IMF: Projected deficit
well above government target

Central Bank advised

to step back from sovereign bond purchases

The 2019 fiscal deficit is likely to represent 9.7 percent of GDP, well above the government’s target of 7.6 percent, according to a concluding statement by the International Monetary Fund (IMF) following its regular annual consultations with the local authorities.

The IMF also said: “The Central Bank (BDL) should gradually step back from quasi-fiscal operations and strengthen its balance sheet. It should step back from government bond purchases and let the market determine yields on government debt.”

Earlier this year, the Ministry of Finance (MoF) said that it plans to issue nearly $7.3 billion in treasury bonds denominated in lira at an interest rate of one percent. The intention was for BDL to subscribe to the bond issue, which aims to reduce 2019’s debt servicing costs by $663 million.

According to the IMF staff, BDL’s buying of the proposed low-interest government bonds would worsen its balance sheet and undermine its credibility. “There should also not be any pressure on private banks to purchase the low-interest debt instead,” the statement said.

Last month, Riad Salameh, Governor of BDL, said that no agreement has been reached yet with the MoF regarding the purchase of the bonds and that nothing would be imposed on the banks.

The fiscal deficit widened to 11 percent of GDP in 2018 from 8.6 percent in the previous year. The primary balance deteriorated to 1.4 percent of GDP driven by new hiring and by an unexpectedly costly salary scale hike implemented in late 2017, according to the statement.

“Eliminating electricity subsidies is the most significant potential expenditure saving,” the IMF said. “It is crucial to start increasing tariffs as soon as possible to generate fiscal savings, possibly targeting the largest consumers first.”

Measures to boost government revenue must include raising the value-added tax (VAT) and increasing fuel excises, according to the statement. These measures should also include efforts to improve tax compliance. The IMF staff also advised the government to make the temporary increase of interest income tax in the 2019 budget a permanent measure.

Structural reforms and fiscal adjustments have the potential to bolster confidence, give breathing space to the economy, and encourage the donors involved with the CEDRE conference for infrastructure projects to disburse the concessional financing packages they committed to, according to the statement.

The country would benefit also from “the potential discovery of a natural gas field in Lebanon’s territorial waters, where exploration is expected to start by the end of the year, would boost growth and improve the country’s external balance,” the IMF staff said.