BEIRUT: The International Monetary Fund (IMF) urged the new Lebanese government to implement the remaining conditions of Paris III donor conference in order to reduce the public debt and overcome all the negative effects of the global credit crunch. These remarks came in a report by the IMF’s Emergency Post-Conflict Assistance (EPCA) which assessed the Lebanese government’s efforts to tackle the fiscal deficit.
“The new government should strive to quickly restore the fiscal consolidation agenda set out under Paris III. Further postponement of this agenda would risk seriously undermining its credibility,” the report said.
It added that top priorities include a reduction in the need for budgetary transfers to Electricité du Liban (EDL) and an increase in the VAT rate.
In addition, the authorities should work toward decisive structural reform in the energy sector to spur growth and toward the privatization of the two mobile phone providers once market conditions allow.
The IMF said that with continued fiscal discipline, the government should be able to obtain the necessary financing from the market during 2009.
“With the successful Eurobond exchange last March and strong commercial bank deposit inflows, financing conditions remain broadly favorable. Under the baseline fiscal policy plans, gross financing needs for the government in the second half of the year would amount to around LL 9.7 trillion, of which LL 1.2 trillion ($795 million) are amortization of foreign currency debt,” the report said.
Under staff’s baseline scenario – which assumes deposit growth to moderate to 10 percent by end-2009 – sufficient market financing would be available for the government during the remainder of this year, both in Lebanese pounds and in US dollars, even if there is little rollover by foreign private investors.
“Nonetheless, the global recession and the still impaired international financial market conditions continue to pose downside risks to government financing,” the IMF said.
The IMF added that there is a need for the Central Bank to temporarily absorb government paper from the secondary market, including from international investors, in the first quarter has shown that Lebanon’s financing conditions have not been completely decoupled from the global financial market environment.
Moreover, a pronounced slowdown in commercial bank deposit growth, which cannot be ruled out if global conditions deteriorate further, could tighten financing conditions in the period ahead, particularly if fiscal discipline were relaxed further.
“To minimize these risks, the government should contain financing needs through strict expenditure control,” the report said.
Moreover, contingency plans for the case of financing shortfalls should be updated in line with evolving conditions, including a combination of (i) further fiscal adjustment, (ii) efforts to mobilize additional donor support, (iii) temporarily lower international reserves accumulation, and (iv) higher interest rates.
It added that monetary policy should remain cautious in the near term, but following the formation of the next government, there could be room for reducing interest rates. – The Daily Star