IMF Executive Board urges comprehensive reform amidst Lebanon's deep economic crisis: 2023 Article IV Consultation concludes

The International Monetary Fund (IMF) Executive Board concluded its 2023 Article IV consultation with Lebanon on June 1. Lebanon, which has been in a three-year-long unprecedented sovereign-banking-currency crisis, saw the economy contract by about 40 percent, the Lebanese lira lose 98 percent of its value, and inflation hit triple-digits. Additionally, the central bank lost two-thirds of its foreign exchange (FX) reserves.

While there were signs of economic stabilization in 2022 due to the expiration of COVID measures, a rebound in tourism, strong remittances inflows, and a gradual improvement in terms of trade, the economy remains severely depressed. High uncertainty, banking sector restrictions, and expensive and very limited electricity supply continue to be major hindrances.

According to Reuters, Lebanon's financial crisis has been worsened due to lack of policy action and vested interests resisting reforms. The delay in action has led to a decrease in the foreign currency deposits that could be recovered during banking sector restructuring. The IMF noted that $10 billion less could now be recovered compared to 2020.

Following the dramatic exchange rate depreciation in Q1 2023, cash dollarization increased, and inflation accelerated to 270 percent year-on-year in April 2023. The fiscal deficit is estimated to have widened to 5 percent of GDP in 2022 due to collapsing revenues. Additionally, the current account deficit widened to almost 30 percent of GDP on account of surging imports, while foreign domestic investment (FDI) and other financial inflows remained depressed.

The IMF's Executive Board emphasizes that the economic outlook is highly uncertain and relies heavily on authorities’ policy actions. A comprehensive economic recovery plan, if decisively implemented, could steadily reduce imbalances, restore confidence, and return the economy to growth. However, a continuation of the status quo presents the largest risk to the outlook, with public debt potentially reaching 547% of GDP by 2027 if no reforms are undertaken.

The IMF Executive Directors stress the need for a comprehensive reform plan to resolve the crisis and bring about a sustainable recovery. This includes credible restructuring of the financial system, reduction of high inflation, addressing sharp exchange rate depreciation, rebuilding the credibility of the central bank, and medium-term fiscal consolidation accompanied by debt restructuring.

Directors also called for prompt adoption of a credible 2023 budget underpinned by tax and revenue administration measures, and they highlighted the need for comprehensive revenue mobilization measures. In addition, the board stressed the need for ambitious structural reforms to improve governance and operational viability of state-owned enterprises, reform the pension system, implement electricity sector reforms, and enhance anti-corruption and AML/CFT standards and practices.