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© 2007 International Monetary Fund
May 2007
IMF Country Report No. 07/177
In the context of the use of Fund resources—request for emergency post-conflict assistance, the following documents have been released and are included in this package:
the staff report for the Use of Fund Resources—Request for Emergency Post-Conflict Assistance, prepared by a staff team of the IMF, following discussions that ended on March 20, 2007, the officials of Lebanon on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on March 30, 2007. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF; and
a Press Release summarizing the views of the Executive Board as expressed during its April 9, 2007 discussion of the staff report that completed the request.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Lebanon*
Technical Memorandum of Understanding*
*Also be included in Staff Report
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
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INTERNATIONAL MONETARY FUND
LEBANON
Use of Fund Resources—Request for Emergency Post-Conflict Assistance
Prepared by the Middle East and Central Asia Department (in consultation with other departments)
Approved by Juan Carlos Di Tata and G. Russell Kincaid
March 30, 2007
Discussions on the authorities’ request for emergency assistance took place in Beirut March 8–20. The staff met with the governor of the central bank, the minister of finance, other senior officials, and World Bank staff. The staff team comprised Messrs. Gardner (head), Schimmelpfennig, Sdralevich, and Ms. Oner (all MCD), Mr. Le Borgne (FAD), and Mr. Tzanninis (PDR); it was assisted by Mrs. Weikert and Ms. Winkler (both MCD). Ms. Choueiri (OED) attended the policy meetings.
In the attached Letter of Intent (LOI), the Lebanese authorities request a purchase of 25 percent of quota (SDR 50.75 million) under Emergency Post-Conflict Assistance (EPCA). In the view of the staff, the authorities’ medium-term reform program presented at the international donors’ conference of January 25, 2007, in Paris (“Paris III”), constitutes an adequate basis for an EPCA request, and is presented as an attachment to the LOI as their Memorandum of Economic and Financial Policies.
Fund support through EPCA is a key part of a concerted international effort to provide financial assistance to Lebanon. A large number of bilateral donors and multilateral agencies are supporting the reconstruction and reform of the Lebanese economy.
Contents
Executive Summary
I. Introduction
II. Background
III. Policy Discussions
A. The 2007 Fiscal Program
B. Monetary and Exchange Rate Policy
C. Structural Reforms
D. The Medium-Term Fiscal Program and Debt Sustainability Analysis
E. The Paris III Package and Commercial Banks’ Contribution
F. Access, Program Monitoring, and Capacity to Repay the Fund
IV. Staff Appraisal
Boxes
1. Eligibility for Access Under EPCA
2. The Authorities’ Five-Year Reform Program
3. Shock Scenarios for the Debt Sustainability Analysis
Figures
1. Real GDP and Coincident Indicator, 1994–2006
2. Inflation, January 2005-December 2006
3. Broad Money and Deposit Dollarization
4. International Reserves and Liquidity
5. Interest Rates
6. Eurobond and Credit Default Swaps (CDS) Spreads
7. Exports and Imports
8. Effective Exchange Rates
9. Public Debt Sustainability
Text Tables
1. Conflict-Related Spending 2006–08
2. Fiscal Effort, 2007–12
Tables
1. Selected Economic Indicators, 2003–12
2. Central Government Primary Balance, 2003–08 (in billions of Lebanese pounds)
3. Central Government Primary Balance, 2003–08 (in percent of GDP)
4. Overall Fiscal Deficit and Financing, 2003–08
5. Government Debt, 2003–12
6. Monetary Survey, 2003–08
7. Balance Sheet of the Banque du Liban, 2003–08
8. Commercial Banks’ Balance Sheet, 2003–08
9. Balance of Payments, 2003–12
10. External Financing Requirements and Sources, 2003–08
11. Indicators of Capacity to Repay the Fund, 2003–08
12. Indicators of Financial and External Vulnerability, 2002–06
13. Banking Sector Financial Soundness Indicators, 2002–06
14. Public Sector Debt Sustainability Framework, 2003–26
Appendix
Letter of Intent (LOI)
Attachments to LOI
I. Quantitative Indicative Targets Under Emergency Post-Conflict Assistance, March–December 2007
II. Monitorable Actions
Executive Summary
The authorities have requested Emergency Post-Conflict Assistance (EPCA) in support of their 2007 economic program, with access of 25 percent of quota (SDR 51 million). EPCA is a key part of a concerted international effort to provide financial assistance to Lebanon.
Background and recent developments
The five-week conflict with Israel in 2006 and the month-long blockade that followed inflicted a heavy human and economic toll on Lebanon. Donor conferences in Stockholm on August 31, 2006 and Paris on January 25, 2007 (Paris III) generated significant donor support that has mitigated the conflict’s impact on public finances. Financial markets weathered the conflict surprisingly well, reflecting the authorities’ skillful management of exchange rate pressures, the banking system’s strong liquidity position, and deposits by Saudi Arabia and Kuwait with the central bank shortly after the conflict erupted.
Outlook and policy discussions
The authorities expect 2007 to be a very difficult year. Political tensions could intensify ahead of the presidential election in the fall and adversely affect economic activity and private capital flows.
The fiscal program for 2007 aims at containing the primary deficit while accommodating reconstruction and relief spending. Financing of the deficit is subject to uncertainties relating to the availability of donor support and volatile market conditions. The authorities will take steps toward the introduction of a global income tax, social and energy sector reforms, and privatization of the telecom sector.
The authorities consider the current level of international reserves sufficient in case of renewed financial markets pressures.
