Lebanon Real Estate Newsletter Vol. 3, Issue 11 - November, 2007

BEIRUT: The International Monetary Fund (IMF) said on Monday that the Lebanese economy is recovering despite persistently high oil prices and political uncertainty, inflationary pressures have eased, and gross international reserves have continued to increase. But the IMF also underscored that major challenges remain, including the large debt overhang, financial and macroeconomic vulnerabilities, and high energy costs.

The IMF based its findings on information provided by the Finance Ministry, the Economy and Trade Ministry, and the Banque du Liban. A team from the IMF carried a one-week visit to Lebanon last month to assess the government's measures to reduce the budget deficit.

The IMF considered the authorities' 2007 reform program to be an ambitious and credible strategy for meeting these challenges. It also acknowledged, though, that implementation of the program will be a challenging task given the difficult political and security situations.

The IMF directors said they were encouraged by the authorities' reiterated commitment to reform, adding that the government would need to pay close attention to the timing of the reform process.

"Directors stressed that donor support is an important pillar of the reform strategy, and called for timely disbursement of such support," the report said.

The IMF welcomed the authorities' success in containing the primary fiscal deficit in the first half of 2007. It also emphasized the need for determined action to achieve the 2007 deficit target and medium-term debt-reduction objectives.

"In this regard, directors commended the steps taken to initiate reforms in the social security and power sectors. They encouraged the authorities to give priority to raising gasoline excises as soon as the political situation allows," the report said.

The report also welcomed the fiscal adjustment and privatization plans for 2008. It noted the planned increases in the value-added tax and the tax on interest income in 2008, the preparations for the introduction of a global income tax in 2008, and the administrative reforms under way.

Directors emphasized that further progress is needed on energy sector reforms to realize the expected medium-term expenditure savings. They supported the planned privatization of the telecom sector as crucial to the success of the reform strategy," the report said.

The IMF found that Lebanon's monetary policy framework has performed well, especially in helping to maintain financial stability in the face of disruptions in international markets. It underscored that Banque du Liban financing of the government will need to be gradually reduced in order to safeguard the central bank's balance sheet, and supported the authorities' intentions to rely increasingly on market finance.

"Going forward, directors supported the planned introduction of transparent short-term monetary instruments, and underscored the importance of allowing greater interest rate flexibility in Treasury bill auctions. Directors advised that the central bank refrain from quasi-fiscal activities, and supported the establishment of a joint working group in the Ministry of Finance and the central bank to better coordinate interventions in the financial market," the report said.

It added that the directors considered that the exchange rate peg to the US dollar has helped maintain financial stability without impairing competitiveness. It noted that gross international reserves, combined with the banking system's liquidity cushion, appear to be sufficient to meet temporary pressures on the exchange rate.

"The real effective exchange rate appears broadly in line with fundamentals. The directors stressed that continued sound macroeconomic policies and structural reforms, particularly full implementation of fiscal adjustment plans, will be essential to support the exchange rate peg," according to the report.

The IMF said that the banking sector, though profitable and well capitalized, faces vulnerabilities associated with high sovereign exposure, maturity mismatches, and the high degree of dollarization.