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10560-9781451883411.Pdf © 2009 International Monetary Fund November 2009 IMF Country Report No. 09/313 June 10, 2009January 29, 2001 January 29, 2001 January 29, 2001 May 21, 2009January 29, 2001 January 29, 2001 Lebanon: Report on Performance Under the Program Supported by Emergency Post-Conflict Assistance This report on Lebanon’s performance under the program supported by emergency post-conflict assistance was circulated to the Executive Directors of the IMF for their information. It was prepared by a staff team of the International Monetary Fund and is based on the information available at the time it was issued on October 28, 2009. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Lebanon or the Executive Board of the IMF. The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information. Copies of this report are available to the public from International Monetary Fund x Publication Services 700 19th Street, N.W. x Washington, D.C. 20431 Telephone: (202) 623-7430 x Telefax: (202) 623-7201 E-mail: [email protected] Internet: http://www.imf.org Price: $18.00 a copy International Monetary Fund Washington, D.C. ©International Monetary Fund. Not for Redistribution This page intentionally left blank ©International Monetary Fund. Not for Redistribution INTERNATIONAL MONETARY FUND LEBANON Report on Performance Under the Program Supported by Emergency Post-Conflict Assistance Prepared by the Middle East and Central Asia Department (In consultation with other departments) Approved by Ratna Sahay and Ranil Salgado October 27, 2009 x Emergency Post-Conflict Assistance (EPCA). Following an initial EPCA disbursement in 2007, the Executive Board approved a second EPCA equivalent to 12.5 percent of quota, or SDR 25.375 million, in November 2008. The EPCA-supported program for the period until June 2009 was designed to support the authorities’ policies aimed at buttressing macroeconomic stability and financial discipline during the period until the parliamentary elections. This report updates Executive Directors on performance under the program relative to the end-June 2009 indicative targets and monitorable actions. x Staff visit. The report’s findings are based on discussions held in Beirut during September 10–18, 2009. The team comprised Messrs. Fanizza (head), Finger (both MCD), and Lopez Murphy (FAD). It was assisted by Mr. Mottu (resident representative). The mission met with the governor of the central bank, the minister of finance, and senior government officials. x Performance under EPCA. The performance has remained broadly favorable, though there has been limited progress on structural reforms. The end-June quantitative target on international reserves was met by a wide margin. While the primary balance target was also met, the program ceiling on net government financing by the Banque du Liban (BdL) was missed. The BdL has adopted formal policies for the selection, appointment, and rotation of the BdL’s external auditors (end-June monitorable action). However, the introduction of a Treasury Single Account (end-June monitorable action) was postponed because parliament did not pass the corresponding legislation. x Economic outlook. Recent cyclical indicators point to a marked resilience of the Lebanese economy to the global recession. In light of strength in tourism, financial services, and construction, staff projects GDP growth at 7 percent this year. x Policy priorities. Given Lebanon’s still very high government debt-to-GDP ratio, fiscal consolidation remains a priority. In the near-term, the authorities should capitalize on buoyant fiscal revenues to achieve a primary surplus of at least a 0.9 percent of GDP this year (up from 0.6 percent in 2008). The next government should swiftly relaunch the Paris III fiscal consolidation agenda. In the near term, interest rates should be allowed to decline further, but at a gradual pace. x Safeguards assessment of the BdL. An update assessment was completed on September 2, 2009. The report indicates progress in implementing some of the previous recommendations, especially those included as monitorable actions in the program, but limited progress in other areas. Further actions are required to enhance the BdL’s financial reporting, transparency, governance, audit oversight, and legal framework. ©International Monetary Fund. Not for Redistribution 2 Contents Page I. Introduction..........................................................................................................................3 II. Recent Developments and Outlook .....................................................................................3 III. End-June Performance Under EPCA...................................................................................6 IV. Economic and Financial Policies.........................................................................................7 Text Tables Banking Sector Financial Soundness Indicators, 2006–09..................................................5 Foreign Assistance to the Government ................................................................................6 Text Figures Government Debt and Primary Balance ..............................................................................3 International Reserves..........................................................................................................3 Cyclical Indicators ...............................................................................................................4 Contribution to Headline CPI Inflation................................................................................4 Commercial Bank Deposits .................................................................................................5 Eurobond and Credit Default Swap Spreads........................................................................5 Sovereign Local Currency Yield Curve...............................................................................8 Tables 1. Selected Economic Indicators, 2006–09..............................................................................9 2. Quantitative Indicative Targets Under the Program Supported by Emergency Post-Conflict Assistance, December 2008–June 2009 ...................................10 3. Monitorable Actions, December 2008–June 2009.............................................................11 ©International Monetary Fund. Not for Redistribution 3 I. INTRODUCTION 1. Lebanon has started to reap the benefits of prudent macroeconomic policies. The two key objectives of EPCA—reducing the government debt-to-GDP ratio and strengthening international reserves—were clearly met, buoying confidence and economic activity despite the difficult international environment and recent delays in forming a government. The debt-to-GDP ratio has dropped 27 percentage points since end-2006, and at $25 billion, international reserves have doubled over the past 18 months. 4 185 30 Government Debt and Primary Balance International Reserves (In percent of GDP) (In billions of U.S. dollars) 180 25 3 Gross reserves excld. gold Net foreign exchange position 1/ 175 20 2 170 15 1 165 10 0 160 5 -1 155 0 Government debt, right axis Primary balance (ex. grants), left axis -2 150 -5 2003 2004 2005 2006 2007 2008 2009 Mar-05 Dec-05 Sep-06 Jun-07 Mar-08 Dec-08 Sep-09 Sources: Lebanese authorities; and Fund staff calculations. 1/ Defined as gross international reserves (including gold) minus foreign currency obligations of the BdL to entities other than the Government of Lebanon. 2. Nonetheless, Lebanon continues to face serious long-standing vulnerabilities. At over 150 percent of GDP, government debt remains high, and large financing requirements imply a substantial exposure to market conditions. The large banking sector, with assets exceeding 300 percent of GDP, is strongly exposed to the sovereign (56 percent of assets) and faces substantial maturity mismatches, with short-term deposits funding longer-term loans to the sovereign and the nonbank private sector. The government and the nonbank private sector are also faced with sizeable currency mismatches given large-scale dollar-denominated debt. II. RECENT DEVELOPMENTS AND OUTLOOK 3. Since the victory of a pro-Western coalition in parliamentary elections last June, the Lebanese political parties have been in a protracted process of forming a new government. Following the resignation and subsequent re-appointment of Prime Minister-Designate Saad Hariri in September, the political parties have resumed ©International Monetary Fund. Not for Redistribution 4 broad-based consultations aimed at forming a national unity government. In the interim, the outgoing cabinet has been acting as a caretaker government. 4. The most recent cyclical indicators point to ongoing strength in economic activity. The global financial crisis and recession has had only a limited impact on the Lebanese economy. Merchandise exports, which account for only a small share of the economy, have been negatively affected by lower external demand, but construction activity appears to hold up well, and tourism and financial services continue to expand almost unabated amidst improved security conditions. Moreover, the limited data available do not suggest a sharp drop in remittances inflows. As a result, real GDP is projected to grow at around 7 percent this year (compared to an earlier staff projection of 4 percent). Inflation has dropped and, under
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