Lack of action on urgent reforms weighing heavily on Lebanon's economy, IMF says

The lack of political will to introduce difficult yet critical reforms has left Lebanon with a collapsed banking sector, eroding public services, deteriorating infrastructure and worsening poverty, the International Monetary Fund staff said.

The country has not undertaken the urgently needed reforms, and this will weigh on its economy for years to come, the fund's staff said on Friday after meeting Lebanese authorities.

Ernesto Ramirez Rigo, the IMF mission's chief, said Lebanon’s inflation remains in “triple digits, further compressing real incomes.

Foreign exchange reserves continued to decline in the first half of the year, "including due to Banque du Liban's financing of quasi-fiscal operations and the large current account deficit”, he added.

Lebanon is grappling with a financial crisis that the World Bank has called one of the worst globally since the middle of the 19th century.

The banking sector is facing more than $70 billion in losses, the currency lost more than 90 per cent of its value and the country defaulted on its debt in 2019 for the first time in its history.

Lebanon has yet to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund, as well as billions in aid from other international donors, due to a lack of consensus among politicians.

Last month, the country marked the third anniversary of the deadly Beirut Port blast on August 4, 2020. The explosion killed more than 200 people and injured about 7,000. It caused damage estimated at $15 billion as large areas of the capital were destroyed, leaving about 300,000 people homeless.

It occurred after a stock of ammonium nitrate – stored at the port for years – caught fire.

This came as Lebanon was already grappling with a financial meltdown that started in 2019 and exacerbated by the Covid-19 pandemic. The economy has deteriorated further since, with triple-digit inflation rates and thousands of families facing poverty.

Lebanon's interim central bank governor Wassim Mansouri, who took on the role after Riad Salameh's 30-year tenure ended on July 31, had previously urged the government to undertake long-delayed reforms to address the deep financial crisis.

The IMF staff said the recent decisions taken by the BdL’s new leadership to phase out the Sayrafa platform, establish a reputable and transparent foreign exchange trading platform, end the drawdown of FX reserves, curb monetary financing, and enhance financial transparency are steps in the right direction.

“Building on this progress, there is now the opportunity for comprehensive reforms to strengthen BdL's governance, accounting, and foreign exchange operations in line with international best practices. Moreover, all official exchange rates should be unified at the market exchange rate,” they said.

IMF representatives suggested implementing a coherent fiscal strategy to restore debt sustainability and create space for social and infrastructure spending.

For this strategy to be effective, improving revenue mobilisation is a critical priority, the IMF said.

The fund's representatives said while the government has taken “gradual action towards adjusting revenue collection to the exchange rate depreciation…more needs to be done”.

“The 2023 budget remains lacking in terms of timeliness and coverage. It does not accurately reflect the true extent of the deficit and associated monetary financing,” Mr Rigo said.

The mission team also recommended that the proposed 2024 budget be consistent with the exchange rate unification process, started by BdL, and that the preferential treatment of certain taxpayers over others is avoided.

Additionally, it should also include sufficient resources to rebuild the tax administration to strengthen compliance and improve tax fairness, IMF staff said.

“While work is progressing well on a revised bank resolution law, it needs to be completed so that the law can be resubmitted to Parliament. Amendments to the bank secrecy law, which are aimed at addressing deficiencies, and the draft law on capital controls and deposit withdrawals, are still awaiting parliamentary approval,” the team concluded.

Business conditions in Lebanon’s private sector fell to a seven-month low in August from a 10-year high in July, as output and new orders declined.

The downturn follows two consecutive months of the headline survey being in expansionary territory as the country endures its worst economic crisis since its independence.

Lebanon's Blom purchasing managers’ index, a measure of the strength of the country’s private sector economy, fell to 48.7 in August from 50.3 in July, sliding into contraction territory.

The contraction was the fastest in six months, dragged down by challenging domestic conditions that dented output volumes.