IMF sounds the alarm on worsening economy in Lebanon

Delays in financial sector restructuring cost depositors $10 billion since 2020
IMF sounds the alarm on worsening economy in Lebanon
Lebanon economic crisis

The International Monetary Fund (IMF) has painted a bleak picture of Lebanon and offered frightening figures for the future of the economy if officials in the country continue to deal with the complex economic crisis the way they do today.

At the conclusion of the Article IV consultations, the IMF Executive Board says that Lebanon is facing an unprecedented sovereign financial and monetary crisis that has been going on for more than 3 years.

Since the start of the crisis, the economy has shrunk by nearly 40 percent and the Lebanese pound has lost more than 98 percent of its value. Inflation has hit unprecedented levels and the central bank has lost two-thirds of its foreign exchange reserves.

“Lebanon’s public debt is expected to rise to 550 percent of GDP by 2027 if the status quo continues,” it said.

While it pointed out that the economy witnessed some stability in 2022, the IMF stressed that the country’s economy is still suffering from a severe recession, noting that the significant deterioration in the exchange rate during the first quarter of 2023 increased the dollarization of cash, and accelerated as a result of the pace of inflation to reach 270 percent in April 2023.

Read: Lebanon’s banking sector in shambles amidst worst crisis

The IMF said in a statement that “Lebanon’s economic crisis has been exacerbated by the failure to take political measures and the refusal to proceed with reforms,” pointing out that “personal interests prevent reforms.”

“The delay in restructuring the financial sector in Lebanon has cost depositors $10 billion since 2020,” it said, calling for prior measures to be taken to confront the huge losses, stressing the need to provide maximum protection for small depositors. The IMF noted that the use of public resources should be limited and commensurate with the goal of debt sustainability, and emphasized the need to address the weaknesses of the Bank Secrecy Act and strengthen the institutional framework of the Central Bank.

“The continuation of the status quo represents the greatest risk, and confidence levels will remain low, monetary dollarization of the economy will increase if reforms continue to be postponed, and the exchange rate will continue to decline to keep inflation rates high,” it said.

The IMF explained that economic activity will shift to informal sectors, which will make it more difficult to collect fiscal revenues, and the Central Bank, which is burdened by financial losses and loss of confidence, will continue to squander its external reserves, while banks will not be able to play their important role in providing credit. It said real growth will continue to slow, expecting the state’s ability to provide services to be limited, as low revenues and lack of financing will increase pressure on expenditures, and social conditions will become more fragile over time.

It pointed out that “the reform measures fell short of expectations and did not adhere to what we advised.” The decisive implementation of a comprehensive economic recovery plan would progressively and steadily reduce imbalances, form a policy pillar to help restore confidence and facilitate a return to growth.

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