Lebanon's Economy Faces Major Contraction Amid Regional Conflict, IMF Warns
The International Monetary Fund (IMF) has projected a significant contraction in Lebanon's economic activity for the current year, citing the ongoing conflict between Israel and Hezbollah and broader regional security developments. Inflation remains in double digits, and the current account deficit has widened due to increased energy costs. The IMF's assessment, released Friday following a mission visit to Beirut from September 15-18 led by Ernesto Ramirez Rigo, highlighted the severe damage inflicted by the war on the Lebanese economy and living conditions, including widespread destruction of infrastructure and housing, significant internal displacement, and a sharp decline in the living standards of those displaced.
Despite these challenges, the IMF mission commended Lebanese authorities for maintaining a degree of stability through prudent fiscal and monetary policies. The fund welcomed amendments to the banking reform law, deeming them more aligned with international best practices and establishing an organized framework for addressing bank statuses and liquidations amid the banking crisis. However, the IMF stressed the need to advance legislation for financial stability and deposit recovery, ensuring consistency with international standards.
The IMF also emphasized the importance of respecting the hierarchy of claims during the banking sector's restructuring, ensuring depositors are not burdened before shareholders and lower-ranking creditors. The deposit recovery mechanism must also be consistent with the banking sector's viability and public debt sustainability.
Regarding fiscal matters, the IMF noted the authorities' strict budget implementation under financing constraints and welcomed the 2027 budget's aim for a balanced fiscal position, alongside measures to enhance tax compliance. The fund pointed out that a planned increase in the value-added tax to 12%, approved by the cabinet to fund public sector wage hikes in February, has not yet been implemented. The IMF urged the completion of legislative steps for this increase and cautioned against further unstudied salary hikes without corresponding revenue-raising measures.
Finally, the IMF called for prioritizing support for internally displaced persons and enabling capital expenditure. They welcomed efforts to develop a medium-term fiscal framework, considering its reliable adoption crucial for restoring fiscal sustainability and allowing essential spending on reconstruction and social protection. The IMF reiterated its commitment to supporting Lebanese authorities in developing and implementing a comprehensive reform agenda, potentially backed by an IMF program, with ongoing discussions between the two sides.