Lebanon
Use of Fund Resources: Request for Emergency Post-Conflict Assistance: Staff Report; and Press Release on the Executive Board Discussion
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International Monetary Fund
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Publication Date:
18 May 2007
eISBN:
9781451822717
Language:
English
Keywords:
ISCR; CR; reform program; Banque du Liban; debt; net; Emergency Post-Conflict Assistance; debt ratio; foreign currency; exchange rate; debt service; real GDP; International reserves
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This report reviews the Emergency Post-Conflict Assistance (EPCA) given to Lebanon after the conflict with Israel in 2006. The five-week conflict with Israel in 2006 and the month-long blockade that followed inflicted a heavy human and economic toll on Lebanon. EPCA would provide an appropriate transition to 2008, when fiscal adjustment is envisaged to commence. The authorities intend to seek IMF support through a Stand-By Arrangement (SBA), following satisfactory implementation of the EPCA program and after the immediate impact of the conflict has been addressed and the current political stalemate resolved.

Abstract

This report reviews the Emergency Post-Conflict Assistance (EPCA) given to Lebanon after the conflict with Israel in 2006. The five-week conflict with Israel in 2006 and the month-long blockade that followed inflicted a heavy human and economic toll on Lebanon. EPCA would provide an appropriate transition to 2008, when fiscal adjustment is envisaged to commence. The authorities intend to seek IMF support through a Stand-By Arrangement (SBA), following satisfactory implementation of the EPCA program and after the immediate impact of the conflict has been addressed and the current political stalemate resolved.

I. Introduction

1. The authorities’ economic program for 2007 derives from the broader medium-term reform strategy presented at the donor conference on January 25, 2007, in Paris (“Paris III”). The medium-term reform program was developed prior to the conflict with Israel. At the Board meeting on the 2006 Article IV consultation, on May 8, 2006, Executive Directors had expressed their support for an earlier version of the debt reduction strategy, although a number of Directors considered that the size of the imbalances called for a more rapid pace of fiscal adjustment. In the wake of the July-August 2006 conflict and its economic and political fallout, the sequencing of reforms and the timing of fiscal adjustment were changed. The specific objectives of the program for 2007 to be supported by EPCA are to protect financial stability, contain the budget deficit during this transition year, and initiate structural reforms that are critical to the success of the medium-term reform program.

2. EPCA would provide an appropriate transition to 2008, when fiscal adjustment is envisaged to commence. Staff’s judgment is that Lebanon meets the criteria for Fund support under EPCA (Box 1). The authorities have indicated that they intend to seek Fund support through a Stand-By Arrangement (SBA), following satisfactory implementation of the EPCA program, and after the immediate impact of the conflict has been addressed, and the current political stalemate resolved.

Lebanon: Eligibility for Access Under EPCA

Urgent balance of payments need. While the central bank was able to protect its reserves position through the conflict, further balance-of-payments support will be needed in 2007 to maintain confidence in the face of continued political instability, potential market volatility, foreign currency debt service of about $3 billion, negative deposit growth since the beginning of the year, and the roll-over of short-term deposits of over $60 billion. The projected conflict-related widening of the current account deficit will increase these vulnerabilities further. The timely deposits for US$1.5 billion by Saudi Arabia and Kuwait also indicated the urgency of the balance of payments need.

Disruption of institutional and administrative capacity. The war and its direct aftermath led to a significant weakening of institutional capacity (evidenced by vacancies in key ministries and the impossibility of convening parliament) and stretched the capacity of the administration (due to the added tasks of planning for recovery, reconstruction and donor coordination) to the point where the authorities are not yet able to implement a comprehensive economic program that could be supported by an upper credit tranche Fund arrangement.

Sufficient capacity for policy planning and implementation and demonstrated commitment. Capacity and commitment are adequate, as demonstrated by the authorities’ management of financial market tensions and the medium-term economic and reform program, which was finalized after the conflict.

Fund support as part of a concerted international effort. Access under EPCA is small relative to the country’s financing needs, but constitutes an integral and catalytic part of the overall financial assistance package of Paris III.

3. The political situation remains difficult, with a risk that legislative activity could be paralyzed in the period leading up to the presidential election, which is expected to be held by the Fall of 2007. Efforts to end the political crisis have so far not met with success, with the government and the opposition remaining firmly entrenched in their positions, putting parliamentary activity on hold. The security situation has become calmer since the street violence and the bomb attacks of January and February 2007. Despite the political stalemate, the government is determined to move ahead with its reform agenda, and is counting on reassurances provided by the Speaker of Parliament, who is aligned with the opposition, that he would, on an exceptional basis, convene parliament to consider legislation related to the implementation of the Paris III program.

II. Background

4. The five-week conflict with Israel in 2006 and the month-long blockade that followed inflicted a heavy human and economic toll on Lebanon. The damage to infrastructure is estimated by the government at $2 billion (9 percent of GDP), just over half of which is housing (Text Table 1). Immediately after the conflict, donors committed $1.7 billion for relief and recovery.1 Most of the pledges are expected to be disbursed by end-2007, but due to implementation capacity constraints, actual conflict-related spending will spill over into 2008.

Text Table 1.

Lebanon: Conflict-Related Spending 2006-08

(In billions of U.S. dollars)

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Sources: National authorities; and Fund staff estimates.

Estimate.

The estimate of the cost of the conflict financed through the budget is based on the Lebanese authorities’ “Donor Monitoring Sheet” (dated 5/11/2006).

5. The conflict and the ensuing domestic political tensions dashed hopes for a strong recovery in 2006 (Table 1). The latest indicators suggest that real GDP was flat in 2006, compared with a pre-war projected growth of around 6 percent, translating into a loss of national income of about $1.3 billion. At the same time, inflation accelerated due to supply shortages triggered by the conflict, reaching 7 percent year-on-year in December 2006.

Table 1.

Lebanon: Selected Economic Indicators, 2003–12

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Sources: Lebanese authorities; and Fund staff estimates.

Defined as cash in circulation plus resident and non-resident deposits.

Short-term debt on a remaining maturity basis.

Figure 1.
Figure 1.

Lebanon: Real GDP and Coincident Indicator, 1994–2006

(Annual change in percent)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities.1/ Coincident indicator is a composite indicator of economic activity monitored by the central bank.
Figure 2.
Figure 2.

Lebanon: Inflation, January 2005—December 2006

(Change in percent)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities.

