IMF WILLING TO CONSIDER AID PACKAGE FOR LEBANON IF REQUESTED

▶ Government must seek fiscal balance with action urgently needed

Lebanon has yet to make a formal request for an aid package from the International Monetary Fund to help it overcome its economic crisis, but the fund would review such a proposal if the country’s authorities make it, a senior IMF official said.

Consumer and investor confidence in Lebanon have ebbed as the economy has systematically decelerated since the outbreak of war in neighbouring Syria in 2011. Pointing to negative deposit growth at Lebanese banks, which traditionally helped the country finance its fiscal and current account deficits, rating agencies have either downgraded the country’s credit rating or placed it on review for further reductions.

“I need before to see what is the reform package that the Lebanese authorities are putting together,” Jihad Azour, the director of the Middle East and Central Asia department at the IMF told The National at the fund’s headquarters in Washington. “For me to answer your question I need to have from them what they intend to do and what type of assistance they need from the fund,” Mr Azour said when asked what an aid package would hinge on and if the peg of the Lebanese pound would need to be modified or abandoned.

“We have a very productive relationship with them, we are in constant work with them, but they did not for the time being ask [for a programme],” he added. “The composition of the programme depends on the composition of the reform agenda that the Lebanese authorities will put together.”

Any country that is a member of the fund can request financial assistance or a programme without financial assistance, he said.

Lebanon’s pound, pegged to the US dollar since 1997, has been under pressure over the past three months as the economic crisis in the country worsened. Street protests have gripped the country since regulators passed an austerity budget to reduce spending and contain the fiscal deficit. A proposal to tax calls on messaging applications such as WhatsApp triggered widescale protests in recent days, forcing the government to abandon the scheme.

Lebanon’s economy is forecast to slow down to 0.2 per cent this year from 0.3 per cent in 2018 because of increased uncertainty, tightening monetary policy and a contracting real estate sector, according to fund projections.

The government’s fiscal deficit increased to 11 per cent of gross domestic product in 2018, from 8.6 per cent the year before, and though the 2019 budget targets a deficit of 7.6 per cent, the IMF estimates the deficit is likely be higher.

The country has long suffered from large fiscal deficits which have pushed public debt to $86.3 billion, equivalent to 150 per cent of GDP, which is now forecast to increase to 155 per cent by the end of 2019. Large current account deficits have pushed external debt close to 190 percent of GDP.

“A sizeable reform agenda that brings confidence back, tackling the issue of corruption and the reform of state-owned enterprises will be a strong step in the right direction,” Mr Azour, who previously served as Lebanon’s finance minister, said at a briefing. “A strong signal that will bring confidence back requires a comprehensive reform agenda that addresses the fiscal imbalances.”

Lowering the level of expenditures, addressing structural weaknesses and improving the revenues of Lebanon must be complemented with other structural programmes that will allow the Lebanese economy to grow, Mr Azour said.

The government must implement certain reforms to unlock $11bn of pledges from international donors that would help finance projects and rekindle growth.

Rebalancing the economy requires measures on both the revenue and expenditure sides, the fund said in a note. Fiscal measures should include raising the VAT rate, broadening the tax base and removing exemptions, as well as increasing fuel excises and eliminating electricity subsidies.

In tandem with the government’s fiscal adjustment measures and structural reforms that aim to boost economic output, Lebanon also needs to take “decisive actions to remove growth bottlenecks and enable external adjustment in the context of the currency peg”.

“Against this precarious backdrop,” the fund warned, “the economic outlook depends critically on policy actions and reforms in the period ahead.”