IMF Warns of Deepening Economic Strain in Lebanon

An International Monetary Fund (IMF) mission has warned that Lebanon’s economy is facing significant challenges from the Hezbollah-Israel conflict and wider regional security developments, while commending authorities for maintaining a measure of macroeconomic stability.

An IMF team led by Ernesto Ramirez Rigo visited Beirut from September 15 to 18 to discuss Lebanon’s economic outlook and progress on key financial and economic reforms.

The IMF said economic activity is expected to contract significantly in 2026, while inflation remains in double digits and the current account deficit has widened, mainly due to higher energy costs.

The conflict has also caused extensive damage to infrastructure and housing, large-scale internal displacement and a significant deterioration in living standards among internally displaced people.

Against this backdrop, the IMF said Lebanese authorities had preserved a degree of stability through cautious fiscal and monetary policies.

The Fund welcomed recent progress in budget management and the approval of amendments to Lebanon’s Bank Resolution Law, saying the changes bring the country’s framework closer to international best practices and provide an effective framework for the resolution and liquidation of banks.

The IMF said further work is needed on the Financial Stabilization and Deposits Recovery Law to bring it in line with international standards.

It stressed that the hierarchy of claims should be respected during the banking sector restructuring process, with depositors not absorbing losses before shareholders and junior creditors.

The Fund also said the repayment proposal under the draft law should be consistent with the viability of the banking sector and the sustainability of public debt.

On public finances, the IMF said Lebanese authorities had appropriately maintained tight budget execution because of financing constraints.

Discussions during the mission focused on the draft 2027 budget, which targets a balanced position and includes measures aimed at strengthening tax compliance.

However, the IMF noted that a cabinet-approved increase in the value-added tax rate to 12 percent has yet to be implemented. The increase was originally intended to help finance higher public wages and pensions approved in February 2026.

The Fund warned that the associated personnel costs would add significant pressure to government spending and encouraged authorities to proceed with the legislative enactment of the VAT increase.

It also called for all foreign-financed spending to be comprehensively recorded in the 2027 budget, while prioritising support for internally displaced people and creating room for capital expenditure.

The IMF cautioned against further ad-hoc salary and pension increases without corresponding revenue measures, saying such measures should instead be considered within a comprehensive fiscal framework.

The mission also welcomed progress on developing Lebanon’s medium-term fiscal framework (MTFF), which it said would help guide the prioritisation and sequencing of fiscal measures.