Global Arab Network | IMF: Lebanon, Remarkable financial performance in face of global recession

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IMF: Lebanon, Remarkable financial performance in face of global recession

Global Arab Network - - Ayman Khalil

Friday, 08 October 2010 18:57

IMF: Lebanon, Remarkable financial performance in face of global recession

Lebanon’s economy has largely escaped the impact of the global crisis and performed remarkably well, reflecting a more stable political environment and prudent macroeconomic management, reports Global Arab Network according to the International Monetary Fund (IMF) publication.

Short-term risks have declined, but there has been little progress in advancing structural reforms and the country’s underlying macrofinancial vulnerabilities—especially the government debt—remain very high, stated IMF.

Lebanon’s economic and financial performance has been remarkable in the face of the global recession. The economy bucked international trends during the global financial crisis, maintaining strong growth momentum despite the country’s large underlying vulnerabilities.

This positive outcome reflected domestic and external factors. Confidence rebounded with the political reconciliation agreement reached in Doha in 2008 and the successful, though delayed, formation of a new national unity government in late 2009, which returned the country to relative political stability. Together with a global low-interest rate environment, this unleashed a sharp acceleration in capital inflows even during the global crisis.

Macroeconomic policies remained prudent during the upswing, but there was little progress on structural reforms. Buoyant revenues, supported by the reintroduction of fuel excises, led to an increase in the government’s primary surplus to 3 percent of GDP in 2009, which—together with strong growth–allowed for a marked reduction in the debt-to-GDP ratio.

In addition, the Banque du Liban (BdL) took advantage of the abundant capital inflows to accumulate international reserves. While macroeconomic outcomes have been broadly consistent with the frameworks that were drawn up in the context of the 2007 Paris III donor conference and the two programs supported by the IMF’s Emergency Post-Conflict Assistance (EPCA), structural reforms fell substantially short of the authorities’ commitments.

Lebanon’s macroeconomic performance has been stronger than anticipated at the time of the Paris III conference and the first program supported by Emergency Post Crisis Assistance (EPCA I) in early 2007. Average real GDP growth during 2007–09 was 8.5 percent, markedly higher than the 3 percent projected under Paris III/EPCA I. Strong growth, together with an increase in the primary fiscal balance broadly in line with expectations, allowed for a decline in the government’s debt-to-GDP ratio to 148 percent by end-2009. While this decline was somewhat less than projected under Paris III/EPCA I, the latter assumed resources from privatization of the mobile phone carriers, which did not materialize. At the same time, strong capital inflows and the ongoing dedollarization of deposits allowed for a much larger than anticipated build-up of international reserves.

Progress toward the Paris III structural reform objectives has been much more limited. Price stability was maintained, gasoline excises were restored, and increases in capital expenditures and the tax on interest income are part of the draft 2010 budget. The authorities are also working to introduce a more uniform income tax, improve debt management and the budget process, and partially privatize the air carrier MEA. Some progress has also been made in capital market, business environment, and social sector reforms. However, the implementation of other commitments has made little headway, including raising the VAT rate; reforming the electricity sector; privatizing the mobile phone carriers; reducing the wage bill as percent of GDP; eliminating extrabudgetary funds (Fund for the Displaced and Council of the South); and reforming the pension system.

Macroeconomic policy since the last Article IV Consultations has been broadly in line with the staff’s advice. The authorities implemented the 2009 budget cautiously and saved the revenue overperformance, which led to a much higher than budgeted primary surplus and a marked decline in the government’s debt-to-GDP ratio. Similarly, the authorities gradually reduced interest rates—although at times somewhat slower than suggested by staff—with a view to moderating the pace of deposit inflows once it became apparent that the global crisis was virtually not affecting Lebanon and domestic political near-term risks abated.

While some headway has been made in reducing short-term risks, large underlying vulnerabilities remain and new vulnerabilities could emerge in the future.

Domestic stability rests on the fragile political system that is split along confessional lines, and the country lies at the crossroads of regional tensions. The government’s debt, at 148 percent of GDP, still remains among the highest in the world, and almost half of it is denominated in foreign currency. The large banking system is highly exposed to the sovereign, and dependent on short-term deposit inflows from nonresidents. Bank lending is to a large extent dollarized, which creates exposure to unhedged borrowers. In addition, unless carefully managed, new vulnerabilities could emerge in the future from rapidly rising real estate prices, plans to develop public private partnerships (PPPs), or the ongoing regionalization of local banks.

Global Arab Network

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