© 2009 International Monetary Fund July 2009 IMF Country Report No. 09/213 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 June 10, 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 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 June 10, 2009 x Emergency Post-Conflict Assistance (EPCA). The Executive Board approved 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 June parliamentary elections. This report updates Executive Directors on performance under the program relative to the end-March 2009 indicative targets and monitorable actions. x Staff visit. The report’s findings are based on discussions held in Beirut May 13–21, 2009. The mission comprised Messrs. Fanizza (head), Finger, and Hesse (all MCD); and Messrs. Lopez Murphy (FAD) and Weisfeld (SPR). The mission met with the governor of the central bank, the minister of finance, and senior government officials. x Performance under EPCA. The end-March quantitative target on international reserves was met with a wide margin. While the primary balance target was also met, the program ceiling on net government financing by the BdL was missed. The Global Income Tax law has not yet been submitted to parliament, and the planned privatization of telecom is waiting for an improvement in global conditions (both measures are end-March monitorable actions). x Economic outlook. Recent cyclical indicators point to a somewhat stronger resilience of the Lebanese economy to the global recession than earlier projected. Staff projects a moderation in GDP growth to 4 percent this year, from 8½ percent in 2008, with risks to the upside if domestic political and security conditions remain calm. x Policy priorities. Near-term macroeconomic policies need to focus on at least safeguarding the authorities’ zero primary balance target. This would provide the basis––once a new government is in place––for swiftly implementing the Paris III fiscal and structural reform agenda to raise growth, improve living conditions, and reduce the debt overhang. Monetary policy should remain cautious in the near term, but following the formation of the new government, there could be scope for easing. x Safeguards assessment of the Banque du Liban (BdL). An update assessment is underway. Preliminary findings indicate progress in implementing some of the previous recommendations, especially those included in monitorable actions of the program, but limited progress in other areas. Further actions are required to enhance the BdL’s financial reporting transparency, governance, audit oversight, and the legal framework of the central bank. ©International Monetary Fund. Not for Redistribution 2 Contents Page I. Recent Developments and Outlook .....................................................................................3 II. End-March Performance Under EPCA................................................................................5 III. Policies for 2009 and Beyond ..............................................................................................6 Text Table Foreign Assistance to the Government ................................................................................5 Text Figures Commercial Bank Deposits .................................................................................................3 Deposit Dollarization and Interest Rate Spread...................................................................3 International Reserves..........................................................................................................3 Eurobond and Credit Default Swap Spreads........................................................................3 Cyclical Indicators.......................................................................................................... .....4 Contribution to Headline CPI Inflation................................................................................4 Government FX Debt Service..............................................................................................7 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. RECENT DEVELOPMENTS AND OUTLOOK 1. Following the June 7, 2009 parliamentary elections, the Lebanese political parties are in the process of forming a new government. The outgoing government, formed after the May 2008 Doha agreement, was successful in maintaining political and economic stability during the global economic and financial crisis, although it faced significant expenditure pressures in the run-up to the elections. 2. The impact of the global financial crisis on Lebanon has so far been muted. x Commercial bank deposit inflows, which are the main financing source for the large government deficit, have remained strong. Deposit dollarization has fallen, helped by stable security conditions, favorable economic developments, and a substantial interest differential between local currency and U.S. dollar denominated deposits. There have been no pressures on the peg, and the BdL has accumulated international reserves at a fast pace. Eurobond and Credit Default Swap spreads have moderated, and move in line with the emerging markets average. x The large banking sector has had virtually no direct impact from the global financial crisis, given limited exposure to failed foreign financial institutions or wholesale funding markets. Banks have remained liquid and well-capitalized, and there has been no need for emergency liquidity provision or other public intervention. 90 20 6.0 80 Commercial Bank Deposits Deposit Dollarization and Interest Rate Spread 18 78 85 5.0 16 76 14 74 80 4.0 12 72 75 10 3.0 70 8 68 70 2.0 Level in billions of 6 66 U.S. dollars, left- 4 64 65 axis 1.0 Y-o-y growth in Dollarization (percent), right-axis percent, right-axis 2 Deposit rate spread (LL minus$), left-axis 62 60 0 0.0 60 Jan-07 Aug-07 Mar-08 Oct-08 May-09 Feb-07 Jul-07 Dec-07 May-08 Oct-08 Mar-09 25 1500 International Reserves Eurobond and Credit Default Swap Spreads (In billions of U.S. dollars) (In basis points) 20 1200 EMBIG Lebanon EMBIG Composite 15 Gross reserves excld. gold CDS Lebanon Net foreign exchange position 900 CDX.EM 10 600 5 300 0 -5 0 Jan-05 Nov-05 Sep-06 Jul-07 May-08 Mar-09 Jan-08 May-08 Sep-08 Jan-09 May-09 Sources: Lebanese authorities; Bloomberg; and Fund staff calculations. ©International Monetary Fund. Not for Redistribution 4 3. Cyclical indicators point to a soft landing of the Lebanese economy in spite of the global financial crisis and recession. Economic activity has continued to expand robustly through the first quarter of 2009. 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. So far, there have not been sizeable returns of Lebanese expatriates from the Gulf, and the limited data available do not suggest a sharp drop in remittances inflows. As a result, the expected decline in economic growth will likely be milder than projected at the time of the 2009 Article IV consultations. Staff now projects real GDP growth at around 4 percent this year (instead of 3 percent), with a significant upside potential should domestic political and security conditions remain favorable. Inflation has dropped and, under the peg, is likely to remain subdued, given the benign inflation outlook in trading partner countries. 225 16 16 Cyclical Indicators Contribution to Headline CPI Inflation 95 14 (Y-o-y, in percent) 14 85 Food and beverages 12 12 Transportation and telecommunications