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|26 April, 2018

IMF cautious on more financial engineering in Lebanon

The International Monetary Fund has urged Lebanon’s Central Bank not to repeat financial engineering and to instead focus on normal financial operations.

International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the IMF/World Bank annual meetings in Washington, U.S., October 14, 2017.

International Monetary Fund (IMF) logo is seen at the IMF headquarters building during the IMF/World Bank annual meetings in Washington, U.S., October 14, 2017.

REUTERS/Yuri Gripas

BEIRUT - The International Monetary Fund has urged Lebanon’s Central Bank not to repeat financial engineering and to instead focus on normal financial operations.

“BDL should rely on a conventional interest rate policy instead of financial operations and encourage banks to gradually strengthen buffers. The BDL’s past financial operations have accomplished important objectives, but they increased risks in the system (sovereign exposure, interest rate and liquidity risks, dollarization),” the IMF said in its report.

It instead recommended that the Central Bank raise interest rates if it needs to secure higher foreign exchange inflows.

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“Buffers in the banking system should continue to be increased by aligning sovereign risk weights with the Basel Accord and encouraging banks to engage in forward-looking capital planning in line with their risk profiles. The authorities should also strengthen their crisis management and AML/CFT [anti-money laundering/combating the financing of terrorism] frameworks,” the IMF said.

In 2006, Central Bank Gov. Riad Salameh resorted to financial engineering to inject cash into the market and commercial banks due to the political vacuum in the country at that time.

But there is no sign that BDL intends to hike interest rates in the near future, arguing that the spreads in Lebanon are relatively higher than those in the United States.

The IMF also repeated the need to carry out structural reforms to boost revenues and achieve better growth.

“Structural reforms are essential given eroding competitiveness and low growth. In particular, the electricity sector has been widely identified as Lebanon’s most pressing bottleneck and remains a significant drain on the budget. The government should step up investment in the electricity sector, which would increase electricity supply and reduce the need for consumers to rely on expensive private generators.

“The government should also gradually increase electricity tariffs to eliminate subsidies to the electricity company EDL,” the report said.

The IMF noted that the Lebanese government has acknowledged that corruption exists in the country.

“The government acknowledges that corruption is widespread, and in response is working on an anti-corruption strategy.

“Improving the business climate, strengthening governance in revenue administration, and significantly enhancing tax/customs compliance and transparency at public institutions, are likely to have a sizable impact on confidence and improve governance,” the report said.

It also commended the government’s plan to draw capital investments to trigger higher growth and create more jobs in the market.

“The government is initiating a large capital investment program to spur overall economic growth, benefitting both refugees and their host communities. The plan aims to raise $1.6 billion (3.2 percent of current GDP) annually over the next decade by tapping into the World Bank’s Concessional Financing Facility, public-private partnerships and other facilities that provide grants or long-term concessional lending. The authorities hope that this will help address Lebanon’s low growth problem, create jobs for both host communities and refugees, and alleviate long-standing infrastructure problems which have become more acute with the large refugee presence,” the IMF said.

It stressed that Lebanon is facing many challenges that need to be addressed, including low economic growth and a high deficit and public debt. “Lebanon is facing low economic growth, twin deficits and high public and external debt. We estimate growth to be at 1-1.5 percent for 2017 and 2018.

“The traditional drivers of growth in Lebanon, tourism, real estate, and construction, remain slow and a strong rebound is unlikely soon.

“While the primary budget balance in 2017 was positive at 2.2 percent of GDP due to one-off factors, the overall budget deficit was 7.5 percent of GDP, reflecting interest payments on public debt, which stands at about 150 percent of GDP,” the IMF said.

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