Middle East Economic Survey
VOL. XLIX
No 25
18-June-2007
Lebanon
IMF Says Lebanon Performance Under Emergency Assistance On Track, But Risks Remain
The International Monetary Fund (IMF) has said that although 2007 continues to be a difficult transition year for Lebanon, beset by political uncertainty and uncertain market conditions, performance under the IMF’s Emergency Post-Conflict Assistance (EPCA) is on track. But financial and fiscal risks remain. In its concluding statement for Article IV consultation held in Beirut on 14-28 May, the IMF noted that the “Paris 3 reform program offers a promising way out of the large debt overhang and financial vulnerabilities, and the 2008 budget as well as implementation of the structural reforms now being launched in the telecom, power and social sectors will be key in generating a clear forward momentum. Still the strategy is not without risks, and to sustain adjustment and reform over the medium term it will be important to generate a broad consensus behind the reform objectives; ensure that spending priorities and structural policy are supportive of high private sector growth; and reform institutions to improve the effectiveness of policy making.” The IMF goes on to say that the success of the program depends on the “timely disbursement of pledged donor support,” adding that an improvement in the fiscal situation should provide the opportunity to reform monetary policy instruments. Other points discussed in the statement included the following:
Financial Stability:The Central Bank of Lebanon (CBL) intervened successfully to maintain financial stability, and the deposit outflow during and in the immediate aftermath of the conflict was fully recovered by end-2006. The government was also able to contain the conflict’s impact on debt by limiting discretionary spending and mobilizing grant support from donors.
Economic Recovery: First quarter developments and a positive external economic environment point to a real GDP growth of at least 2% or higher for 2007. However the IMF adds that there is a large degree of uncertainty around this projected growth, with downside risks linked to the political and security situation, but also a significant higher potential, if the country were able to capitalize on the strong regional demand.
Paris 3 Program: The 2007 program is the first step in the long process of adjustment and reform outlined in the Paris 3 document, whose main aims are to restore the foundations of solid growth and reduce the risks of a financial crisis stemming from the large debt overhang. The IMF adds that in combination with privatization and external donor support, the large-scale adjustment would bring down government debt to under 130% of GDP by 2012.
Privatization: Remains a core element of the overall strategy and should be seen as an instrument to raise growth. Telecom privatization will have a direct impact on debt and thereby can be expected to boost growth, the IMF says.
Exchange Rate Peg: The IMF notes that the exchange rate peg has served the authorities well in maintaining financial stability and the exchange rate does not seem to be misaligned. International reserves held by the CBL, combined with the banking system’s liquidity cushion, appear sufficient to meet temporary pressures on the exchange rate, should they occur.
Finance Minister Expects $1Bn From Donors
Lebanese Finance Minister Jihad Az'ur has said that he expects his government to receive over $1bn in the next few months from the pledged donor aid – $300mn from the UAE, $200mn from the World Bank and €500mn from France. He stressed that at present the liquidity situation was under control.
