Global Arab Network | IMF: Lebanon’s economy lost momentum reflecting domestic political uncertainty

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IMF: Lebanon’s economy lost momentum reflecting domestic political uncertainty

Global Arab Network - - Asmaa Malik

Thursday, 24 November 2011 00:16

http://www.english.globalarabnetwork.com/images/stories/2010/MAR/lebanon_bank_central.jpg

Global Arab Network - An International Monetary Fund (IMF) mission led by Ms. Kristina Kostial visited Beirut during November 8-23, 2011 to conduct the annual discussions in the context of the Article IV consultation. The mission met with the Prime Minister, Mr. Najib Mikati, the Minister of Finance, Mr. Mohammad Safadi, the Governor of the Banque du Liban (BdL), Mr. Riad Salameh, the Head of the Parliamentary Budget and Finance Commission, Mr. Ibrahim Kanaan, and various members of Cabinet and administration officials, as well as representatives of the private sector, civil society, and academia, Global Arab Network reports according to a press statement.

At the conclusion of the discussions, Ms. Kostial made the following remarks:

“After four years of strong growth, Lebanon’s economy has lost momentum reflecting domestic political uncertainty and regional unrest. Latest indicators are pointing to some pick-up in activity, and the economy could grow at 1-2 percent in 2011, markedly below an average of 8 percent per year during 2007-10.

“The authorities managed the downturn well, using buffers built up during the upswing. The BdL relied on its large foreign reserves to intervene forcefully when the Lebanese pound came under pressure from deposit outflows and currency conversions in January 2011. Thanks to the marked decline in the debt-to-GDP ratio since 2006 and the sizeable primary surplus in 2010, Lebanon’s fiscal position improved and freed up room for an accommodative fiscal stance in 2011.

“Growth could increase to 3-4 percent in 2012. But risks are high and to the downside, reflecting among others an uncertain global and regional environment, particularly in Syria. Thus, strong domestic policies are needed to instill confidence.

“The key policy challenges are to maintain macroeconomic stability and lay the foundation for a more dynamic economy that leads to inclusive growth, while reducing the country’s debt-to-GDP ratio, which is among the highest in the world.

“High downside risks call for a prudent 2012 budget, embedded in a medium-term agenda. Fiscal policy should target a small primary surplus in the 2012 budget, which would imply a broadly neutral fiscal stance and keep the debt-to-GDP ratio on a downward path. There is also scope for making fiscal policy more equitable through revenue measures and better targeted social spending. Investment in the electricity sector is welcome as are accompanying reforms to address losses and ultimately bring tariffs to a cost-recovery level.

“The government’s reliance on BdL financing should be reduced. Letting interest rates on Lebanese pound T-bills with maturities of less than 7 years rise would allow the treasury to return to market financing. Parliamentary approval for new borrowing in foreign currency would also provide an opportunity to benefit from globally low interest rates and high foreign exchange liquidity of domestic banks.

“Lebanon’s medium-term strategy should focus on generating sustained inclusive growth while reducing vulnerabilities. Structural reforms are key to tackle the infrastructure deficit and improve the business environment. This would strengthen competitiveness and ultimately have a tangible impact against unemployment and poverty.

“Addressing high unemployment calls for a more efficient labor market, including by attuning the education system to the needs of the labor market and reforming the social security system. Wage increases should be in line with productivity growth so as to not risk undermining competitiveness.

“Medium-term fiscal policies should be anchored in reducing the debt-to-GDP ratio. There is scope for revenue and expenditure measures to create fiscal space for both a reduction in the debt-to-GDP ratio and higher social and capital spending. Potential revenue measures include introducing a capital gains tax, broadening the VAT base, raising excises, and rescinding the February fuel excise reduction. Savings could come from reducing subsidies to the electricity company by reforming the sector and rationalizing non-priority current spending, while better targeting safety nets.

“Thanks to prudent management and conservative regulation, banks report capital above the regulatory minimum, high liquidity buffers, low levels of nonperforming loans, and stable profits. However, the recent expansion abroad exposes banks to heightened risks from the regional turmoil. In this context, the mission welcomes the authorities’ ongoing efforts to strengthen bank regulation and supervision as well as the Anti Money Laundering/ Combating the Financing of Terrorism (AML/CFT) framework.

“Despite progress in a number of areas, national accounts, balance of payments statistics, and social and labor market indicators remain weak. Thus, continued efforts are needed to strengthen statistics, including by providing the Central Administration of Statistics with a clear legal mandate, high-level support, and appropriate funding.

“The team thanks the authorities and all of its interlocutors for their insights, and open and constructive discussions.”

Global Arab Network

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