Thursday, October 23, 2008

IMF Praises Lebanon

The following are excerpts from a recent article on IMF comments on Lebanon. The comments have been broken down into three categories:

Global Credit Crisis
The International Monetary Fund's (IMF) senior resident representative to Lebanon praised the country's central bank ... saying the banking sector had few direct links to the current financial crisis and that Lebanon would likely prove more resilient than other emerging markets.

"The central bank did an excellent job in not exposing [itself] to risky products," Edward H. Gardner said during a presentation at the InterContinental Phoenicia Hotel which was hosted by the Lebanese Dutch Business Association.

Gardner said Lebanese banks' higher-than-average liquidity and the central bank's leadership could spare the country from the larger effects of the economic crisis that has been ravaging the US, European, and Asian markets.

However, he also noted that if booming Gulf economies were hit hard by the current crisis, Lebanon could feel the indirect effects due to its heavy reliance on jobs, remittances and foreign direct investment from oil-rich Gulf states.
IMF Aid and Lebanon's Strengths
Lebanon received its first aid package from the IMF in 2007 after the devastating 2006 war with Israel. Up to that point, the IMF and Lebanon had a purely surveillance-based relationship.

The 2007 loan was not credit-based. It was classified as Emergency Post-Conflict Assistance, which places fewer restrictions and requirements on the receiving country.

The primary focus of the package was Lebanon's spiraling national debt. In 2006, debt represented 177 percent of Lebanon's GDP, the highest debt-to-GDP ratio in the world.

Despite this massive load, Gardner said, confidence in Lebanese markets remained surprisingly high. This confidence, he added, was based on five factors: internal financing from the central bank, large remittances, no history of bank defaults, banks' maintenance of large liquidity as a buffer to defaults, and a general perception that Lebanon was too important to fail.

These factors, Gardner pointed out, make Lebanon unique in the world financial market.
More Needs to be Done
The IMF loan was tied to qualitative and quantitative targets, like decreasing the government deficit, increasing internal reserves, a government audit of Electricite du Liban (EDL), and progress toward privatizing the telecommunications sector.

"The program was very successful from the IMF point of view," Gardner said, adding that this success led to a preliminary deal on a second drawing of emergency aid, announced last week, worth $40 million.

The advantages of the IMF involvement, he added, are the target frameworks that the body provides governments and the seal of confidence that IMF lending presents to other countries that might join in giving.

At the Paris III Conference in 2007, a collection of donor countries pledged $7.6 billion in grants and loans to Lebanon. But, by June 2008, the actual disbursement of the aid, which was tied to specific political and financial benchmarks, has amounted to only $900 million.

Aside from its debt, Gardner cited EDL's fiscal failures and the stalled efforts to privatize the domestic telecommunications market as abiding concerns. "Government support to EDL is 5 percent of GDP," the IMF representative added.

As for privatization, Gardner said that what remains important is that "privatization is ready to go when market conditions are right."

"Obviously," he added, "you don't want to privatize in a market where there is no credit."

Speaking with The Daily Star after his presentation, he restated the essential question facing Lebanon's economy: whether it can capitalize on its unique ability to withstand shocks and move in the "right direction," in particular, by decreasing debt.

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