by implementing a package of comprehensive reforms, according to the statement of the IMF delegation.

The statement read: “Poverty and unemployment will remain high, and economic potential will continue to decline. A continuation of the status quo would further undermine trust in the country’s institutions and additional delays in implementing reforms will keep the economy depressed, with irreversible consequences for the whole country, but especially low-to-middle income households.”

According to the statement, the economy seems to have stabilized somewhat in 2022 thanks to “some recovery in tourism, further deleveraging of the corporate sector, and continued strong remittances inflows, which have supported consumption.”

The current account deficit widened substantially to over 25 percent of GDP in 2022 after a significant improvement in 2020-2021. The current account’s major components include the trade balance and net remittance flows (balance of inflows and outflows). The IMF staff statement attributed the worsening current account deficit mainly to high oil and food prices and an increase in imports in anticipation of raising the official exchange rate. “High uncertainty will further weaken the external position and BDL will continue to lose scarce international reserves,” it said. Foreign reserves plunged to about $10 billion at the end of December 2022 from $36 billion before the crisis. The steady decline in foreign currency reserves resulted from the country’s weak external position and ad hoc monetary policy decisions, according to the IMF staff.

The statement said that the reforms that would lead to stability and growth include a medium-term fiscal strategy, credible restructuring of the financial system, unification of exchange rates and tightening monetary policy in addition to ambitious structural reforms. The required reforms also include strengthening the public finance management framework, reforming state-owned enterprises, enhancing the governance and anti-corruption frameworks, as well as the anti-money laundering/combating the financing of terrorism frameworks.

Date Posted: Mar 24, 2023