The International Monetary Fund forecasts Lebanon's economy will grow by 2 percent in 2014 and a "modest 4 percent over the medium term," despite two years of violence, political paralysis and a huge refugee influx.
But with heavy pressures weighing on the economy, the IMF also said in a report published on Friday that Lebanon should "urgently strengthen policies" and its fiscal priority should be to "put public debt on a sustainable downward path".
Political jockeying and sectarian tensions have slowed or stalled action needed to tackle Lebanon's financial problems. Public sector wage strikes and widespread power cuts continue in Lebanon, causing further strain on government spending.
Lebanon's primary budget turned negative in 2012 and deteriorated further in 2013 to 141 percent of GDP as the government came under pressure to spend and economic activity dropped, the IMF report said.
It added that policy decisions, such as a VAT exemption of gasoline and a cost of living adjustment for public sector employees, had also contributed to the rising deficit.
The IMF called for salary scale adjustments to be contained with no retroactive payments, something public sector workers have been calling for in regular protests.
The Fund further said the small Mediterranean coastal country was losing competitiveness and should focus on reducing electricity subsidies. "Plans to strengthen generation capacity, switch to natural gas and increase electricity tariffs should be implemented without further delay."
Lebanon, still struggling to recover from its own 1975-1990 civil war, has found its internal rifts aggravated by the conflict in Syria, whose sectarian divisions mirror its own.
Lebanon's economic growth dropped to about 1.5 percent in 2013 from an average of eight percent a year from 2007 to 2010.
A million Syrian refugees have entered Lebanon, whose own population is four million, and rebels have moved into border regions to take refuge from forces loyal to Syrian President Bashar al-Assad.
In February, divided politicians in Lebanon ended a year-long government vacuum by forming a cabinet. But another political vacuum looms this month as Lebanese lawmakers have failed in three attempts to choose a president.
"Given the political impasse, the lack of reforms has amplified the macroeconomic imbalances. The fiscal position, in particular, has worsened, with adverse consequences for public debt," the report said.
"It is therefore important to urgently strengthen policies and make progress on key structural reforms."SHOW MORE