6. The conflict also pushed the primary fiscal balance (excluding grants) into a deficit of 1.2 percent of GDP in 2006 (Tables 2 and 3). Disbursed grants (2.9 percent of GDP) more than covered the direct budgetary impact of the conflict in 2006 (estimated at 1 percent of GDP), but a marked increase in interest expenditure (reflecting in part the expiration of some of the Paris II interest relief) caused the overall deficit to widen to 11.2 percent of GDP, from 8.5 percent in 2005. Gross public debt rose to $40 billion (179 percent of GDP) by end-2006 (Tables 4 and 5).

Table 2.

Lebanon: Central Government Primary Balance, 2003–08:

(In billions of Lebanese pounds)

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Domestic excises, which are collected at customs, are classified as taxes on international trade.

On checks issued basis.

Excludes principal and interest payments paid on behalf of EdL.

From 2005 onward includes additional transfers to the social security funds (NSSF) to clear the stock of arrears.

Includes (i) from 2006 to 2008 transfers for telecom settlements of $97 million, $30 million, and $150 million; and (ii) transfers to the Council of the South and the Displaced Fund (LL 750 billion split between 2007 to 2009).

The budgetary cost of the 2006 conflict is estimated to at $1.48 billion.

Includes transfers to municipalities.

Table 3.

Lebanon: Central Government Primary Balance, 2003–08:

(In percent of GDP)

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Sources: Ministry of Finance; and Fund staff estimates and projections.

Domestic excises, which are collected at customs, are classified as taxes on international trade.

On checks issued basis.

Excludes principal and interest payments paid on behalf of EdL.

From 2005 onward includes additional transfers to the social security funds (NSSF) to clear the stock of arrears.

Includes (i) from 2006 to 2008 transfers for telecom settlements of $97 million, $30 million, and $150 million; and (ii) transfers to the Council of the South and the Displaced Fund (LL 750 billion split between 2007 to 2009).

The budgetary cost of the 2006 conflict is estimated to at $1.48 billion.

Includes transfers to municipalities.

Table 4.

Lebanon: Overall Fiscal Deficit and Financing, 2003–08

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Sources: Lebanese authorities; and Fund staff estimates and calculations.

Figures in 2003 are affected by the role played by the Banque du Liban (BdL) in the debt exchange with banks that tends to increase BdL financing and decrease commercial bank financing of the government.

Debt cancellation and Banque du Liban revaluation of gold and foreign exchange.

Table 5.

Lebanon: Government Debt, 2003–12 1/

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Sources: Lebanese authorities; and Fund staff estimates and calculations.

Includes all debt contracted by the treasury on behalf of the central government and public agencies other than the Banque du Liban; accrued interest; and Banque du Liban lending to Electricite du Liban. Excludes government arrears to the private sector.

Defined as gross debt less central government deposits.

Denominated in domestic currency; mainly to the National Social Security Fund, and the National Deposit Insurance Fund.

7. Financial markets weathered the conflict surprisingly well. Financial stability and confidence in the peg were maintained throughout the conflict owing to deft management of the situation by the central bank, in particular in limiting capital outflows, the banking system’s strong liquidity position, and the timely deposits of $1 billion by Saudi Arabia and $500 million by Kuwait with the central bank. Cumulative deposit outflows of about $3 billion during the conflict (5 percent of the deposit base) were recouped by year-end (Tables 6-8). However, deposit growth since the beginning of 2007 remains negative, deposit dollarization has not come down, and Eurobond and Credit Default Swap spreads have declined only slightly since the end of the conflict and the Paris III conference. Faced with tighter and volatile market conditions, the government had to rely on central bank financing in the second half of 2006.

Table 6.

Lebanon: Monetary Survey, 2003–08

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Sources: Banque du Liban; and Fund staff estimates and projections.

Broad money is taken to be M5 which is defined as M3 (currency + resident deposits) + non-resident deposits.

Table 7.

Lebanon: Balance Sheet of the Banque du Liban, 2003–08

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Sources: Banque du Liban; and Fund staff estimates and projections.

Defined by currency (not by residency), as official foreign currency assets, including gold and SDR, less foreign currency liabilities.

Includes certificates of deposits in foreign currency held by commercial banks.

Includes the deposits by the Saudi and Kuwaiti governments. Excludes all other special bilateral long-term deposits.

Defined as all official foreign currency assets, less encumbered foreign assets.

Defined as gross international reserves including gold and Eurobonds issued by the Republic of Lebanon.

Table 8.

Lebanon: Commercial Banks’ Balance Sheet, 2003–08

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Source: Banque du Liban.

Includes nonresident deposits.

Includes bonds denominated in foreign currency.

Includes other items net as assets.

Figure 3.
Figure 3.

Lebanon: Broad Money and Deposit Dollarization

(January 2005-February 2007)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities.
Figure 4.
Figure 4.

Lebanon: International Reserves and Liquidity

(January 2005-February 2007; in billions of U.S. dollars)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities; and Fund staff calculations.1/ Defined as gross international reserves minus principal and interest due over the next 12 months on all foreign currency liabilities of the central bank to entities other than the government of Lebanon. Excludes long-term foreign exchange liabilities of the central bank.
Figure 5.
Figure 5.

Lebanon: Interest Rates

(January 2005-January 2007; in percent)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities.
Figure 6.
Figure 6.

Lebanon: Eurobond and Credit Default Swaps (CDS) Spreads

(January 2005-March 2007; in basis points)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Source: J.P. Morgan.

8. The overall balance of payments (including the $1.5 billion special deposits from Saudi Arabia and Kuwait) posted a surplus of $1.7 billion in 2006, with gross international reserves (excluding gold) increasing to $11.4 billion (Table 9). Trade slowed down considerably during the war and the blockade. As a result, imports were almost flat for the year as a whole, while exports still showed strong growth owing to a good first half and a recovery during the last quarter, with jewelry exports displaying particular buoyancy. Significant foreign direct investment in the first half of 2006 also helped the balance of payments. The depreciation of the U.S. dollar (to which the Lebanese pound is pegged) against major currencies more than offset the impact of domestic inflation on the real effective exchange rate, which by end-2006 depreciated modestly over December 2005.

Table 9.

Lebanon: Balance of Payments, 2003–12

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Sources: Lebanese authorities; BIS; and IMF staff estimates and projections.

Change in the foreign liabilities of the BdL.

For the period beyond March 2007, it is assumed that Fund purchases proceed as programmed and that repurchases are made on an obligation basis.

