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French Version

Beirut pulls in a few good marks in cautious IMF report on economy

Political tensions still put financial outlook in negative light

The International Monetary Fund (IMF) on Monday renewed its deep concern that the tense political situation in Lebanon will spill over to dampen the country's economic performance. In a report issued under the Emergency Post-Conflict Assistance Program, the IMF said that the Lebanese government, and the Finance Ministry in particular, however, had made some progress in reducing the budget deficit despite many political difficulties.

"The political stalemate and concerns about the security situation weigh on the economic outlook for 2008. Real GDP growth is projected in the 2-3 percent range [well below potential], which implies that activity remains near the level achieved during the fourth quarter of 2007," the IMF said.

It added that inflation is likely to stay above 5 percent, given international developments.

"With lackluster growth and continued fiscal tightness, the external current account deficit relative to GDP should improve moderately. Deposit inflows are likely to remain strong, barring any unexpected worsening in the political and security conditions," the IMF said.

It added that the government has limited scope for fiscal policy actions in the absence of an active Parliament.

"As such, the tax increases envisaged in the Paris III reform agenda for 2008 have been put on hold. Still, revenue should at least grow broadly in line with nominal GDP, taking into account one-off effects in 2007," the IMF said.

"Notwithstanding pressures for increases in subsidies and the minimum wage, the government plans to maintain strict expenditure control, and expects to realize savings from a hiring freeze and a reassessment of priorities in capital spending and transfers," it said.

It added the increase in transfers to Electricte du Liban should be limited by the planned partial switch in electricity production from gas-oil to natural gas.

"As a result, the authorities should be able to keep the primary balance excluding grants relative to GDP close to its 2007 level, or even achieve a further improvement. This would keep the public debt-to-GDP ratio on a gradual downward trend and help limit vulnerabilities until political conditions permit a resumption of the Paris III fiscal reform agenda," the IMF said.

The report warned the government faces substantial financing needs in 2008.

"Expected donor support of $800 million is crucial to cover some of these needs. In addition, the government can use its foreign exchange revenues of around $1 billion a year," it said.

As for the remainder, the report said that the government should be able to rely largely on market financing, with commercial banks expected to roll over the 2008 Eurobond maturities of $2 billion.

"If the authorities' financing strategy succeeds and donor support is in line with projections, gross international reserves should increase by more than $1 billion during 2008, reflecting expected deposits from Gulf countries at the central bank," the IMF said.

But the IMF cautioned that the outlook, however, is subject to significant risks.

"So far, the region has been somewhat isolated from the slowdown in major industrial countries, but Lebanon remains vulnerable to possible changes in regional liquidity and demand, for example, if oil prices were to drop sharply. A worsening of the Lebanese political and security situation could rattle confidence and trigger a slowdown or even a reversal of deposit inflows, which would complicate the government's financing strategy and put pressure on reserves," the IMF said.

Another risk, according to the report, is that increased inflation could eventually result in rising subsidies and wages, worsening the fiscal outlook.

Beirut 08-04-2008
The Daily Star

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