Lebanon’s economy is on an unsustainable path, requiring urgent action to restore investor confidence and shore up strained public finances, according to the International Monetary Fund.
As the most indebted Arab nation grapples with political turmoil and the impact of the war in Syria, the central bank will likely need to raise interest rates or use its foreign reserves to offset a slowdown in private-sector deposits, whose growth has helped support a ballooning public debt, the IMF said.
Lebanon will likely see its debt reach 180 per cent of gross domestic product in five years from 150 per cent in 2017, according to the Washington-based lender. For Lebanon to maintain its pegged exchange rate to the dollar, a “significant fiscal adjustment is inescapable,” it said.
The bleak assessment underlines the magnitude of politically costly decisions Lebanon must take to revive its economy. The government should improve its balance sheet by the equivalent of 5 per cent of GDP by cutting spending, raising taxes on gasoline and eliminating electricity subsidies, the IMF said. Some of the brunt from an adjustment will likely fall on the central bank which has so far adopted a myriad of financial operations to muddle through the difficulties.
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The bank “should rely on conventional interest rate policy instead of financial operations” such as higher lending costs if deposit growth remains soft, the IMF said.