Differs from banks’ reported data, to include estimated deposit flows by Lebanese nationals living abroad but classified as residents.

Net of non-deposit foreign liabilities.

Excludes Eurobonds and encumbered reserves.

Includes all banking deposits held by non-residents, including estimated deposits of Lebanese nationals living abroad but classified as residents.

Includes private sector foreign currency deposits in commercial banks.

Figure 7.
Figure 7.

Lebanon: Exports and Imports

(January 2005-December 2006; in millions of U.S. dollars)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities.
Figure 8.
Figure 8.

Lebanon: Effective Exchange Rates

(January 2005-December 2006; 1995=100)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: Lebanese authorities; and Fund staff calculations.

9. Based on the staff’s assessment, the grant element of the $7.6 billion pledged at Paris III that can be applied to debt reduction is estimated at around $1.4 billion; this amount could be increased substantially depending on the flexibility shown by donors in terms of concessionality and use of funds.2 Unlike the case of Paris II, most of the support pledged at Paris III is in the form of project financing, which may be difficult to fit within the government’s existing expenditure plans. To the extent that donors pursue project financing independently of the government’s own expenditure objectives, this would add to debt. The timing of disbursement remains uncertain, although donors generally indicated that support will be phased in line with progress in the reform agenda.

III. Policy Discussions

10. Discussions on EPCA were based on the program presented by the authorities at Paris III donors’ conference (Attachment III to the LOI). The program is broad in its objectives and range of actions (Box 2). The fiscal reform program spans five years, but owing to institutional and political constraints, as well as concerns about the state of the economy, most adjustment measures would only start in 2008. The agenda for 2007 includes a commitment to contain the deficit and initiate important structural reforms, including steps toward privatization of the two mobile phone operators, the launching of the reform plan of power utility Electricité du Liban (EdL), preparations for tax policy reforms in 2008, budget management measures, and an increase in gasoline excise revenues.

11. The authorities recognized that the volatile political climate could affect the timing of policy implementation. Some delays in reforms have occurred on account of the political stalemate, but work is under way on a number of fronts with a view to advancing the reform program as much as possible. However, given the political situation, the authorities would need to retain flexibility in choosing among structural measures to implement in case of rising tensions. For these reasons, the authorities considered it essential that the calendar of measures monitored under EPCA should focus on a limited set of clearly deliverable actions.

12. Notwithstanding the outcome of the Paris III conference, the authorities expect 2007 to be a very difficult year. Apart from the adverse impact of the protracted political stalemate, political tensions and uncertainty ahead of the presidential election are expected to affect adversely economic activity and private capital inflows. Based on these considerations, as well as recent economic and financial developments, the authorities and staff agreed to revise the macroeconomic assumptions for 2007 as follows:

Lebanon: The Authorities’ Five-Year Reform Program

The authorities’ reform program covering the period 2007—11 follows closely the reform agenda developed prior to the conflict.

Fiscal adjustment and related structural reforms aim to increase the primary surplus and reduce public debt. Revenue measures include increasing the VAT rate and the tax on interest income; returning gasoline excises to their 2004 levels; introducing a global income tax to replace the current schedular system; and reforming tax administration. Expenditure measures center on containing the wage bill and other current expenditures, eliminating extrabudgetary funds, and reducing transfers by reforming the power utility and the pension system. Capital expenditures will be temporarily increased for reconstruction. The government also intends to improve the budget process and debt management.

Privatization plans include the two mobile phone operators and the fixed line telephone company. Moreover, the central bank is expected to divest ownership of Middle East Airlines and Intra (a holding company which owns Casino du Liban). Privatizations would reduce the debt, but the associated saving on debt service would be offset by the foregone profit transfers.

Monetary and exchange rate policies will focus on maintaining price stability through the exchange rate peg, relying on short-term instruments for sterilization purposes. The government will reduce its reliance on central bank financing to strengthen the independence of the Banque du Liban.

Growth-enhancing structural reforms are geared to improving the business climate and competitiveness. They will address governance problems in the public sector; streamline regulations; facilitate access to credit; enhance the enforcement of the rule of law; and deepen capital markets.

Social sector reforms seek to alleviate poverty, reduce regional income disparities, and improve education and health indicators. Specific actions will include rationalizing social spending across ministries; reforming the existing social safety net; introducing new pilot programs targeting the poor, including through cash transfers; and raising the effectiveness and coverage of health and education facilities.

  • The projected rebound of GDP growth in 2007 has been lowered from 4 to 1 percent, owing to the uncertain political situation as well as the better-than-anticipated outcome for 2006. Over the medium term, growth is projected to accelerate gradually to 5 percent a year, with confidence effects and the benefits of structural reforms outweighing any dampening impact of fiscal tightening. Moreover, Lebanon is expected to benefit from continued strong regional demand for services. With the exchange rate peg, inflation is projected to return to the low single digits by end-2007, with some possible temporary up-ticks over the reform period reflecting planned increases in indirect taxes.

  • The slower than expected improvement in confidence has been reflected in higher interest rate and lower money growth projections for 2007 than envisaged at the time of Paris III. Interest rates are not projected to decline until the end of 2007, implying a possible widening of interest rate spreads vis-à-vis international dollar rates. Interest rate spreads would narrow starting in the last quarter of 2007, reflecting improved confidence and declining external financing needs. Monetary growth is projected to turn positive (but only modestly) in the second quarter, and to reach 3.5 percent by year-end. This would imply very tight domestic financial market conditions in 2007. Over the medium term, monetary growth is projected conservatively at an average of 5 percent a year.

A. The 2007 Fiscal Program

13. The 2007 fiscal program aims at containing the primary budget deficit (excluding grants) at 3.7 percent of GDP (indicative target), compared with 1.2 percent in 2006. The draft budget for 2007, which has not yet been submitted to parliament (monitorable action), builds in significant reconstruction and relief spending. Excluding one-off and conflict-related spending, the primary deficit is targeted to remain roughly unchanged relative to 2006. Grant disbursements (from both Stockholm and Paris III pledges) are projected at 3.7 percent of GDP in 2007, but there is considerable uncertainty about their timing, reflecting ongoing discussions of the authorities with donors. The overall deficit (including grants) would increase from 11.2 percent of GDP in 2006 to 12.4 percent in 2007.

