Lebanon's reforms insufficient for recovery, IMF says as it concludes visit to Beirut

Lebanon's reforms are insufficient to help lift the country out of its economic crisis, the International Monetary Fund said Thursday.

Head of the IMF mission visiting Lebanon Ernesto Ramirez Rigo, said in a statement that Lebanon's ongoing refugee crisis, clashes with Israel at its southern border and the spillover from the war in Gaza are exacerbating an already weak economic situation.

An IMF team, led by Ramirez Rigo, had arrived Monday in Beirut to discuss recent economic developments and progress on key reforms.

At the end of the mission Thursday, Ramirez Rigo said that the unaddressed economic crisis continues to weigh heavily on Lebanon’s population. "Unemployment and poverty have reached exceptionally high levels and the delivery of critical public services has been severely disrupted. At the same time, Lebanon continues to struggle with hosting the largest number of refugees per capita in the world, amidst limited resources."

He warned that "the negative spillovers from the conflict in Gaza and increased fighting at Lebanon’s southern border are further exacerbating an already weak economic situation. It has internally displaced a significant number of people and caused damage to infrastructure, agriculture, and trade in southern Lebanon. Together with a decline in tourism, the high risks associated with the conflict create significant uncertainty to the economic outlook."

Hezbollah, a Hamas ally, has traded near daily cross-border fire with Israeli forces since the Palestinian group's October 7 attack on southern Israel that sparked the war in Gaza.

The fighting has killed at least 427 people in Lebanon, mostly militants but also including 82 civilians, according to an AFP tally.

Israel says 14 soldiers and 11 civilians have been killed on its side of the border.

"Some progress has been made on monetary and fiscal reforms since the last Article IV consultation. Policy measures taken by Ministry of Finance (MoF) and Banque du Liban (BdL) – including the phasing out of monetary financing of the budget, the termination of the Sayrafa (electronic foreign exchange) platform, tight fiscal policy, and steps towards the unification of exchange rates – have helped contain exchange rate depreciation, stabilized the money supply, and started to reduce inflationary pressure. In addition, measures by the MoF to improve revenue mobilization from VAT and customs, by adjustment of the customs dollar to the market exchange rate, brought the estimated 2023 fiscal deficit close to zero. The joint efforts of BdL and MoF have also enabled some accumulation of foreign reserves," Ramirez Rigo said.

He added that however, these policy measures fall short of what is needed to enable a recovery from the crisis. "Bank deposits remain frozen, and the banking sector is unable to provide credit to the economy, as the government and parliament have been unable to find a solution to the banking crisis. Addressing the banks’ losses while protecting depositors to the maximum extent possible and limiting recourse to scarce public resources in a credible and financially viable manner is indispensable to lay the foundation for economic recovery. Without progress, the cash and informal economy will continue to grow, raising significant regulatory and supervisory concerns."

Ramirez Rigo said that the timely approval of the 2024 budget was an important first step, but stronger efforts are needed to strengthen public finances. "The tax administration remains underfunded, hampering tax collection and putting the formal sector taxpayers at a disadvantage. Lack of resources prevents the provision of essential public services, social programs, and capital spending. It also exacerbates inequities and negatively affects perceptions of tax fairness. Looking ahead, and given the likely lack of any financing, the 2025 budget should continue to aim for a zero deficit through more ambitious fiscal reforms, particularly to further enhance revenue mobilization through strengthening compliance and reprioritizing current spending to meet essential social and infrastructure needs."

He added that progress on other critical reforms, including governance, transparency and accountability, remains limited. "The BdL is in the process to start taking steps to enhance internal control and governance. At the same time, further measures to raise transparency across the public sector are much needed, including audited financial statements of state-owned enterprises (SOEs), as well as SOE reforms more broadly. Furthermore, weaknesses in the quality, availability, and timeliness of economic data pose challenges for informed policymaking, he said.

Ramirez Rigo vowed that the Fund remains committed to supporting Lebanon, and expects the Article IV discussions to take place in September 2024 to assess progress on critical economic and financial reforms.