The International Monetary Fund (IMF) forecasts Lebanon's economy will grow by two per cent in 2014 and a "modest 4 per cent 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 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 per cent of GDP as the government came under pressure to spend and economic activity dropped, said the IMF report.

The report pointed out that policy decisions, such as a VAT exemption of petrol 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. It further said the country was losing competitiveness and should focus on reducing electricity subsidies.

"Plans to strengthen generation capacity, switch to natural gas and increase in electricity tariffs should be implemented without further delay," it stated.

Lebanon's economic growth dropped to about 1.5 per cent in 2013 from an average of 8 per cent a year from 2007 to 2010.

In February, politicians ended a year-long government vacuum by forming a cabinet. But another political vacuum looms this month as Lebanese legislators 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.-Reuters