14. Government revenue is projected to rise by 1.1 percent of GDP in 2007, mostly on account of an increase (0.7 percent of GDP) in gasoline excises. This increase will be realized by setting a floor on the gasoline excise (monitorable action), which is akin to asymmetric indexation of domestic prices to international prices. Acknowledging that their revenue projections may be on the conservative side, the authorities indicated that they intend to use any revenue over performance for debt reduction instead of increased spending. Preparations are also ongoing for the introduction of a Global Income Tax (GIT) in 2008 (with effect on 2009 tax revenues), to replace the current schedular system. The law to implement the GIT would need to be passed before end-2007.

15. Total expenditure is projected to increase by 3.1 percent of GDP relative to 2006 (3.5 percent, excluding interest). Most of the increase relative to 2006 (2.8 percent of GDP) comes from extraordinary outlays related to recovery and reconstruction. Military spending is also projected to increase due to the expansion of the army and one-off bonus payments to military personnel carried over from 2006. Additional pressures on expenditures arise from rising transfers to the public power company, EdL, the National Social Security Fund (NSSF), the Council of the South, and the Fund for the Displaced, in all, adding 1.2 percent of GDP relative to 2006. These increases are offset in part by a reduction in other spending and the postponement of infrastructure spending for the reform of EdL.

16. Reforms intended to address the large and growing transfers to the rest of the public sector are expected to begin in 2007. The gradual elimination of these transfers is at the core of the authorities’ medium-term fiscal adjustment strategy. To that end, the authorities will develop an audit plan for the NSSF (monitorable action) in order to assess the contingent liabilities for the government, and put in place appropriate reforms. Power sector reform developed by the government in consultation with the World Bank is also set to begin in 2007. The reform will address a mix of governance and infrastructural issues, starting with an audit of EdL (monitorable action); however, the planned installation of remote meters to improve revenue collection has been delayed. Moreover, public expenditure reform envisages the closure in 2009 of two extrabudgetary funds—the Council for the South and the Fund for the Displaced.

17. The authorities’ program includes implementation of a public financial management reform plan developed with technical assistance from the Fund. Weak controls and accountability have prevented effective budgetary control, making it difficult to adjust line ministries’ spending in line with the government’s priorities. One key concern for the ministry of finance has been the ability of line ministries to roll over expenditures from one budget year to the next. The authorities committed to eliminating, in the 2007 budget, the rollover of any spending that has not already been contracted (monitorable action), and to prepare the necessary measures to prevent the unchecked carry over of expenditures starting with the 2008 budget. They noted that they had already reduced the outstanding stock of committed carryovers from around 5.7 percent of GDP in early 2005 to around 1.5 percent at the end of 2006. The authorities have also completed the automation of payments, which is a prerequisite for the planned move to a Treasury Single Account.

18. Despite the large overall deficit, gross government debt is projected to decline in 2007 by three percentage points of GDP to 176 percent of GDP, reflecting a $1.6 billion (6.7 percent of GDP) transfer to the government from the (unrealized) valuation gains of gold held by the central bank. Lebanese law provides for the annual transfer of 80 percent of gold revaluation, although an informal agreement between the ministry of finance and the central bank had suspended such transfers for three years. The authorities indicated that the transfer would be used to retire government debt held by the central bank, and would therefore have no direct monetary impact. The projected decline in gross debt matches that of net debt (indicative target).

19. The financing of the deficit is expected to take place largely through donor financing and borrowing from commercial banks. The program projects that official financing (Paris III and undisbursed Stockholm pledges) would cover $2.7 billion of the $3.8 billion deficit (before grants), and that commercial banks would provide another $900 million. The remaining $200 million would be covered by domestic public institutions and the central bank. In gross terms, the financing requirement of the government in 2007 is projected at $10 billion (43 percent of GDP), $3 billion of which is in foreign exchange. Most of the debt is held by domestic banks and their ability to refinance the government depends in large part on the strength of deposit growth. The authorities considered that, in the current uncertain market environment, there was little scope for increasing private financing by raising interest rates. Therefore, in the absence of a pick up in monetary growth, or in the event of a shortfall in donor financing, the authorities noted that they would have to resort to additional central bank financing of the government (indicative target), with a direct impact on international reserves. While committed to the quantitative indicative targets of the program, the authorities argued therefore that the target on central bank credit to the government allow for a degree of flexibility should they face difficulties in borrowing from the market or shortfalls in donor financing. They agreed that they would consult with staff should it become necessary to exercise such flexibility.

B. Monetary and Exchange Rate Policy

20. To protect the exchange rate peg and financial stability in the face of large liquidity shocks, the banking sector (central bank and commercial banks) has maintained a high level of liquid foreign assets. The program aims at maintaining an average level of gross international reserves (indicative target3) equivalent to roughly 20 percent of total deposits, which has proven adequate in the face of the large financial shocks of 2005 and 2006.4 Nevertheless, given the difficult financial outlook expected in 2007, and the low projected rate of monetary growth, the authorities considered that some temporary decline in gross reserves target was justified to enable them to address possible intra-annual pressures, with the objective of returning by end-year to the level of international reserves projected for end-March 2007. Consistent with the international reserves objective, the authorities will also seek to contain the growth of central bank claims on the government (indicative target), with the understanding that temporary shortfalls in market or donor financing would have to be accommodated through additional central bank financing.5

21. The central bank will continue to monitor closely liquidity conditions in the domestic markets because of its impact on international reserves. In managing liquidity, the authorities confirmed their objective of moving to a more conventional system of short-term monetary instruments, but indicated that it would be too risky to reform monetary policy instruments in the current unstable market environment. They were of the view that, in times of high uncertainty, the effectiveness of interventions in the money market in countering pressures on the exchange rate was limited, and that they would have to continue to rely on longer-term monetary instruments in order to prevent banks from liquidating at short notice their claims on the central bank.

22. The costs of past central bank operation constrain liquidity management. As a result of such operations (including the cost of defending the peg and maintaining international reserves), the central bank’s balance sheet generates large cash losses. Given the expected slow recovery of money demand growth in 2007, the liquidity injection stemming from these losses is likely to have a direct impact on international reserves. The monetary authorities assured staff that they would monitor the situation closely, with a view to avoiding a structural imbalance between their liquidity injections and money demand.

