Abstract
In this study, Lebanon’s economy performed well during the global financial crisis. The banking sector has been resilient in the face of the global crisis, thanks to relatively conservative funding and asset structures, and prudent banking regulations and supervision. The need to address the high government debt and to implement growth-enhancing structural reforms is emphasized. To underpin the medium-term fiscal strategy and growth, Executive Directors encouraged the authorities to take the opportunity of the positive economic environment to implement structural reforms.
1. This statement reports on most recent developments and their impact on the economic outlook. It complements information contained in the staff report for the 2010 Article IV Consultation (SM/10/199), issued on July 15, 2010, and does not change the thrust of the staff appraisal.
2. Information has become available regarding some modifications that were introduced to the draft 2010 budget prior to its approval in cabinet and submission to Parliament. The proposed asset revaluation tax was dropped and some minor expenditure increases were added. With this, full implementation of the 2010 budget would imply a primary balance close to zero (instead of a 0.5 percent of GDP surplus, as noted in the staff report). These developments notwithstanding, staff continues to advise the authorities to target a primary balance of at least 2 percent of GDP, which could be achieved by cautiously implementing the budget and saving any revenue overperformance.
3. The primary balance of the government in the first four months of 2010 reached a surplus of about 1 percent of GDP, more than three times the level achieved in the same period of 2009. The surplus reflects substantial tax revenue increases (+16 percent year-on-year) and lower transfers to Electricité du Liban. Available data indicates that fiscal performance remained strong in May, suggesting that the primary balance floor of 2 percent of GDP recommended by staff for the full year is within reach.
4. Other recent economic data releases have been broadly consistent with the 2010 projections presented in the staff report.
Inflation. CPI inflation dropped to 3.5 percent year-on-year in June (May: 4.9 percent), helped by lower energy prices.
Monetary developments. Following a period of substantial moderation, deposit growth picked up in the first half of July, increasing by $1.3 billion (1.3 percent). With sizeable deposit inflows, international reserves (excluding gold) reached around $29.7 billion in mid-July, an increase of nearly $400 million since end-June. Staff remains of the view that the authorities should maintain a pause in the interest reduction cycle to allow pass-through of earlier policy interest cuts. However, if strong deposit growth persists in the coming weeks, there could be room for a further gradual reduction in policy rates.