IMF, donors pledge to assist Lebanon

• Author: Axel Schimmelpfennig
• Position: IMF Middle East and Central Asia Department
• Pages: 101-113

Page 101

In early 2006, poised for economic recovery, Lebanon outlined reforms to reduce its debt and financial vulnerabilities. But a conflict with Israel in July has made achievement of these goals difficult and forced the government to adapt its strategy. In 2006, the overall fiscal deficit widened, partly to accommodate reconstruction spending. To aid Lebanon in its recovery, the international community has pledged $7.6 billion in grants and loans, and the IMF has approved a $77 million loan in the form of Emergency Post-Conflict Assistance.

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Lebanon navigates difficult waters

In early 2006, the Lebanese government outlined an ambitious reform program to reduce the country's large debt and financial vulnerabilities. The timing was opportune because the economy looked poised for a strong recovery.

However, the July 2006 conflict with Israel dashed hopes of high growth and forced the government to adapt its reform strategy to the postconflict environment. Donors endorsed the government's revised agenda, presented at the Paris III conference on January 25, 2007, and on April 9, the IMF Executive Board approved a $77 million loan to Lebanon in the form of Emergency Post-Conflict Assistance, as part of a concerted international effort to assist the country.

The five-week conflict with Israel and the month-long blockade that followed inflicted a heavy human and economic toll on Lebanon. Housing and infrastructure suffered significant damage, many professionals left the country, and economic activity came to a near standstill, with tourism being particularly hard hit. As a result, real GDP in 2006 is estimated to have been flat. Financial markets weathered the crisis surprisingly well, owing to the central bank's skillful management of pressures, the banking system's strong liquidity position, and the timely deposit with the central bank of $1 billion by Saudi Arabia and $500 million by Kuwait. Cumulative deposit outflows of $3 billion during the conflict were recouped by year-end, but deposit dollarization and Eurobond spreads have remained larger than before the conflict.

The conflict has exacerbated Lebanon's challenges in reducing its debt and financial vulnerabilities. The overall fiscal deficit widened in 2006, partly because of conflict-related revenue shortfalls and the need to accommodate relief and reconstruction spending. Donors committed $1.7 billion to...