C. Structural Reforms

23. EPCA discussions on structural reforms focused on the following macrocritical areas:

  • Privatization of the telecom sector. The authorities confirmed that the board of the Telecom Regulatory Authority (TRA) was now in place. Another precondition for the privatization of the sector is passage of a law enabling the sale of the assets of the mobile phone operators and relevant operating licenses. The authorities plan to submit such legislation to parliament by end-June 2007 (monitorable action). Because of the political calendar, the authorities expect to launch the privatization process by sending invitations for expression of interest in the purchase of the two operators toward the end of the year (monitorable action). The two companies are currently privately managed under a contract that expires in April 2008, which would therefore permit completing the transfer of the assets and licenses to the new owners by mid-2008. The privatization would be for the full value of the assets and the licenses, compared with the assumption of a partial privatization in the Paris III program.6 The privatization of the fixed line, along with a third mobile license, is projected to begin in 2008, with a first partial sale to a strategic investor.

  • Power sector. The reform of EdL includes actions on both governance and infrastructure. On the governance front, there is a need to both clarify the financial situation of the company (the last audited financial accounts date to 2001) and corporatize it so that it can operate more independently and according to commercial principles. On the infrastructure front, investment is needed to install remote meters to reduce the problem of non-technical losses, and to upgrade production facilities (possibly through Build Operate and Transfer or other financing arrangements). The World Bank will take the lead in this area and has begun discussions on a power sector lending operation. Preparation of an audit plan by end-June (monitorable action) will serve as an input to this reform.

  • Social security, pension reform and health care reform. Two of the three funds of the NSSF (the family allowance fund and the health insurance fund) run structural deficits which give rise to large liabilities for the government, which has a legal obligation to cover some of the costs of NSSF. Inadequate contribution rates, excessive and unchecked benefit payments, and other possible leakages may be at the origin of these losses. However, in the absence of a clear financial picture, reforms have been delayed and the government has been reluctant to meet all of the financial requests of NSSF.7 The private pension system (the third fund in NSSF) has been running surpluses, but a reform of the system from an end-of-service lump sum payment scheme to a fully-funded pension system may entail large transitional costs for the government. The World Bank is directly involved in these areas. The preparation of an audit plan by end-June (monitorable action) will facilitate the reform process.

D. The Medium-Term Fiscal Program and Debt Sustainability Analysis

24. Based on the revisions to the 2007 fiscal projections and the macroeconomic framework, the staff’s medium-term scenario projects that the implementation of the authorities’ program would raise the primary surplus to 5½ percent of GDP by 2011-12. Relative to the authorities’ Paris III projections, the staff’s scenario takes a more conservative view on the fiscal dividend from the reforms of the electricity company and the pension system and factors in a larger loss in nontax revenue due to the full rather than partial privatization of the mobile phone operators. The current scenario also embodies more recent (and higher) oil price assumptions over the medium term, which translates into higher projected losses of EdL and related budgetary transfers. However, the assumed rate of real GDP growth is considerably higher than the historical average.

25. The medium-term fiscal adjustment is about equally divided between revenue and expenditure measures (see table below). The first step of the VAT rate increase, an increase in the interest income withholding tax, and the introduction of the GIT are all planned for 2008. In the event of delays in the implementation of any of these measures, the authorities intend to take compensatory actions to match the original adjustment path of Paris III.

26. Under the scenario, the government debt ratio would decline to 128 percent of GDP by 2012. Of the 51 percentage point net reduction in the debt ratio over the period 2007—12, 31 points would come from privatization, 10 points from fiscal adjustment, 7 points from the 2007 transfer of gold revaluation gains, 6 points from Paris III contributions, and 3 points from post war recovery grants, with the automatic debt dynamics partly offsetting these gains. Fiscal adjustment would progressively become the main driving factor behind debt reduction and, by 2012, the projected primary surplus would exceed the debt-stabilizing primary surplus by 6 percent of GDP. The debt ratio would thus remain on a downward path even with some relaxation of the fiscal stance after 2012. This is illustrated in the Debt Sustainability Analysis (DSA), which is carried out over a 20-year horizon and assumes that the primary surplus returns to 3 percent of GDP by 2015 (Figure 9 and Table 10).

Figure 9.
Figure 9.

Lebanon: Public Debt Sustainability

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2007, 177; 10.5089/9781451822717.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Growth shock based on average 2002-2006 values. Interest rate shock is permanent one-half standard deviation shock. Historical path is defined in Table 14, Footnote 8. Figures in the boxes represent average projections for the respective variables in the program scenario and shock scenario; historical refers to 10 year averages.From 2012, the primary fiscal surplus reverts slowly to a long term level of 3 percent of GDP.2/ Through 2012, the planned revenue and expenditures reforms generate half of their estimated yield in the scenario; after 2012, the primary surplus slowly declines to 1 percent of GDP.3/ Combined real interest rate and growth rate (50 percent intensity), and primary balance shock (100 percent intensity).4/ No privatization in the projected period.
Text Table 2.

Lebanon: Fiscal Effort, 2007—12:

(Net gain over the preceding year in percent of GDP)

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Source: Fund staff projections. Figures may not add due to rounding.

The cumulative adjustment starts from 2006.

Includes (i) increasing the tax rate on interest income from 5 to 7 percent; (ii) improving non-tax revenue from government properties; (iii) taxing illegal seashore properties and improving property tax administration; and (iv) improved buoyancy of “Other Treasury revenue” to return to pre-conflict levels.

Includes (i) containment of other current expenditures; and (ii) increased capital spending (as advocated by the World Bank’s Public Expenditure Review).

Includes the fiscal impact of exogenous factors and one-off effects.

Table 10.

Lebanon: External Financing Requirements and Sources, 2003&3x2013;08:

(In millions of U.S. dollars)

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Sources: Data provided by the Lebanese authorities; and IMF staff estimates and calculations.

Original maturity of less than 1 year. Stock at the end of the previous period.

Includes non-resident deposits held at commercial banks.

Only loans.

Includes all other net financial flows, and errors and omissions.

27. The DSA reveals that under a number of macroeconomic shocks, the debt-to-GDP ratio would revert to an unsustainable path. Box 3 describes the shocks in detail. The implication is that additional grant financing and/or stronger fiscal adjustment would be needed over the medium term to place the debt ratio on a firmer path toward sustainability.

E. The Paris III Package and Commercial Banks’ Contribution

28. Discussions are under way with all Paris III donors to finalize the terms of the package of financial assistance and the conditions for its disbursement. The medium-term scenario builds in the assumption that official budgetary assistance (Stockholm and Paris III) over 2007-12 will come to $1.9 billion in grants, and $2.6 billion in loans.8 The authorities indicated that, in view of the debt reduction objective, they would seek flexibility from donors to convert Paris III project assistance pledges into budgetary support on highly concessional terms, so as to increase the overall contribution of Paris III to debt reduction.

