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© 2007 International Monetary Fund

December 2007

IMF Country Report No. 07/382

Lebanon: 2007 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Lebanon

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2007 Article IV consultation with Lebanon, the following documents have been released and are included in this package:

  • The staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on May 28, 2007, with 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 September 18, 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.

  • A staff statement of October 3, 2007 updating information on recent developments.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its October 3, 2007 discussion of the staff report that concluded the Article IV consultation.

  • A statement by the Executive Director for Lebanon.

The document listed below has been or will be separately released.

  • Report on Performance Under the Program Supported by Emergency

    • Post-Conflict Assistance

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.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org • Internet: http://www.imf.org

Price: $18.00 a copy

International Monetary Fund

Washington, D.C.

Front Matter Page

INTERNATIONAL MONETARY FUND

LEBANON

Staff Report for the 2007 Article IV Consultation

Prepared by the Staff Representatives for the 2007 Consultation with Lebanon

Approved by Juan Carlos Di Tata and Scott Brown

September 17, 2007

  • Discussions were held in Beirut May 14-28, 2007. The mission comprised Mr. Gardner (head), Ms. Oner, Messrs. Schimmelpfennig and Sdralevich (all MCD), Finger (PDR), Hoffmann (MCM), and Le Borgne (FAD). Mr. Di Tata (MCD) and Ms. Choueiri (OED) participated in some of the policy discussions. The mission met with the central bank governor, the ministers of finance, economy and trade, tourism, and energy, the Banking Control Commission, senior government officials, the director of the electricity company, and representatives of the banking sector, the business community, the trade union, and donor countries.

  • Lebanon accessed Fund resources under Emergency Post-Conflict Assistance (EPCA) (25 percent of quota or SDR 50.75 million) in April 2007. Lebanon has accepted the obligations of Article VIII, Sections 2, 3, and 4 in 1993 and maintains an exchange system free of restrictions on the making of payments and transfers for current international transactions; controls on capital account transactions are minor, and relate mostly to a prohibition on domestic borrowing by nonresidents. The Lebanese pound is de facto pegged to the U.S. dollar; since October 1999, the Banque du Liban has intervened to keep the pound within a narrow corridor of LL 1501 to LL 1514 per U.S. dollar. The 2006 Article IV consultation was concluded by the Executive Board on May 3, 2006.

  • Lebanon participates in the General Data Dissemination Standards. The fiscal ROSC was published May 16, 2005, and the last FSAP update was concluded in 2001.

  • This report reflects information through May 2007. A progress report on performance under EPCA at end-June 2007 was issued to the Executive Board for information (IMF Staff Country Report No. 07/371) on September 5. A forthcoming staff statement will discuss more recent developments.

Contents

  • Executive Summary

  • I. Introduction

  • II. Background and Recent Developments

  • III. Outlook and Authorities’ Views on Policies

    • A. Minimizing Risks to the Paris III Reform Strategy

    • B. Monetary and Exchange Rate Policies

    • C. Banking Sector Vulnerabilities

    • D. Policies for 2007 and 2008

    • E. Other Issues

  • IV. Staff Appraisal

  • Boxes

  • 1. Implementation of Past Fund Advice

  • 2. Debt Sustainability Analysis

  • 3. Assessment of the Level of the Real Exchange Rate

  • 4. Performance Under the Program Supported by EPCA

  • 5. Energy Sector Reforms

  • Figures

  • 1. Recent Developments, January 2005–March 2007

  • 2. Public Debt Sustainability, 2002–26

  • Text Tables

  • 1. Economic Impact of the July–August 2006 Conflict, 2006–09

  • 2. The Paris III Fiscal Adjustment Objectives, 2006–12

  • 3. Paris III Aid

  • 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. Government Expenditure by Function, 2002–06

  • 5. Overall Fiscal Deficit and Financing, 2003–08

  • 6. Government Debt, 2003–12

  • 7. Monetary Survey, 2003–08

  • 8. Balance Sheet of the Banque du Liban, 2003–08

  • 9. Commercial Banks’ Balance Sheet, 2003–08

  • 10. Balance of Payments, 2003–12

  • 11. Public Sector Debt Sustainability Framework, 2003–26

  • 12. National Social Security Fund Operations, 2000–06

  • 13. Interest Rates, 2003–07

  • 14. Banking Sector Financial Soundness Indicators, 2003–07

  • 15. Indicators of Financial and External Vulnerability, 2003–07

  • 16. Size and Distribution of Deposits, February 28, 2007

  • 17. Quantitative Indicative Targets Under the EPCA, March–December 2007

  • 18. Monitorable Actions for the Period March–December 2007

  • 19. External Financing Requirements and Sources, 2003–08

  • 20. Indicators of Capacity to Repay the Fund, 2003–12

Executive Summary

Background and recent developments

The economy is slowly recovering from the 2006 conflict with Israel. A political stalemate continues to paralyze legislative activity, and, combined with repeated security incidents, is weighing negatively on economic activity. Money demand has remained robust. In support of the government’s 2007 program, the Executive Board approved EPCA in April 2007.

Outlook and policy discussions

  • The government’s five-year reform program lays out an ambitious strategy aimed at reducing Lebanon’s large debt overhang and financial vulnerabilities. The strategy is subject to recognized risks from domestic and regional tensions, macroeconomic shocks, contingent fiscal liabilities, and the difficulty of mobilizing political support for sustained adjustment. To address some of these risks, the authorities’ fiscal strategy is complemented by structural reforms to promote private sector growth (with privatization at its core) and social sector reforms.

  • The objectives of the 2007 program are to contain the budget deficit and to maintain financial stability during this difficult transition year, while preparing for sizeable fiscal adjustment and structural reforms in 2008. Revenue, expenditure and public financial management reforms have been identified; structural reforms in the key power and social sectors are being finalized in collaboration with the World Bank.

  • Successful fiscal adjustment would provide an opportunity to strengthen the central bank’s balance sheet and reform the monetary policy framework by relying on short-term monetary instruments.

  • Banks face balance sheet risks from dollarization and exposure to the sovereign. They are diversifying their portfolio through regional expansion and increased retail lending. The sector appears well prepared for the introduction of Basel II in 2008.

Staff appraisal

  • Performance in the first quarter was consistent with the 2007 program objectives, but the uncertain economic and financial outlook requires monitoring. The authorities rightly intend to create a fiscal buffer through tight expenditure control. Early introduction of a floor on gasoline excises would help safeguard revenues.

  • Full implementation of major reforms and adjustment measures planned for 2008 will be important to establish the credibility of the strategy and safeguard external stability over the medium term.

  • The exchange rate peg remains key to financial stability, and needs to be supported by the authorities’ planned fiscal adjustment as well as greater interest rate flexibility and a strengthening of the central bank’s balance sheet.

Front Matter Page

INTERNATIONAL MONETARY FUND

LEBANON

Staff Report for the 2007 Article IV Consultation—Informational Annex

Prepared by Middle East and Central Asia Department

September 17, 2007

Contents

  • Annexes

  • I. Fund Relations

  • II. Relations with the World Bank Group

  • III. Statistical Issues

Front Matter Page

October 3, 2007

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Public Information Notice (PIN) No. 07/137

FOR IMMEDIATE RELEASE

November 26, 2007

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On October 3, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Lebanon.1

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October 3, 2007

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