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Lebanon Needs Urgent Policy Overhaul, IMF Says

The fallout from the Syrian war continues to weigh on Lebanon’s economy and fiscal stability with long-needed structural reforms now more challenging to implement, an International Monetary Fund mission visit to the country found after routine consultations with local authorities.

A political impasse “has amplified the microeconomic imbalances,” a mission report summary said, in a country with one of the highest debt-to-GDP ratios in the world.

Here are some of the key conclusions from the IMF mission visit, ahead of a summer season here that is being closely watched for a potential rebound in tourism and other sectors that could help kick-start the economy:

-With the volatile security situation dampening traditional growth sectors like real estate and construction, growth is expected to remain at around 2% this year (compared with around 8% in 2007-2010).

-Public debt reached 141% of GDP in 2013, as the fiscal deficit widened. This is a slight increase from previous years.

-The unemployment rate is estimated to have doubled to about 20%, with the impact mostly felt in the low-skilled market. This is due to “a dramatic increase in the labor supply” from the Syrian refugee influx that “has revealed underlying weaknesses in Lebanon’s labor market.”

-The electricity sector is a major problem to fiscal stability and growth and needs serious reform. Lebanon’s state electricity firm generates electricity at a loss, and production doesn’t cover demand.

And here are some of the IMF’s recommendations:

-Electricity sector reform, including plans to strengthen generation capacity, switch to natural gas, and lower tariffs “should be implemented without further delay, and complemented by improvements in transmission and distribution.”

-To address unemployment spurred by the Syrian refugee crisis, the government should consider measures for those most affected, like cash-for-work programs and local economic development plans.

-Authorities need to pass a budget in 2014. The last officially approved budget was in 2005.

-There’s room for more transparency in government spending and funding, so the IMF supports efforts to seek parliament’s approval for new foreign currency borrowing.

-Lebanon needs direct international support to help meet spending needs at hospitals, schools and for public services, in addition to the funds flowing through humanitarian agencies to Syrian refugee communities.

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(via WSJ Vault)