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IMF urges Lebanon to implement reforms with haste

Syrian refugee children stand on a balcony in Sidon, Friday, May 9, 2014. (The Daily Star/Mohammed Zaatari)

BEIRUT: The International Monetary Fund called on Lebanon to “urgently strengthen policies” and make it a fiscal priority to “put public debt on a sustainable downward path.”

Lebanon’s primary budget turned negative in 2012 and deteriorated further in 2013 to 141 percent of GDP as the government came under pressure to spend and economic activity dropped, the IMF said in a report published Friday.

It added that policy decisions, such as a VAT exemption on gasoline and a cost of living adjustment for public sector employees, had also contributed to the rising deficit.

The IMF called for salary scale adjustments to be contained with no retroactive payments as demanded by government workers and public school teachers currently on strike.Political jockeying and sectarian tensions had slowed or stalled action needed to tackle Lebanon’s financial problems, it said.

The lack of reforms amplified macroeconomic imbalances, and the fiscal position, in particular, has worsened, with adverse consequences for public debt, it added.

The IMF issued a series of recommendations following a visit to Lebanon, including passing a budget for 2014, a necessary step to anchor fiscal policy.

“The last officially approved budget dates back to 2005. A sound budget – covering all government expenditure and revenue plans – would crystallize the government’s policy intentions and restore credibility in fiscal policy,” it said.

The IMF advised as well the immediate introduction of reforms in the electricity sector including plans to strengthen generation capacity, switch to natural gas and lower tariffs.

Such reforms should be complemented by improvements in transmission and distribution, it said.

It also recommended taking other measures for preserving financial stability such as maintaining large liquidity and strengthening capital buffers by banks.

“Banks have been largely resilient despite the difficult environment. Regional instability has halted their expansion in neighboring countries and opportunities for credit for the private sector are currently limited. Non-performing loans have marginally increased and profitability ratios have declined,” the IMF’s report said.

It continued: “Still, liquidity buffers remain large and the quality of capital is high. Capital buffers should be re-assessed in relation to the large exposure to the sovereign in accordance with Basel III. The Central Bank requires by end-2015 an additional capital buffer of 1.5 percent on top of the Basel III minimum plus the 2.5 percent conservation buffer.”The IMF forecasts Lebanon’s economy will grow by only 2 percent this year compared with 8 percent in 2007-10 and a “modest 4 percent over the medium term,” despite two years of violence, political paralysis and a huge refugee influx. “Traditional drivers of growth – real estate activity, construction and tourism – have been impacted by the deteriorating security and increasing uncertainty,” it said.

The Syria crisis has created unprecedented inflows of refugees, now estimated to equal a quarter of the population, causing an increase in the unemployment rate to about 20 percent.

“This is due to a dramatic increase in the labor supply from the Syrian refugee influx that has revealed underlying weaknesses in Lebanon’s labor market,” it said.

 
A version of this article appeared in the print edition of The Daily Star on May 12, 2014, on page 5.

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Summary

The International Monetary Fund called on Lebanon to "urgently strengthen policies" and make it a fiscal priority to "put public debt on a sustainable downward path".

Lebanon's primary budget turned negative in 2012 and deteriorated further in 2013 to 141 percent of GDP as the government came under pressure to spend and economic activity dropped, the IMF said in a report published Friday.

The IMF forecasts Lebanon's economy will grow by only 2 percent this year compared with 8 percent in 2007-10 and a "modest 4 percent over the medium term," despite two years of violence, political paralysis and a huge refugee influx.


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