Lebanon: Shock Scenarios for the Debt Sustainability Analysis

Panel 1: the program scenario.

Panel 2: a permanent increase in the real interest rate by 150 basis points (i.e., one-half standard deviation from its past distribution) relative to the program scenario.

Panel 3: a drop in average GDP growth from 4.1 percent in the program scenario to 3.1 percent, i.e., the average rate of 2002–06.

Panel 4: a shortfall in the yield from fiscal reforms, i.e., halving of the yield of the fiscal reform package while meeting in full reconstruction spending (this reduces the average primary surplus to 1.6 percent of GDP in 2007–12, compared with 4.4 percent under the program), and convergence of the primary surplus to 1 percent of GDP in the long run (compared with 3 percent in the program scenario).

Panel 5: a combination of the fiscal shock with 50 percent of the growth and interest rate shocks.

Panel 6: no privatization—since privatization essentially brings forward the income stream from the privatized companies, the scenarios with and without privatization converge to the same point in the long run.

29. The authorities are also discussing a possible contribution from the local commercial banks. The proposal envisages a voluntary subscription to zero (or low) interest Treasury bills to the tune of 5–10 percent of the commercial banks’ deposit base. The contribution would be staggered over five years and conditioned on the government’s observance of its deficit target—the EPCA target would be the trigger for this year. This would ensure that the contribution is matched by a reduction in the sovereign risk which banks carry on their balance sheets.

F. Access, Program Monitoring, and Capacity to Repay the Fund

  • Staff considers that access of 25 percent of quota would be justified in light of Lebanon’s large external financing needs in relation to its quota.

  • Staff will update the Executive Board (and donors) regularly, through informal country matters sessions, on progress under EPCA, including on performance relative to the quarterly indicative targets and monitorable actions set out in the LOI.

  • A safeguard assessment of the Banque du Liban has been initiated.

  • Lebanon is expected to meet its financial obligations to the Fund in a timely manner. The authorities note that, to date, Lebanon has maintained a perfect record of meeting external debt payments, even during its civil war and recent episodes of financial pressures. Fund credit would be low relative to quota and in absolute terms, and debt service to the Fund would remain below 0.2 percent of exports of goods and non-factor services (Table 11).

  • The provision of Fund financing to Lebanon under the existing circumstances poses risks to the Fund, owing to Lebanon’s very high debt ratio. Financing committed by certain donors that could help to reduce Lebanon’s external financing requirements, while a very welcome indication of support, would not be sufficient to significantly alter the debt situation. Against this background, staff and management have consulted with the authorities and, through the relevant Executive Directors, with the bulk of Lebanon’s official bilateral donors and creditors to address the risks that are posed by the provision of Fund financing. Based on these consultations, Management has understood that these members confirm the Fund’s preferred creditor status in respect of drawing by Lebanon under the EPCA and, similarly, that they acknowledge the importance of timely repayment to the Fund of the amounts provided under the EPCA, in accordance with the Fund’s preferred creditor status.

  • The main risk to program implementation stems from the ongoing domestic and regional political tensions. The government is committed to its economic program and determined to move ahead with reforms swiftly. However, the continuation of the political stalemate and a possible further escalation in the run-up to the presidential elections in the Fall of 2007 could delay or derail implementation of specific measures.

Table 11.

Lebanon: Indicators of Capacity to Repay the Fund, 2003–12

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Sources: Data provided by the Lebanese authorities; and IMF staff estimates and calculations.

Projections are based on repurchase obligations and are at February 28, 2007, exchange rates.

IV. Staff Appraisal

30. Seven months after the end of the conflict with Israel, economic and financial conditions in Lebanon remain very difficult. Market confidence is hostage to the domestic political situation, and structural imbalances and vulnerabilities (chief among them the unsustainable debt burden) have been magnified by the economic and financial situation. Against this environment, the authorities face the difficult simultaneous challenges of economic recovery, reform, and fiscal adjustment.

31. The deferment of adjustment measures until 2008 and beyond, although motivated by the economic fallout from the conflict and the need to support economic recovery and reconstruction, has increased significantly the government’s financing needs at a time when market access has become more difficult. Although 2007 should be viewed as a transition year, every opportunity should therefore be seized to advance the reform and adjustment process, particularly since tensions related to the financing of the fiscal program will remain a key risk factor in 2007. The program is build on conservative budget revenue projections, and staff welcomes the authorities’ commitment to use any over performance on revenue to reduce the deficit and not to increase spending.

32. The success of the program rests crucially on donors matching the authorities’ own efforts with timely disbursement of their pledges. Moreover, there is a need for donor support to be aligned with the authorities’ macroeconomic objectives and policy priorities. In this regard, much of the project financing pledges at Paris III will have limited benefits if not channeled flexibly to the government in the form of outright budget support or by financing specific line items of the budget. An enhancement of the concessionality element of the overall package is also needed to address the debt sustainability problem.

33. Although post-conflict conditions preclude much fiscal adjustment in 2007, it is essential to set up the stage for meaningful and sizable fiscal adjustment in 2008, while improving the quality of spending. The 2007 program envisages yet another increase in transfers to the power sector offset by a compression of more productive infrastructure spending. Structural reforms need to be initiated urgently to address deep-seated spending rigidities, eliminate the burden of large inefficient transfers, and reduce the risks from contingent liabilities. In particular, setting in motion the reform of EdL, the private pension system and the health sector—all in cooperation with the World Bank—should be key objectives for 2007. The planned audit of the social security fund will also be critical to clarify the financial obligations of the state vis-à-vis the fund and address the build up of contingent liabilities. The unsustainable pension liabilities of the government to civil servants and military personnel also deserve urgent attention, as they constitute a major risk for the budget which could wipe out any gains made in reducing power sector and social security transfers. On the revenue front, the planned introduction of the GIT in 2008 remains an important objective, not only because of its positive budgetary implications, but also as a way to distribute more equitably the burden of adjustment. To that end, the authorities need to move swiftly to pass the relevant legislation before the beginning of 2008.

