Lebanon's Challenge: Reforming When Times Are Improving

Political stability and growth-enhancing policies are needed to sustain expansion

Reducing the country’s high debt remains the medium-term priority

Thriving financial sector will need continued strong regulation, supervision

In its annual health check of the Lebanese economy, the IMF found that domestic economic and financial conditions remain favorable, possibly more so than at any point since the civil war ended in 1990. After two years of relative political stability, the country has shown an exceptional resilience in the face of the global financial crisis and a capacity to rebound and thrive. Led by a dynamic private sector, Lebanon grew an estimated 9 percent in 2009 and is projected to grow by 8 percent in 2010, according to the IMF assessment.

Every year, the IMF conducts reviews of its member countries’ economies. The analysis is subsequently discussed by the IMF’s 24-member Executive Board.

Sustaining the growth momentum

To sustain the current rebound in growth and to achieve durable job creation, a major effort is needed to upgrade the country’s infrastructure (mainly electricity and water supply, telecommunications, and transport) and improve the business environment. Growth is currently concentrated in a few sectors—retail trade, tourism services, and construction—in and around Beirut, the capital. To achieve more widespread and durable growth, electricity and water must be provided around the clock; energy, telecommunication, and transportation costs reduced; and internet services improved.

But the government will need to reconcile plans for a substantial increase in infrastructure investments with the need to maintain macroeconomic stability and reduce the country’s debt burden. While significantly reduced in recent years, Lebanon’s public debt—at about 148 percent of GDP—still ranks among the highest in the world and drains about half of the annual budget revenues in interest payments, leaving little room for productive public spending (see Chart 1). The need to periodically refinance this large stock of debt is a source of vulnerability, despite the country’s dedicated and resilient investor base.

A determined strategy to reduce the debt-to-GDP ratio is thus essential, the IMF said. Such a strategy should not rely solely on economic growth but also focus on creating fiscal space to reduce the deficit while increasing social spending and public investment in infrastructure. This will require increasing tax...