BEIRUT: An International Monetary Fund (IMF) mission led by Mr. Ernesto Ramirez Rigo visited Beirut, Lebanon from September 19 to 21, to discuss the recent economic developments and progress in implementation of prior actions agreed under the April 7, 2022 Staff Level Agreement (SLA) for a Four-Year Extended Fund Facility. At the end of the mission, Mr. Ramirez Rigo made the following statement:
“The Lebanese economy remains severely depressed against continued deadlock over much needed economic reforms and high uncertainty. GDP has contracted by over 40 percent since 2018, inflation remains in triple digits, FX reserves are declining, and the parallel exchange rate has reached 38,000 LBP per USD. Amidst collapsing revenues and drastically suppressed spending, public sector institutions are failing, and basic services to the population have been drastically cut. Unemployment and poverty are at historically high rates.
“Despite the urgency for action to address Lebanon’s deep economic and social crisis, progress in implementing the reforms agreed under the April SLA remains very slow. In particular, the majority of prior actions have not been implemented:
– The 2022 budget is yet to be approved by parliament. The long delay in approving it means that for macroeconomic purposes the focus should now turn to preparing and approving a credible 2023 budget. This should be based on realistic macroeconomic assumptions, with the necessary revenue raising measures, including the use of a realistic exchange rate (i.e., the Sayrafa rate that should become the market rate with exchange rate unification) for all tax purposes. This should allow for a significant increase in social and investment spending and adjustment to public sector spending to re-start the basic functioning of the public administration at a time where public services are all but disappearing with noticeable impact on revenues collection.
– Existence of the multiple exchange rates causes significant distortions to economic activity, undermines the operations of the public sector, and creates opportunities for corruption and rent-seeking, leading to excessive pressures on the central bank’s FX reserves. The adoption of the Capital Controls and Deposit Withdrawal Limits Law that was submitted to Parliament in March is crucial to tackle these issues and reduce pressures on the central bank’s foreign currency reserves. In the present context, intervention in the exchange rate market to stabilize the exchange rate has proven to be inefficient in the absence of much needed reforms.
– While the reform of Banking Secrecy Law that was approved by parliament in July contained some positive steps, it fell short of the changes needed to bring it in line with best international practice. We welcome that Parliament is reviewing some of these key shortcomings, which are fundamental to fight corruption, eliminate impediments to effective banking sector supervision and restructuring, tax administration, as well as investigate financial crimes, and recover misappropriated assets.
– The financial sector rehabilitation strategy, which was approved by cabinet, should be implemented to allow a healthier banking system to function normally again, attract deposits and support economic activity. The large losses in the sector need to be recognized and addressed upfront, while respecting the hierarchy of claims. Small depositors must be fully protected (the SLA envisioned protection of a vast majority of deposit accounts); and recourse to public resources—assets belonging to all Lebanese citizens, with or without a bank account —should be limited.
“These and other reforms agreed in the April SLA are crucial for the recovery of the Lebanese economy to begin. Delaying their implementation only increases the costs to the country and its population. Completion of these and other prior actions is also needed for the IMF Board to consider the request for a financial program with Lebanon.
“We would like to thank all our interlocutors for the fruitful and deep discussions and will remain engaged with the authorities to advance the reform agenda.”