Dubai: The conflict in Syria, now in its fifth year, dominates Lebanon’s economic outlook, with refugees now comprising more than one-quarter of the population, the International Monetary Fund (IMF) said in its recently concluded Article IV Consultation Paper.
“The refugee crisis is straining local communities, adding to poverty and unemployment, and placing further pressure on the economy’s already-weak public finances and infrastructure. Moreover, Lebanon faces a difficult domestic political situation. The presidency has been vacant since May 2014 and a lack of consensus between the major parties is hindering passage of key legislation,” the IMF said.
In the face of this uncertainty, growth remains subdued. Following a sharp drop in 2011, growth has crawled upward to about 2—3 per cent but remains well short of potential.
The IMF staff estimate that GDP increased by only 2 per cent in 2014 and project a similarly modest growth rate in 2015. “Lebanon’s traditional growth drivers — tourism, real estate, and construction — have received a significant blow and a strong rebound is unlikely soon. Lebanon’s return to potential growth of 4 per cent before 2019 is now doubtful,” the IMF paper said.
Inflation also declined sharply in 2014 on the back of lower oil prices and other one-off factors, but should return to about 3 per cent by end 2015.
On the fiscal side, exceptional factors allowed for a primary surplus in 2014, but without decisive action fiscal deterioration is projected to continue in 2015. Foreign-exchange and financial markets continue to be resilient, despite Lebanon’s sizeable external financial requirements. Inflows remain large, particularly from non-resident deposits; and in the context of Lebanon’s currency peg to the US dollar, the Banque du Liban (BdL) has maintained an adequate level of gross foreign exchange reserves.
Toll on finances
The IMF commended the authorities for preserving macroeconomic stability and market confidence despite the unprecedented humanitarian and economic spillovers from the conflict in Syria, including a daunting inflow of refugees which has taken a toll on public finances, infrastructures, and the social fabric. The IMF directors said that a sustained fiscal adjustment is essential. The IMF has cautioned that, without further adjustment, the public debt ratio will continue to rise and add to existing vulnerabilities, crowding out essential public investment and social spending. As a first step, Directors encouraged the authorities to pass an appropriately ambitious budget for 2015. They also stressed the urgent need to reform the electricity sector to remove a large drain on the public finances.
More broadly, IMF directors urged the need to place public indebtedness on a sustainable downward path. In this context, they advised caution in implementing a salary scale adjustment for public sector employees. They pointed to significant scope to increase revenue equitably, including by improving compliance and broadening the tax base, starting with fuel taxation. Further, Directors observed that changing the spending mix toward capital and social spending would help mitigate the procyclical impact of fiscal adjustment. They also considered that strengthening the safety nets and reforming the pension system could improve equity and fiscal sustainability.
US dollar peg
Directors commended the central bank for supporting macroeconomic stability and maintaining adequate international reserves. They agreed that monetary policy should remain geared to supporting the US dollar peg. Looking ahead, they underscored that fiscal adjustment would help reduce the financial and institutional burden on the central bank related to quasi fiscal activities.
Directors noted the critical role played by Lebanon’s banking system in securing sustained, broad based economic growth. They commended the authorities’ close oversight of the financial system, and stressed the need for continued vigilance and efforts to strengthen the regulatory framework. The IMF has underscored the need to advance structural reforms to promote job creation and improve competitiveness. In addition to electricity reform, which is a critical priority, Directors highlighted the need for labour reforms, improvements in public service provision, and legislation to reinvigorate private investment, including in the oil and gas sector. Directors also encouraged the authorities to improve Lebanon’s statistical system, building on ongoing progress.