24/06/2018 08:40 AST

Lebanon needs “immediate and substantial” fiscal adjustments to improve its public debt, which has reached more than 150 per cent of its gross domestic product last year, the International Monetary Fund said.

The country should increase its value-added tax rates, gradually cut electricity subsidies and rein in public wages, the IMF’s executive directors said in a statement on June 22.

“A well-defined fiscal strategy, including a combination of revenue and spending measures, amounting to about 5 percentage points of GDP is ambitious but necessary over medium-term to stabilise public debt and place it on a declining path,” the IMF said in a statement.

Lebanon’s debt to GDP ratio is the third-largest in the world. Its economy has been weakened by the ongoing war in neighbouring Syria as an influx of refugees has diminished growth, strained public infrastructure and stretched its finances.

The fiscal deficit is expected to increase in 2018 from a year ago, contributing to a further increase in the country’s already high public debt, the IMF said. The fund reiterated estimates of low economic growth of 1 to 1.5 per cent in 2017 and 2018. The main drivers of growth, real estate and construction, remain subdued and a strong rebound is unlikely soon, it said.

“Going forward, under current policies growth is projected to gradually increase towards 3 per cent over the medium term,” the statement said. Prime minister-designate Saad Hariri has been appointed to form a government following the May parliamentary elections - the first to be held since 2009 - and has emphasised the importance of proceeding with long-delayed economic reforms.

In April, donors from various countries pledged at the Cedre investment conference in Paris to provide Lebanon with over $11 billion in soft loans to mainly fund infrastructure projects.

The pledges were linked to reforms, which include lowering the fiscal deficit by 1 percentage point annually over five years among other measures.

The IMF encouraged Lebanon’s authorities to reduce financial sector vulnerabilities by strengthening buffers and taking steps to address rising credit risks.

It also urged authorities to push forward with structural reforms, improve governance and reduce corruption. Separately, credit rating agency Moody’s said on Friday that Lebanon’s interest-to-revenue ratio was the highest among all the countries it rated, reaching 42.9 per cent.

"Combined with an average term to maturity of about five years, this underscores the sovereign's very high sensitivity to further interest rate rises,” said Elisa Parisi-Capone, a Moody's senior analyst, said.

Moody’s, which rates Lebanon B3 with a stable outlook, had a more positive view than the IMF of the country’s economic growth. It said the economy grew 1.9 per cent last year and predicts it will expand by 2.5 per cent in 2018 and 3 per cent next year.

Moody’s based its outlook on greater economic policy coordination, the winding down of the open conflict in Syria and the inflow of donor funds from the Paris conference.

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