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Share on GoogleIMF: Lebanon should be more resolute in tackling fiscal, economic problems
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Wed, Jun 06 2010 |
“The current environment of low global interest rates and abundant liquidity is not likely to persist indefinitely. Complacency should be avoided and a consensus built to quickly address Lebanon’s structural weaknesses and vulnerabilities is needed,” he said. “This could set the stage for extending the current growth spell and achieving a stable and long-lasting economic expansion.”
Bauer’s remarks came during a press conference at the Finance Ministry in Beirut to present the results of the discussions held between the IMF mission to Lebanon and Lebanese officials on the future of the Lebanese economy.
Bauer said that the Lebanese authorities are facing two important challenges today. “They should cautiously manage the buoyant economy in order to avoid potential overheating risks,” he said. “Moreover, they should seize on the positive economic momentum to implement a range of pending reforms.”
He said that one of the vulnerabilities facing the Lebanese economy is the high public debt. “At 148 percent of GDP at end-2009, the government’s debt is still among the highest in the world,” he said.
The high growth that has been witnessed in Lebanon during the past couple of years has led to a drop by 30 percentage points in the government’s debt-to-GDP ratio from its peak of 180 percent in 2006.
“Progress in strengthening economic institutions and addressing structural weaknesses, including important infrastructure gaps, most notably in the electricity sector, has also been limited,” he added.
On the fiscal level, Bauer did not stress on the need for fiscal impulse this year given the buoyant economy. “The medium-term framework for fiscal policy should provide room for more public investment and social spending, and substantially higher primary surpluses to decisively reduce the public-to-GDP ratio,” he said. “For that fiscal space could be created through a combination of measures to increase the quality of public spending and mobilizing additional revenues.”
Bauer underlined the importance of reducing the deficit of Electricite Du Liban, saying this was urgent. “This will require adjusting tariffs, reducing technical and non-technical losses, and improving governance,” he said. “A package of tax measures could include elements such as introducing the global income tax, taxing capital gains, broadening the VAT base by reducing exemptions and refunds, in addition to considering gradual moderate increases in VAT and corporate income tax rates, which are relatively low by international standards.”
He added that since reserves have reached a comfortable level, the monetary policy has focused on reducing interest rates to bring the deposit inflows which are very high to levels that can be naturally absorbed by the economy. “We support that policy and we think that given the interest rates reduction that already been implemented it is important to make sure that this adjustment in the deposits inflow is a smooth adjustment,” he said.
Regarding the recent rise in real estate prices, Bauer said that they require vigilance. “If credit growth accelerates further, the authorities should consider capping and gradually phasing out incentive schemes that provide exemptions to reserve requirements,” he said.
He added that public-private partnerships provide a potentially useful way to address infrastructure bottlenecks.
“However, a sound institutional framework, with strong involvement of the fiscal authorities, must be put in place to avoid possible fiscal risks.
For his part, Central Bank Governor Riad Salameh said that the IMF report assured the stability of the exchange rate of the Lebanese pound. He added that the Central Bank has a good level of foreign reserves and this helps in controlling inflation. He added that Lebanon will be witnessing an 8 percent growth this year which is the highest in the region. “This is mainly due to the sound policies that were adopted and the increase in the flow to deposits to Lebanon.”
He added that the IMF apparently does not favor reducing the interest rates at this stage in Lebanon, noting that the fund fully supported the Central Bank’s monetary policy.
Finance Minister Raya Hassan stressed the need to undertake structural reforms which will create more job opportunities. “The debt-to-GDP ratio should be reduced to a level that guarantees a good future for our economy,” she said.
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