34. Improvements in public financial management are equally important to the achievement of the Paris III objectives. Insufficient budgetary controls make it very difficult to align government spending to the government’s policy priorities. This is evident in the social sector, where the fiscal space required for the government’s reform agenda can only be generated by clawing back from low priority and less efficient spending. The public financial management reform agenda developed with the assistance of Fund staff offers a useful road map, and it would be important that its recommendations be reflected in the 2008 budget.

35. The projected reduction of the debt ratio in 2007 is the direct result of the gold revaluation transfer from the central bank to the government. The monetary impact is neutralized by the government’s decision to use the proceeds to retire debt held by the central bank, rather than reduce its market financing. However, while this operation reduces the headline debt figure, it does not alter the underlying net worth of the state. Moreover, the central bank will suffer a loss of income owing to the foregone interest earnings on T-bills.

36. In the event of renewed pressures, defending the peg and maintaining market confidence in this transition year will again require a mix of foreign exchange intervention and interest rate increases. In particular, the instruments deployed in 2005 and 2006 to contain pressures on reserves could be reactivated in case of need (i.e., discounting of domestic currency paper against long-term central bank dollar paper). At the same time, as noted in the Paris III document, the monetary authorities should prepare the institutional ground for introducing more traditional short-term monetary instruments. This will also help strengthen the balance sheet of the central bank and reduce its cash losses.

37. There is considerable scope for enhancing coordination between the central bank and the government. Procedures are not in place for the regular exchange of information and policy planning, and the problems for policymakers are complicated by the absence of clear market signals due to the absence of efficient primary and secondary financial markets. Progress on a number of plans, including the establishment of a primary dealer market for T-bills and of the Higher Debt Council to coordinate debt management issues, would be important in filling these institutional gaps.

38. In the current domestic and regional political environment, Lebanon remains highly vulnerable to swings in confidence. The international reserve buffer and expected donor inflows should mitigate the risks to financial stability, but the increase in the government’s financial imbalance in 2007, even if temporary, poses additional strains on the system. Faced with tight market conditions and a possible shortfalls in donor financing, the authorities may have to resort to additional central bank financing of the government and accept the related loss of international reserves. Staff welcomes the authorities’ intention to consult with staff in such circumstances, and agrees with the authorities that the target on central bank financing of the government should be viewed with flexibility. Additional recourse to central bank financing would be a move in the wrong direction. Therefore, the staff emphasize the importance of donor financing being disbursed as scheduled. However, the authorities should also be ready to accept higher interest rates in response to a worsening of market conditions. Persistent market pressures may also need to be met by accelerating the pace of fiscal adjustment.

39. In all, the program is built on the expectation that 2007 will be a difficult year, and that the authorities’ medium-term objectives remain subject to significant risks. As illustrated by the DSA, the large debt overhang will remain a threat to financial stability well into the medium term, and any delay in the implementation of the structural reform agenda in 2007 will have consequences for the pace and the quality of fiscal adjustment in 2008 and beyond. In this context, EPCA provides support for the transitional challenges of moving from a post-conflict situation to a program of ambitious fiscal adjustment starting in 2008. Timely disbursement of donor support is key, particularly in a situation where market financing may be adversely affected by the political stalemate. However, market sentiment as well as donor support are themselves dependent on the authorities’ ability to deliver on their reform commitments. The staff considers that the criteria for Fund support under EPCA have been met and therefore recommends that the Board approve the authorities’ request.

Table 12.

Lebanon: Indicators of Financial and External Vulnerability, 2002–06

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Sources: Lebanese authorities; Bank for International Settlements; and Fund staff estimates and projections.

2006 refers to November data.

Includes estimates for public debt and banking deposits held by non-residents, and non-resident claims on the nonfinancial sector.

On a remaining maturity basis (scheduled amortization over the next year).

Short-term foreign currency debt of the public sector and the banking sector plus external debt of the nonbank sector.

Excludes gold and encumbered assets.

Table 13.

Lebanon: Banking Sector Financial Soundness Indicators, 2002–06

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Sources: Banque du Liban, Banking Control Commission; and staff estimates.

2006 figure is the August net interest margin annualized.

FC and LL stand for “foreign currency” and “Lebanese pound”, respectively.

FC deposits of residents and nonresidents as a share of total deposits of residents and nonresidents.

Table 14.

Lebanon: Public Sector Debt Sustainability Framework, 2003–26:

(In percent of GDP, unless otherwise indicated)

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Central government gross debt.

Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - Π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

This path assumes that, from 2008 onwards, real GDP growth is set at its 10-year average level while the primary fiscal balance and real interest rates are the same as in the baseline scenario.

This path assumes that, from 2008 onwards, real interest rate and real GDP growth are set at their 10-year average level while the primary fiscal balance is the same as in the baseline scenario.

Appendix. Lebanon: Letter of Intent

March 30, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

700 19th Street N.W.

Washington, D.C. 20431

Dear Mr. de Rato:

In 2006, the government had made significant progress in preparing a comprehensive five-year reform program that was to be presented to a Donors Conference in Beirut. At the time of the outbreak of the conflict with Israel, the government was close to adopting this program, after extensive consultations with domestic and international stakeholders.

The conflict not only inflicted large human and economic costs to Lebanon, but also set back the timeline of the government reform agenda. However, while the war and its devastating consequences shifted the government’s short-term attention to immediate relief and reconstruction efforts, the government remained fully committed to pursue economic reforms and consolidate the public accounts. Indeed, the urgency of implementing the program was amplified by the conflict, which put further strain on the public finances and the management of the large public debt.

For these reasons, in the months following the conflict the government worked to adapt the program to the new circumstances with the intention of launching the reform agenda in 2007. The overall structure of the program has remained intact. However, particular attention was accorded to the timing of the reform measures, taking into consideration the difficulties to implement up-front reforms in the post conflict situation. The program also took into account the impact of the conflict on the macroeconomic situation and the heightened social needs of the population. On the fiscal front, the reform program aims at improving the fiscal situation, in particular through an intensification of the revenue effort starting in 2008, the rationalization of expenditures, and at improving efficiency and competitiveness through energy sector reform and a privatization plan that relates to the telecommunications sector. Fiscal consolidation will be supported by a strict monetary policy, aimed at maintaining price stability and supporting the exchange rate peg.

The reform program complements these macroeconomic policies with a social sector reform plan aimed at alleviating poverty, reducing regional income disparities, and improving education and health indicators; and with a growth-enhancing structural reform plan that will strengthen the business climate and the competitiveness of Lebanese business.

