In its bid for IMF support, Lebanon must address a question it has evaded since the economy imploded two years ago: how should it distribute the huge losses caused by its financial collapse? Till now, the answer has been brutally simple: ordinary Lebanese have paid the price as they watched savings evaporate, the currency crumble and basic goods disappear from the shelves.
When a plan was drawn up last year that identified a $90bn hole in the financial system, it was shot down by banks which complained it made them foot too much of the bill and by the ruling elite who had driven Lebanon into its crisis.
Since then, Lebanon has sunk deeper into trouble with no plan and no government until its fractious sectarian politicians ended a year of bickering and agreed a new cabinet this month.
The new prime minister, billionaire tycoon Najib Mikati, and his government need to acknowledge the scale of losses and work out how to share them out to deliver on a promise to secure International Monetary Fund assistance with economic reforms.
The financial system collapsed in 2019 because of decades of corruption and waste in the state and the unsustainable way it was financed.
The trigger was slowing inflows of hard currency into the banking system, which lent heavily to the government.
Mikati may have a better shot in IMF talks than his predecessor partly because there is now broader political recognition that an IMF deal is the inescapable path to aid.
Several reforms the IMF would likely seek, including cutting subsidies and unifying the numerous exchange rates in Lebanon’s chaotic cash economy, are already becoming realities as hard currency dries up.
Many analysts are deeply sceptical about whether the government can embark on significant reforms, even if it can start IMF negotiations, or fix problems like the fuel shortage.
The World Bank has criticised Lebanon for “a deliberate” lack of policy.
Moreover, the government has just eight months before elections that will preoccupy the main parties.
The World Bank says the depression is one of the most severe since the mid-19th century: gross domestic product shrank by 40% between 2018 and 2020. Even during Lebanon’s 1975-1990 civil war, the banks remained solvent and functional.
Clearing the first hurdle to an IMF deal - agreeing on the distribution of losses - will be tough.
Last year’s plan encountered opposition from stakeholders including the banks.
In a report, Goldman Sachs said reaching an agreement on the issue would likely “prove difficult to achieve, representing a critical obstacle along the path to recovery”.
The IMF has said it has had courtesy calls with members of the new government and stands ready to engage.
The government has said it will renew and develop last year’s plan, which included figures endorsed by the IMF. That plan had enraged the banks, partly because of provisions for a shareholder bail-in that would wipe out their capital. The banks countered with their own proposals including a $40bn state asset fund to help settle debts.
The finance ministry and central bank are now expected to work better together to agree on the losses.
But the government faces enormous scepticism. Its policy programme gave scant detail on major reforms sought by donors, including fixing the state-run electricity sector which has drained the public purse yet still produces barely any power. – Reuters
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