IMF recommends
boosting confidence

Its latest report sees the glass as being half-full

Policy inertia is taking a growing toll on the economy and in the face of a continued refugee presence and new challenges, is threatening Lebanon’s resilience, according to a report by the International Monetary Fund (IMF), (Article IV Consultation mission to Lebanon, which visited during April 29–May 12).

The country’s well-deserved reputation for resilience is facing an exceptionally challenging environment, the IMF said. The Syria crisis, now in its fifth year, dominates Lebanon’s short-term outlook and longer-term prospects.

Marwan Barakat, Head of Research at Bank Audi said that Syrian refugees represent a double-edged sword for the economy: “They are contributing to consumption growth, but at the same time have a negative impact on employment, poverty, and public finance,” he said.

An assessment of the need to cope with the refugee crisis was presented by the Government at the Kuwait donor summit held in March. A committee has been formed to follow up on solutions. “We have a common vision in the country about the need to solve this problem, but more support is needed from the international community,” said Wassim Mansouri, Advisor to the Minister of Finance.

The IMF estimates growth in 2014 at about two percent and projects at a similarly modest rate in 2015. It said projection for 2015 would have been worse without the one-off impact of lower oil prices.

“The economy is not in a recession, but in a continuous slowdown since the beginning of the regional turmoil,” said Barakat. “Some factors are contributing to the growth of the economy, including the Central Bank (BDL) stimulus packages and the rerouting of exports through the Port of Beirut to compensate for the slowdown in land exports,” he said.

The IMF welcomed the primary budget surplus realized in 2014, but without decisive action, fiscal deterioration will continue in 2015, it said. It estimated the current account deficit of 2014 at about 25 percent of the Gross Domestic Product (GDP). “This is a clear vulnerability, particularly in light of the currency peg to the US dollar,” it said.

“There are two defensive lines that will continue to help the economy show resilience. One is the BDL’s foreign reserves, which stand at $38 billion and cover 80 percent of the lira money supply. The other is the banks’ liquidity in foreign currency, which is equivalent to $39 billion, representing 41 percent of the foreign currency deposits of banks, which is an important risk cover for outflows, bearing in mind that the outflows in the 2005-2006 crisis following political incidents locally was four percent of the banks’ deposits base,” said Barakat.

Lebanon’s economic model rests on confidence, the IMF said. The underlying faith of foreign investors and the large Lebanese diaspora is the basis for the country’s continued ability to attract sizable deposit inflows, which have in turn helped fund large budget and current account deficits, it said.

“Deposit growth over two decades was at 15 percent. This is a healthy growth exceeding the borrowing needs of the economy in its private and public components,” said Barakat.

In the short term, the authorities should look beyond the temporary impact of lower oil prices and deliver a credible policy mix with sustained adjustment and a falling public debt ratio, the IMF said.

“The State is benefiting from lower oil prices. The impact on the fiscal deficit is a savings of two percent of the GDP and five percent for the trade deficit, but this is not enough as the 2015 budget is expanding the deficit,” said Barakat.

In the medium term, social stability requires job-rich, sustainable growth. This cannot happen without structural reform, starting immediately with the electricity sector, the IMF said.

“Job creation can happen through the increase of investments in the upcoming years to absorb 30,000 Lebanese flowing into the labor market yearly,” said Barakat. He said that investments represent only 28 percent of the GDP.

The IMF issued a series of recommendations, the first and most important of which is for the authorities to anchor confidence by passing a comprehensive budget for 2015.

“The non-approval of the budget is becoming a classic common issue,” said Mansouri. “The approval of the budget is obligatory for regaining economic balance. The approval of the budget by Parliament should lead it to the approval of further projects that are still on hold, including those of the World Bank,” he said.

Timely and reliable data are crucial for greater accountability, the IMF said. Although data collection and dissemination have improved in some areas, national and external accounts, fiscal, social and labor-market statistics remain weak, undermining economic decision-making, transparency, and policy effectiveness.

“As much as we move toward automation of formalities between the State and citizens, it will be easier to collect data,” said Mansouri. “This will increase revenues as well as confidence in the economy,” he said.