Staff appraisal
The program for 2007 strikes a careful balance between post-conflict needs and the challenges posed by the large public debt overhang. Implementation of the Paris III reform agenda combined with pledged donor support would significantly lower the debt-to-GDP ratio over the next five years in the absence of adverse macroeconomic shocks. Still, risks in both the short and the medium term are substantial, and every opportunity should be seized to advance the reform and adjustment process. Donor support needs to be closely aligned with the authorities’ macroeconomic objectives and policy priorities.
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January 02, 2007
Lebanese Republic
RECOVERY, RECONSTRUCTION AND REFORM
“International Conference for Support to Lebanon”
25, January 2007
Paris
Abbreviations And Acronyms
| BdL |
Banque du Liban (Central Bank of Lebanon) |
| BOT |
Build-Own-Transfer |
| CDR |
Council for Development and Reconstruction |
| EdL |
Elêctricitê du Liban |
| EU |
European Union |
| GDP |
Gross Domestic Product |
| HCP |
Higher Council for Privatization |
| HRC |
Higher Relief Commission |
| INSEE |
Institut National de la Statistique et des Etudes Economiques |
| LL |
Lebanese Pounds |
| MEA |
Middle East Airlines |
| MOF |
Ministry of Finance |
| NGO |
Non-Governmental Organization |
| NSSF |
National Social Security Fund |
| PMO |
Prime Minister’s Office |
| SME |
Small and Medium Scale Enterprise |
| UN |
United Nations |
| UNDG |
United Nations Development Group |
| UNDP |
United Nations Development Program |
| UN MACC |
United Nations Mine Action Coordination Center |
| VAT |
Value Added Tax |
“International Conference for Support to Lebanon”
RECOVERY, RECONSTRUCTION AND REFORM
Contents
RECOVERY, RECONSTRUCTION AND REFORM
Prelude
I. Background
II. Developments during 2001-05
A. The Reform Program Prior to the Israeli July War
B. The Impact of the July Israeli War
C. The Cost of the July Israeli War and International Support for Recovery & Reconstruction
III. The Government’s reform program
A. Growth-Enhancing Structural Reforms
Governance
Financial Sector Reform and Debt Management
Improving the business environment
B. Social Sector Reforms
Main elements of the social plan
Specific social interventions
C. Pension Reform
D. Fiscal Adjustment and Structural Reform
Expenditure Measures
Revenue Measures
E. Privatization Program
F. Monetary and Exchange Rate Policies
G. Banking Sector’s Contribution to the Domestic Effort
IV. Medium-Term macroeconomic Framework
A. Macroeconomic scenario with domestic adjustment
B. Macroeconomic Scenario with External Support
C. Implementation of the reform program
V. Conclusion
Lebanese Republic
Recovery, Reconstruction And Reform
Preface
In April 2005, Lebanon reclaimed its democracy and independence through a popular uprising triggered by the assassination of late Prime Minister Rafic Hariri. The international community rallied in support of Lebanon and, on the occasion of the Core Group meeting in New York in September 2005, vowed to support the new government and help Lebanon reduce its debt to sustainable levels so it can achieve growth, equity, and political stability.
Following that meeting, the Government prepared a comprehensive reform program that was to be presented to a Donors Conference in Beirut with a request for international support to complement the significant domestic effort that was envisaged in this program. Following extensive consultations with domestic and international stakeholders, the government was on the verge of adopting this program when Lebanon once again came under a massive Israeli attack.
The direct and indirect costs of the July 2006 war far exceed the capacity of any middle-income country to bear, let alone a country that has been saddled with a very large public debt and a country that had just come out of a major setback associated with the assassination of Prime Minister Hariri, which has left deep scars on the economic and political landscape. As a result, the burden of Lebanon’s public debt—largely a legacy of the 1975-92 war and its aftermath—has become even heavier.
While the July war and its devastating consequences have shifted the government’s short term attention to immediate major relief efforts and reconstruction needs, the government remains fully committed to pursue economic reforms, although some changes to the timetable and to the size of adjustment are needed. These changes are necessary to take into account the impact of the war on the macroeconomic situation, and to spread the burden of reform over time so as to give the suffering population a breathing space following this year’s tragic events.
By the end of 2006, Lebanon’s debt will be around US$40.5 billion, or about 180% of GDP. Despite its resiliency, Lebanon cannot shoulder this price on its own. The re-phasing of some measures necessitated by the latest Israeli war will fail to achieve growth, equity, and debt sustainability in the absence of sizeable external support. Failure to achieve these objectives could well jeopardize Lebanon’s broader goals of political and social stability, and the strengthening of its democracy. Lebanon is therefore hopeful that on the occasion of the “International Conference for Support to Lebanon”, the international community will invest in Lebanon’s future and democracy.
The Lebanese people are determined to build a strong state: a state which can reclaim the position of Lebanon as a haven of moderation where individual initiative and potential can be fulfilled. In our part of the world, Lebanon represents indeed a unique phenomenon of diversity, multi-confessionalism, democracy, and freedom of expression. We will strive to preserve and keep these ideals alive, but our friends’ help is critical. We strongly believe that what happens in Lebanon will have repercussions that transcend Lebanon’s borders and far exceed Lebanon’s size. Our success in strengthening our democracy and building a strong economy is in the interest of all.
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Press Release No. 07/87
International Monetary Fund
FOR IMMEDIATE RELEASE
Washington, D.C. 20431 USA
May 4, 2007
Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772 • www.imf.org
