Analysis: who pays? Lebanon faces tough question in IMF bailout offer


  • Skeptical analysts PM Mikati can do a lot ahead of the election
  • Goldman Sachs sees “critical obstacle” to recovery
  • Source sees momentum for IMF deal, room for compromise
  • “We desperately need dollars,” says senior politician

BEIRUT, Sep 23 (Reuters) – In its bid for IMF support, Lebanon must answer a question it has been sidestepping since the economy imploded two years ago: how to distribute the huge losses caused by its collapse financial?

So far, the answer has been bluntly simple: ordinary Lebanese have paid the price when they see savings evaporate, currency collapse, and basic goods disappear from the shelves.

When a plan was drawn up last year that identified a $ 90 billion hole in the financial system, it was shot down by banks complaining of overpaying them and by the elite. leader who had pushed Lebanon into its crisis.

Since then, Lebanon has sunk deeper into trouble without a plan or a government until its rowdy sectarian politicians end a year of bickering and agree on a new cabinet this month.

The new prime minister, billionaire tycoon Najib Mikati, and his government must recognize the scale of the losses and find a way to distribute them to keep their pledge to get help from the International Monetary Fund for economic reform.

The financial system collapsed in 2019 due to decades of corruption and waste in the state and the unsustainable way it was funded. The trigger was the slowdown in hard currency inflows into the banking system, which lent heavily to the government.

Mikati may have a better chance in talks with the IMF than her predecessor in part because there is now broader political recognition – including, it seems, within the Shiite group backed by the Iran Hezbollah – that a deal with the IMF is the go-to route to aid.

From crippling shortages of fuel and other basic commodities to a de facto “haircut” of up to 80% of the value of savings in a zombie banking system, many argue the crisis has inflicted more pain than even the most difficult IMF adjustment program imaginable.

Several reforms the IMF would likely seek, including cutting subsidies and unifying the many exchange rates in Lebanon’s chaotic monetary economy, are already becoming realities as the hard currency dries up, according to reports. political sources.

‘CRITICAL OBSTACLE’

Still, many analysts are deeply skeptical about whether the government can embark on significant reforms, even if it can start negotiations with the IMF, or resolve issues like fuel shortages.

The government was chosen by the same elite that led Lebanon into its mess and allowed it to escalate. The World Bank has criticized Lebanon for a “deliberate” lack of policy.

In addition, the government has only eight months left before elections that will concern the main parties.

The World Bank says the depression is one of the most severe since the mid-19th century: gross domestic product declined by 40% between 2018 and 2020. Even during the Lebanese civil war from 1975 to 1990, banks remained solvent and functional.

It will be difficult to overcome the first obstacle to an agreement with the IMF – agreeing on the distribution of losses -. Last year’s plan met opposition from stakeholders, including banks.

In a report, Goldman Sachs said agreement on the issue would likely be “elusive, representing a critical obstacle on the road to recovery.”

A financial source familiar with the IMF process in Lebanon said there was room for a compromise on losses and significant momentum for a deal with the IMF, which meant there was a likelihood of “a lot. higher “to reach an agreement.

While some banks still hoped their debts would evaporate by converting US dollar deposits into sterling, the source said banks were more willing to recognize the need for “proper restructuring”.

“We don’t need to look to Finland or Sweden to close an IMF program,” the source said. “We must do the minimum required, including recognizing losses in the banking sector and the central bank and agreeing to a fair distribution of those losses.”

A capital control law is also to be passed and the exchange rates unified, the source added.

READY TO COMMIT

The IMF said it had made courtesy calls with members of the new government and stood ready to engage. Read more

The government said it would renew and expand last year’s plan, which included figures approved by the IMF.

The plan angered the banks, in part because of the bail-in provisions for shareholders that would wipe out their capital. Banks have responded with their own proposals, including a $ 40 billion public asset fund to help pay off debts.

Riad Salameh, central bank governor since 1993, also dug his heels last year on losses, and lawmakers representing factions within the ruling elite have put forward figures between a quarter and half of the amount. plan.

The new Minister of Finance is Youssef Khalil, former head of the central bank.

The finance ministry and the central bank should now work better together to agree on the losses, said Alain Aoun, a senior member of the Free Patriotic Movement, which was founded by his uncle, President Michel Aoun.

“What has changed? The team has changed,” he told Reuters. “Last year some parties said ‘never touch the subsidies’, and look where we are today. Everyone is gradually surrendering to reforms, whether voluntarily or because they are forced to. “

“We are desperate to get dollars, the IMF promises aid, but conditioned to enter into a financial plan. Everyone will have to (accept) this time,” he said.

But the government faces enormous skepticism.

His political agenda gave few details on the main reforms donors are seeking, including repairing the state-run electricity sector which has depleted public funds but still barely produces electricity.

Nadim Houry, executive director of the Arab Reform Initiative, doubted the new government would seriously engage with the IMF.

“I call it the restoration government – the government that is supposed to improve the image of traditional parties ahead of the next election,” he said, claiming he would be able to spend more than $ 1 billion. dollars issued in Lebanon as part of a general allocation of IMF Special Drawing Rights.

“They are going to stabilize the country and sell this under the name of reforms.”

Additional reporting by Laila Bassam; Writing by Tom Perry; Editing by Edmund Blair

Our standards: Thomson Reuters Trust Principles.


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