Economy loses momentum

IMF calls government for a prudent 2012 budget amid heightening downside risks

The International Monetary Fund called the government to adopt a prudent budget for the year 2012, warning against “high downside risks” induced by the turmoil in the region, mainly in Syria.

The IMF’s recommendations were made following the conclusion of its two-week mission, led by Kristina Kostial. The IMF team had visited Beirut from November 8th to 23rd to hold the annual discussions in the context of the Article IV consultation. Under Article IV of the IMF's Articles of Agreement, the IMF holds annual bilateral discussions with member states. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies.

“After four years of strong growth, Lebanon’s economy has lost momentum reflecting domestic political uncertainty and regional unrest,” the IMF’s report said.

The IMF said that the economy could grow between one and two percent in 2011. It expected growth to increase to between three and four percent next year. The country posted an average growth of eight percent during the years 2007 to 2010.

The IMF said that high downside risks call for a prudent 2012 budget. It said that the fiscal policy should target a small primary surplus in the 2012 budget, which would help keep the debt-to-GDP ratio – which is among the highest in the world - on a downward path. It said that the fiscal policy could be made more equitable through better targeted social spending.

According to the report, the Central Bank has relied on its large foreign reserves to intervene when the Lebanese lira came under pressure from deposit outflows and currency conversions in January 2011.

The IMF said that the government should reduce its reliance on the Central Bank’s financing. It said that raising interest rates on lira-denominated T-bills with maturities of less than seven years would allow the treasury to return to market financing. It also recommended new borrowing in foreign currency, which it said would provide an opportunity to benefit from globally low interest rates and high foreign exchange liquidity of local banks.

The IMF said that the conservative regulation has helped banks sustain a capital above the regulatory minimum, low levels of nonperforming loans, and stable profits. However, it warned that the banks’ expansion abroad exposes them to risks within the regional turmoil.