In the context of the program, the government remains committed to an open trade and exchange system, and is taking steps to become a full member of the World Trade Organization. Looking forward, the government will avoid imposing restrictions on payments and transfers for international transactions, to introduce or intensify trade restrictions for balance of payments purposes, or resort to multiple currency practices.

The government received the strong support for its reform program from the international donor community at the donors’ conference chaired by President Chirac in Paris on January 25, 2007. The Paris conference generated considerable financial support toward reducing the government’s debt burden. Some donors expressed support for IMF monitoring of the implementation of certain measures proposed in the reform program.

The government of Lebanon intends to actively pursue its reform program and, in order to support the implementation of the measures envisaged in the program for 2007, hereby requests access to the IMF’s policy for emergency post-conflict assistance (EPCA), in an amount equivalent to SDR 50.75 million, or 25 percent of quota. In view of this request, and as described in the attached tables, the government has revised the program’s macroeconomic projections on the basis of the latest economic developments, and has selected key macroeconomic indicators and structural measures that it intends to monitor closely and report on during 2007.

Some of the measures that are laid out in this request are subject to the settlement of the current political stalemate and approval by Parliament. Given the sensitive nature of these measures, particularly in light of the destruction caused by the war and its social consequences, they are also contingent upon an internal consensus in the country.

A satisfactory implementation of the 2007 program under EPCA, a strengthening of capacity, also through technical assistance from the Fund, and an improvement of economic and social conditions, should allow the government to move, in 2008, to a more ambitious part of its five-year program. At that stage, the government intends to seek further support for its program through a stand-by arrangement from the Fund.

The Government of Lebanon and Banque du Liban will provide the IMF with any available information it may request on the implementation of the program, consistent with the understandings reflected in the attached Technical Memorandum of Understanding, and will consult with Fund staff regarding any revision to the policies described in the government reform program.

Sincerely yours,

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Attachments

I. Quantitative Indicative Targets

II. Monitorable Actions

III. Authorities’ Medium-Term Reform Program Presented at the Paris III Conference

IV. Technical Memorandum of Understanding

Attachment I. Lebanon: Quantitative Indicative Targets Under the Emergency Post-Conflict Assistance, March—December 2007:

(In billions of Lebanese pounds, unless otherwise indicated; end-of-period) 1/

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Source: Lebanese authorities.
1/

At program exchange rates.

2/

In millions of U.S. dollars. Defined as Banque du Liban’s foreign exchange deposits abroad, foreign exchange holdings (including SDR), gold and holdings of investment grade liquid foreign currency-denominated securities, less encumbered foreign assets.

3/

Includes the decline in net borrowing of LL2380 billion on account of the gold revaluation transfer.

Attachment II. Lebanon: Monitorable Actions

Monitorable Actions for the Period March–December 2007

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1

This includes the amounts pledged at the Stockholm donor conference of August 31, 2006, as well as separately by Arab donors.

2

Out of total pledges of $7.6 billion, $5.1 billion was earmarked for the government. The rest includes money already disbursed, funds pledged to the private sector, UN agencies and NGOS, and funds previously committed.

3

For the purpose of the program, gross reserves are defined to include Lebanon Republic Eurobonds in order to align the headline number to the national definition. However, the floor on gross reserves is adjusted for any change in the holdings of Eurobonds.

4

Table 12 shows financial and external vulnerability indicators.

5

The target ceiling includes the redemption of LL2,380 billion in Treasury bills held by the central bank to be paid through the transfer of the gold revaluation gains.

6

The larger upfront reduction in the debt to GDP ratio is offset by a lower primary surplus over the medium-term due to the foregone profit transfers from the telecom operators.

7

NSSF has covered the residual financing needs of the two funds from its reserves, and by running arrears.

8

The Paris III package is assumed to contain $822 million in grants and $2.4 billion in soft loans for budget support, with an average grant element of 23 percent.

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Cover IMF Staff Country Reports
Lebanon: Use of Fund Resources: Request for Emergency Post-Conflict Assistance: Staff Report; and Press Release on the Executive Board Discussion
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 177
Publisher:
International Monetary Fund
ISBN:
9781451822717
ISSN:
1934-7685
Pages:
82
DOI:
https://doi.org/10.5089/9781451822717.002
  • Figure 1.
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    Figure 1.

    Lebanon: Real GDP and Coincident Indicator, 1994–2006

    (Annual change in percent)

  • Figure 2.
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    Figure 2.

    Lebanon: Inflation, January 2005—December 2006

    (Change in percent)

  • Figure 3.
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    Figure 3.

    Lebanon: Broad Money and Deposit Dollarization

    (January 2005-February 2007)

  • Figure 4.
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    Figure 4.

    Lebanon: International Reserves and Liquidity

    (January 2005-February 2007; in billions of U.S. dollars)

  • Figure 5.
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    Figure 5.

    Lebanon: Interest Rates

    (January 2005-January 2007; in percent)

  • Figure 6.
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    Figure 6.

    Lebanon: Eurobond and Credit Default Swaps (CDS) Spreads

    (January 2005-March 2007; in basis points)

  • Figure 7.
    View in gallery
    Figure 7.

    Lebanon: Exports and Imports

    (January 2005-December 2006; in millions of U.S. dollars)

  • Figure 8.
    View in gallery
    Figure 8.

    Lebanon: Effective Exchange Rates

    (January 2005-December 2006; 1995=100)

  • Figure 9.
    View in gallery
    Figure 9.

    Lebanon: Public Debt Sustainability

    (Public debt in percent of GDP)

Figure 1.

Lebanon: Real GDP and Coincident Indicator, 1994–2006

(Annual change in percent)
Figure 2.

Lebanon: Inflation, January 2005—December 2006

(Change in percent)
Figure 3.

Lebanon: Broad Money and Deposit Dollarization

(January 2005-February 2007)
Figure 4.

Lebanon: International Reserves and Liquidity

(January 2005-February 2007; in billions of U.S. dollars)
Figure 5.

Lebanon: Interest Rates

(January 2005-January 2007; in percent)
Figure 6.

Lebanon: Eurobond and Credit Default Swaps (CDS) Spreads

(January 2005-March 2007; in basis points)
Figure 7.

Lebanon: Exports and Imports

(January 2005-December 2006; in millions of U.S. dollars)
Figure 8.

Lebanon: Effective Exchange Rates

(January 2005-December 2006; 1995=100)
Figure 9.

Lebanon: Public Debt Sustainability

(Public debt in percent of GDP)