IMF calls for stronger fiscal management

Azour: A balanced budget is overdue

The International Monetary Fund (IMF) called for preventing further fiscal deterioration, including putting the $65 billion public debt on a sustainable path. It said that the electricity sector needs to be reformed and that tariffs needs to be raised to achieve cost recovery. 

The Executive Board of the IMF, in a report released last week, said that deteriorating real estate, construction, and tourism activities have slowed GDP growth to 1.5 percent in 2013, from 2.5 percent in 2012.

The IMF said: “The crisis in Syria is having a dramatic impact on Lebanon. The refugee influx is fueling unemployment and poverty, and straining local communities and public services.”  It predicts that without a resolution in Syria, economic performance is expected to remain weak, with high downside risks from a further weakening of public finances and delays in structural reforms.

The IMF encouraged the authorities to undertake revenue-enhancing measures, such as broadening the tax base and strengthening collection, while ensuring that they are equitable and minimize distortions. It also called for the need to reform the electricity sector by raising average tariffs toward costs recovery, while mitigating the impact on the poor and rebalancing freed-up resources toward capital and social spending.

 It blamed State revenue declines from weak economic activity as well as policies such as Value Added Tax (VAT) exemption on gasoil. “Fuel is a sector where we lost revenues for no social or economic reasons,” said Jihad Azour, a former Minister of Finance and an economist.  He agrees with IMF’s call for broadening the tax base. He also called for introducing a more modern structure on capital gains, and eliminating the $2 billion deficit in the Electricité du Liban (EDL) bill.

The IMF said that monetary policy should continue aiming to maintain adequate foreign currency reserves and support the exchange rate peg to the US dollar. A stronger fiscal management based on a budget calendar would support a sustainable fiscal strategy according to the organization. The IMF called for the reestablishment of primary surpluses in public finance. It urged caution in implementing the planned salary scale adjustment for public sector employees. “A balanced budget is overdue and we’ve been without one since 2006,” said Azour. He said that with the debt level being so high, there were fiscal vulnerabilities. “We can’t increase spending without a proper budget that addresses a medium term framework and  offers guidance, puts limits, and reduces the fiscal deficit,” said Azour.

The report encouraged authorities to reduce their dependence on financing from the Central Bank and allow it to further strengthen its balance sheet. “We need a clear framework between fiscal and monitoring policy where the two sides create a council that clarifies their relationship and enacts a debt management law,” said Azour.

The IMF said it was vital to proceed with structural reforms and called for measures to lower the cost of doing business. The directors also encouraged the authorities to take further steps to improve the country’s statistical resources.  “We haven’t received an updated fiscal performance statement from the Ministry of Finance since February 2014,” said Azour.