Political inertia, refugee crisis stifling Lebanese economy: IMF

Published May 19th, 2015 - 08:51 GMT

The International Monetary Fund warned that Lebanon’s economic resilience is being threatened by policy inertia and the presence of a large number of Syrian refugees in the country.

“Policy inertia is taking a growing toll on the economy, and in the face of a continued refugee presence and new challenges, is threatening Lebanon’s resilience,” the IMF said in a statement summarizing the findings of its recent consultation mission to Lebanon.

The IMF cautioned that the political reality and regional tension have further compounded the problems of the Lebanese government, which is struggling to reduce the budget deficit and cut the mounting losses of state-owned Electricite du Liban.

It added that Lebanon is trying to cope with the huge number of Syrian refugees and urged the international community to help the country contain this problem.

“Lebanon should be commended for hosting the Syrian refugees, but will need ongoing and sizable international assistance as it, alone, cannot shoulder the related costs; to date, the government’s Lebanon Crisis Response Plan remains largely unfunded by donors,” the IMF said.

The statement also expressed concern that persistent regional tension and the domestic political standoff could exacerbate the crisis in Lebanon.

“In the face of political deadlock, the presidency has been vacant since May 2014, the Council of Ministers [Cabinet] is often unable to make progress, and Parliament lacks sufficient consensus to convene to discuss key legislation,” the statement said.

The IMF also noted that due to domestic and external uncertainty, Lebanon’s growth rate since 2011 has been disappointing.

“We have therefore revised downward our medium-term projections. Inflation also declined sharply in 2014 on the back of lower oil prices and other one-off factors, but should return to a trend rate of about 3 percent by end-2015,” it said.

The IMF urged the government to take swift measures to reduce the deficit and achieve higher growth, warning that the mitigating effects of lower fuel prices and exceptionally high telecoms revenues were only temporary.

“Exceptional factors allowed for a welcome primary surplus in 2014, but without decisive action, fiscal deterioration will continue in 2015,” it noted.

“We project the primary balance will deteriorate to almost 1¼ percent of GDP in 2015, with public debt remaining at 132 percent of GDP, very high by international standards,” the statement said.

The IMF praised the efforts of the Central Bank, which helped boost the foreign currency reserves.

“Banque du Liban has maintained an ample level of gross FX reserves, which stood at around $38 billion at end-March. And in February, a $2.2 billion Eurobond issue by the treasury – the largest so far – was significantly oversubscribed,” the statement said.

It underlined the importance of seeking a decisive change in policy warned against counting on the flow of customer deposits to the country.

“The growth rate of deposits is slowing. A decisive change in policies is thus needed to strengthen confidence, which cannot be taken for granted in the current international environment,” the statement said.

IMF repeated calls for sustained and balanced fiscal adjustment to reduce the deficit.

“In the recent past, high growth and low global interest rates have helped lower Lebanon’s debt burden. But global and domestic conditions will be less favorable in the foreseeable future, and without adjustment public debt will continue to increase – and with it risks and vulnerabilities will further rise,” the IMF warned.

Among the measures proposed by IMF is an increase of the value added tax in a bid to increase government revenues.

“The authorities need to seize the opportunity afforded by low oil prices to remove the VAT exemption on diesel immediately, and increase gasoline excises. Additionally, we recommend a modest increase in the VAT rate, by one percentage point; and increased transparency and regularity in the telecom transfers,” the statement said.

IMF also reiterated calls to implement wide ranging reforms in the electricity sector.

Lebanon’s inefficient electricity supply is a major impediment to growth: EDL losses weigh heavily on public finances, and poor service delivery has prompted the extensive use of costly private generators. The refugee crisis has put further strains on the sector,” the IMF said.

The IMF emphasized that the government should pursue longstanding plans to strengthen public generation capacity, switch to less expensive natural gas, improve transmission and distribution, and progressively increase tariffs.

“The ultimate goal should be zero EDL transfers, freeing up fiscal resources for more productive uses,” it said.

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