IMF: Permanent solution requires comprehensive decisions to contain deficits and start the restructuring of the banking system

A recent visit by an International Monetary Fund (IMF) delegation, led by Mr. Ernesto Ramirez Rigo, to Beirut from September 11 to 14, focused on discussions surrounding Lebanon's current economic status and the progress made in implementing crucial reforms. 

Following the mission, Mr. Ramirez Rigo issued the following statement:

Lebanon's economic future looks bleak due to its failure to initiate urgently needed reforms. The absence of political determination to make tough yet essential decisions for reform has left Lebanon grappling with a crippled banking sector, insufficient public services, deteriorating infrastructure, escalating poverty and unemployment rates, and a widening income disparity. Inflation continues to soar into triple digits, further squeezing the real income of its citizens. 

Moreover, foreign exchange (FX) reserves have dwindled significantly during the first half of this year, partly due to Banque du Liban's (BDL’s) involvement in quasi-fiscal operations and a substantial current account deficit.

While there has been a temporary boost in tourism during the summer months, resulting in increased FX inflows, it is unlikely to be a sustainable solution. This might create an illusion that Lebanon has emerged from its crisis, potentially leading to complacency. 

However, earnings from tourism and remittances fall far short of bridging the enormous trade deficit and the lack of external financing. The current trajectory of Lebanon's external balance is unsustainable and underscores the urgency of the situation.

Recent decisions made by BDL’s new leadership, including phasing out the Sayrafa platform, establishing a transparent FX trading platform, ending the drawdown of FX reserves, restraining monetary financing, and enhancing financial transparency, represent steps in the right direction. Building on this progress, there is an opportunity for comprehensive reforms to enhance BDL's governance, accounting practices, and FX operations in alignment with international best practices. 

Furthermore, it is imperative to unify all official exchange rates at the market exchange rate to eliminate opportunities for arbitrage and rent-seeking, which burden public finances.

These measures should receive temporary support from the capital and withdrawal restrictions law, accompanied by policy actions from the government and parliament aimed at addressing twin deficits and rectifying issues within the financial sector by acknowledging losses and advancing bank restructuring.

The government must formulate a coherent fiscal strategy to restore debt sustainability and allocate resources for social and infrastructure spending. To make this strategy effective, improving revenue mobilization is of utmost importance. 

The government has initiated gradual adjustments to revenue collection, taking into account exchange rate depreciation by adopting more realistic tax base valuation rates and revising tax schedules and fees to more plausible values, leading to significantly higher revenues. However, more efforts are required. The 2023 budget remains deficient in terms of timeliness and coverage, failing to accurately reflect the actual extent of the deficit and associated monetary financing. 

While timely, the proposed 2024 budget should ensure consistency with the exchange rate unification process initiated by BDL, refrain from preferential treatment of certain taxpayers, and allocate adequate resources for revitalizing the tax administration to enhance compliance and fairness.

 

In this regard, we encourage the authorities to begin implementing the key aspects of the Fund's tax policy reform recommendations outlined in the 2023 Technical Assistance Report on Restoring Tax Policy, and to commence rehabilitation plans for major state-owned enterprises (SOEs).

Regrettably, there is still no concrete plan in place to restructure Lebanon's banking sector. This inaction has resulted in a substantial decline in recoverable deposits and hampers the provision of credit to the economy. Although progress has been made on revising bank resolution laws, it is imperative that these are finalized for resubmission to the parliament. 

Proposed amendments to the Bank Secrecy Law, designed to address deficiencies, and the draft Law on Capital Controls and Deposit Withdrawals, are still awaiting parliamentary approval.

The mission team extends its gratitude to the Lebanese authorities and all stakeholders for their open and constructive dialogues. They stand ready to continue supporting the authorities with policy guidance and technical assistance. 

Anticipating Article IV discussions in the first half of 2024, we aim to assess the progress made in key reforms and policies.