Lebanon's Economy Faces Significant Contraction Amid Regional Tensions, 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 September 15-18 visit to Beirut by an IMF mission led by Ernesto Ramirez Riego, highlighted the substantial damage inflicted by the war and regional security events on the Lebanese economy and living conditions. This includes widespread destruction of infrastructure and housing, significant internal displacement, and a severe deterioration in the living standards of displaced persons.

Despite these challenges, the IMF mission commended the 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 mechanism for addressing bank resolutions and liquidations. However, the IMF stressed the need to advance legislation on financial stability and deposit recovery, ensuring consistency with international standards. It also emphasized respecting the hierarchy of claims during banking sector restructuring, protecting depositors from losses before shareholders and junior creditors, while ensuring deposit recovery mechanisms are compatible with the banking sector's viability and public debt sustainability.

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 (VAT) to 12%, approved by the cabinet to fund public sector wage and pension increases in February, has not yet been implemented. The IMF urged the completion of legislative procedures for this increase and cautioned against further unbudgeted salary hikes without corresponding revenue-raising measures. The organization also called for prioritizing support for the internally displaced and enabling capital expenditure, welcoming efforts to develop a medium-term fiscal framework essential for restoring financial sustainability and facilitating crucial spending on reconstruction and social protection.

The IMF concluded by reaffirming 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 parties.