IMF Staff Concludes Visit to Lebanon

IMF Staff Concludes Visit to Lebanon

September 21, 2022

End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion

• The Lebanese economy remains severely depressed against continued deadlock over much needed economic reforms and high uncertainty. Despite the urgency for action to address Lebanon’s deep economic and social crisis, progress in implementing the reforms agreed under the April SLA remains very slow.
• Delaying their implementation only increases the costs to the country and its population. Completion of prior actions is needed for the IMF Board to consider the request for a financial program with Lebanon. We will remain engaged with the authorities to advance the reform agenda.
• The large losses in the banking sector need to be recognized and addressed upfront, while respecting the hierarchy of claims. Small depositors must be fully protected (the SLA envisioned protection of a vast majority of deposit accounts); and recourse to public resources—assets belonging to all Lebanese citizens, with or without a bank account —should be limited.

Beirut, Lebanon:
An International Monetary Fund (IMF) mission led by Mr. Ernesto Ramirez
Rigo visited Beirut, Lebanon from September 19 to 21, to discuss the recent
economic developments and progress in implementation of prior actions
agreed under the April 7, 2022 Staff Level Agreement (SLA) for a Four-Year
Extended Fund Facility. At the end of the mission, Mr. Ramirez Rigo made
the following statement:

“The Lebanese economy remains severely depressed against continued deadlock
over much needed economic reforms and high uncertainty. GDP has contracted
by over 40 percent since 2018, inflation remains in triple digits, FX
reserves are declining, and the parallel exchange rate has reached 38,000
LBP per USD. Amidst collapsing revenues and drastically suppressed
spending, public sector institutions are failing, and basic services to the
population have been drastically cut. Unemployment and poverty are at
historically high rates.

“Despite the urgency for action to address Lebanon’s deep economic and
social crisis, progress in implementing the reforms agreed under the April
SLA remains very slow. In particular, the majority of prior actions have
not been implemented:

– The 2022 budget is yet to be approved by parliament. The long delay in
approving it means that for macroeconomic purposes the focus should now
turn to preparing and approving a credible 2023 budget. This should be
based on realistic macroeconomic assumptions, with the necessary revenue
raising measures, including the use of a realistic exchange rate (i.e., the
Sayrafa rate that should become the market rate with exchange rate
unification) for all tax purposes. This should allow for a significant
increase in social and investment spending and adjustment to public sector
spending to re-start the basic functioning of the public administration at
a time where public services are all but disappearing with noticeable
impact on revenues collection.

– Existence of the multiple exchange rates causes significant distortions
to economic activity, undermines the operations of the public sector, and
creates opportunities for corruption and rent-seeking, leading to excessive
pressures on the central bank’s FX reserves. The adoption of the Capital
Controls and Deposit Withdrawal Limits Law that was submitted to Parliament
in March is crucial to tackle these issues and reduce pressures on the
central bank’s foreign currency reserves. In the present context,
intervention in the exchange rate market to stabilize the exchange rate has
proven to be inefficient in the absence of much needed reforms.

– While the reform of Banking Secrecy Law that was approved by parliament
in July contained some positive steps, it fell short of the changes needed
to bring it in line with best international practice. We welcome that
Parliament is reviewing some of these key shortcomings, which are
fundamental to fight corruption, eliminate impediments to effective banking
sector supervision and restructuring, tax administration, as well as
investigate financial crimes, and recover misappropriated assets.

– The financial sector rehabilitation strategy, which was approved by
cabinet, should be implemented to allow a healthier banking system to
function normally again, attract deposits and support economic activity.
The large losses in the sector need to be recognized and addressed upfront,
while respecting the hierarchy of claims. Small depositors must be fully
protected (the SLA envisioned protection of a vast majority of deposit
accounts); and recourse to public resources—assets belonging to all
Lebanese citizens, with or without a bank account —should be limited.

“These and other reforms agreed in the April SLA are crucial for the
recovery of the Lebanese economy to begin.
Delaying their implementation only increases the costs to the country
and its population. Completion of these and other prior actions is also
needed for the IMF Board to consider the request for a financial
program with Lebanon.

“We would like to thank all our interlocutors for the fruitful and deep
discussions and will remain engaged with the authorities to advance the
reform agenda.”