Statement by Mr. Shaalan on Lebanon Executive Board Meeting

Lebanon is facing a difficult global, regional, and domestic environment simultaneously for the first time in more than a decade. Domestic policies should aim at instilling confidence and tackling key policy challenges, such as preserving macroeconomic stability and paving the way for a more resilient, dynamic, and inclusive economy. The Banque du Liban (BdL) relied on its large foreign reserves build-up during the upswing to intervene forcefully when the Lebanese pound came under pressure from deposit outflows and currency conversions in the wake of the government crisis.

Abstract

Lebanon is facing a difficult global, regional, and domestic environment simultaneously for the first time in more than a decade. Domestic policies should aim at instilling confidence and tackling key policy challenges, such as preserving macroeconomic stability and paving the way for a more resilient, dynamic, and inclusive economy. The Banque du Liban (BdL) relied on its large foreign reserves build-up during the upswing to intervene forcefully when the Lebanese pound came under pressure from deposit outflows and currency conversions in the wake of the government crisis.

On behalf of the Lebanese authorities, I would like to thank staff for the valuable policy discussions during the 2011 Article IV Consultation. The authorities also wish to express their appreciation for the continued provision of effective technical assistance.

Recent Developments and Outlook

The Lebanese economy lost momentum in 2011 amidst difficult domestic and regional conditions. GDP growth is expected to fall to 1–2 percent in 2011 from 8 percent on average over the preceding four years. This deterioration could have been much more pronounced given negative spillovers from developments in the region, particularly Syria, with whom political and economic links are very close. However, the prudent policies that have been followed over a number of years, which led to the build-up of fiscal and foreign reserve buffers, provided the authorities with the policy space needed to support the economy and limit adverse impacts.

The authorities remain fully committed to policies that ensure macroeconomic stability while addressing infrastructure bottlenecks and improving social conditions. This would help to pave the way for higher, sustainable, and inclusive growth. The authorities are well aware of the risks facing the economy. These pertain mainly to the difficult regional environment, as well as to the large gross public financing requirements related to the high public debt ratio.

Fiscal Policy and Reforms

The draft budget for 2012 aims at balancing essential spending needs with stability goals. The authorities view the relaxation of the budget as temporary and needed to meet pressing infrastructure and social needs. The budget envisages a significant increase in capital spending, notably in needed electricity production. It also provides for an increase in public wages and allowances, which has been approved by the Cabinet in December but whose magnitude and modalities are still under discussion. The authorities are cognizant of the need to finance the envisaged increase in current spending with recurrent revenues or permanent savings elsewhere. Substantial tax measures are planned, which include an increase in the VAT rate, an increase in the withholding tax on interest and the introduction of a fee on real estate sales. The authorities remain fully committed to fiscal consolidation and debt reduction in the medium term.

Further progress has been made in the area of budgetary reforms, notably with the ongoing modernization of revenue administration and public financial management, as well as work on embedding fiscal priorities in a medium-term fiscal framework.

Monetary and Exchange Rate Policies

Monetary policy has helped to bolster confidence in the Lebanese financial system, with the exchange rate peg providing a firm anchor for financial stability. Despite intervention by the Banque du Liban (BdL) in support of the Lebanese pound, holding interest rates stable in the midst of strong regional and domestic uncertainty has helped maintain market confidence over the past year. The authorities are fully aware of the costs for the BdL’s balance sheet and foreign reserves. Nonetheless, while they are keen to reduce the Treasury’s reliance on the BdL, they do not concur with staff’s recommendation to raise interest rates on Treasury bills with maturities of less than 7 years. In the current turbulent times, confidence is paramount, and the authorities are concerned that raising interest rates would risk undermining depositor confidence. Moreover, the recent pick-up in Lebanese pound deposit inflows is expected to increase demand for Treasury bills. The reduction in the government’s financing needs in 2012, as well as the potential parliamentary approval for new foreign currency borrowing, is also expected to reduce reliance on BdL financing.

Banking Sector

Effective banking regulation and supervision, coupled with conservative bank funding, asset structures, and management, have allowed the banking sector to build buffers. Lebanese banks report capital above the regulatory minimum, high liquidity buffers, low levels of nonperforming loans and stable profits. Lebanese banks are well-placed to implement Basel III and work in this direction is ongoing. The authorities intend to introduce supervisory colleges to strengthen the oversight of cross-border activities of the largest banks. This would include annual group audits and assessing risks, capital, and liquidity within the group. Work on enhancing the framework on anti-money laundering and combating the financing of terrorism is also ongoing.

Structural Reforms

Economic and social reforms, particularly in the electricity, water, telecommunications and social protection sectors, rank high on the authorities’ agenda. These reforms are essential for sustainable and inclusive growth, as well as improved competitiveness. To accelerate the design and implementation of their reform agenda, the authorities are cooperating with the World Bank in specific areas. These comprise (i) creating a competitive business environment, (ii) improving basic infrastructure services, (iii) ensuring a quality public education system, (iv) creating an expanded, sustainable and inclusive social protection system—including social safety nets, pensions, health insurance, and other forms of income protection for the most vulnerable—and (v) public finance management reform.

Lebanon: 2011 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Lebanon
Author: International Monetary Fund