The International Monetary Fund has reached an agreement to offer about $3 billion to Lebanon as part of a four-year deal based on a comprehensive economic reform programme, the IMF announced on Thursday.
“It’s the first step towards really going out of this crisis and we are on the right track,” prime minister Najib Mikati told The National, when asked if the accord marked the beginning of the end of the country’s economic crisis.
“We have all the necessary reform laws that they are asking for, we are going to present them soon and hopefully the parliament will look at them and God willing everything will work out,” Mr Mikati said.
The Extended Fund Arrangement (EFF) aims to “rebuild the economy, restore financial sustainability, strengthen governance and transparency, remove impediments to job-creating growth, and increase social and reconstruction spending”, the IMF said.
“This will need to be complemented by the restructuring of external public debt that will result in sufficient creditor participation to restore debt sustainability and close financing gaps,” the statement said.
The country’s public debt increased to $100bn, or about 212 per cent of GDP, in 2021. That ranks Lebanon as the country with the fourth highest debt-to-GDP ratio in the world, surpassed only by Japan, Sudan and Greece, according to the World Bank.
Lebanon had applied for a $10bn IMF bailout package in May 2020. However, talks with the lender stalled due to bickering among the various political factions in the country and a lack of consensus on the size of the debt and losses on the balance sheet of the central bank.
The agreement struck on Thursday is subject to IMF management and executive board approval, after the implementation “of all prior actions and confirmation of international partners’ financial support”, the fund said.
Lebanon is going through its worst economic crisis since the country’s independence in 1943. The country’s economy contracted about 58 per cent between 2019 and 2021, with gross domestic product plummeting to $21.8bn in 2021 from about $52bn in 2019, according to the World Bank. That is the largest contraction on a list of 193 countries.
Lebanon’s economy collapsed after it defaulted on about $31bn of Eurobonds in March 2020, with its currency sinking more than 90 per cent against the dollar on the black market and inflation rising to triple digits.
The crisis has been compounded by the Covid-19 pandemic and the August 2020 port of Beirut explosion, while the war in Ukraine is exacerbating pressures on the current account and inflation and further straining food and fuel supplies, the IMF said.
Inflation soared to an annual 215 per cent in February, marking the 20th consecutive triple-digit increase of the Central Administration of Statistics’ Consumer Price Index since July 2020. The index increased 4.31 per cent from January 2022.
“Lebanon is facing an unprecedented crisis, which has led to a dramatic economic contraction and a large increase in poverty, unemployment, and emigration,” the Washington-based fund said.
“This crisis is a manifestation of deep and persistent vulnerabilities generated by many years of unsustainable macroeconomic policies fuelling large twin deficits (fiscal and external), support for an overvalued exchange rate and an oversized financial sector, combined with severe accountability and transparency problems and lack of structural reforms.”
The economic reform plan includes improving public finances and reducing public debt through revenue-generating and administrative reform measures to ensure a more equal and transparent distribution of the tax burden.
Lebanon’s 2022 budget, part of that plan, aims to achieve a primary deficit of 4 per cent of GDP, supported by a change in imports valuation for custom and tax purposes to be done at a unified exchange rate.
Confidence in the country’s banking system and lenders who traditionally had been the backbone of the economy and helped various governments fund fiscal and current account deficits eroded as a liquidity crunch, shortage of dollars and informal capital control measures set in once the economic crisis unfolded.
The fund said the “health and viability of the financial sector will need to be restored for the country to be able to lift the existing uncertainty and provide conditions for strong economic growth”.
“Total recapitalisation needs in the banking system are very large, and losses will need to be recognised upfront and allocated, while protecting small depositors. An appropriate strategy has been designed, but its implementation requires a number of legislative changes to support it.”
Lebanon had escaped the 2008 global credit crisis relatively unscathed due to a high interest rate regime, which lured more than $1bn a month in capital flows that financed the government deficits. But the outbreak of war in neighbouring Syria in 2011, years of fiscal mismanagement, and the collapse of oil prices slowed the flow of funds to Lebanese lenders which led to negative deposit growth.
The fund called for reforms to Lebanon’s tax policy to strengthen its revenue intake.
“The authorities recognise the urgent need to initiate a multipronged reform programme to tackle these challenges, bring back confidence and put the economy back on a sustainable growth path, with stronger private sector activity and job creation,” the IMF said.
Prior to receiving the IMF board’s consideration, Lebanon’s authorities have agreed to certain measures including cabinet approval of a bank restructuring strategy; an emergency bank resolution legislation to implement the strategy; initiating an externally assisted bank-by-bank evaluation for the country’s 14 largest banks; a reformed bank secrecy law to fight corruption; a medium-term fiscal and debt restructuring strategy; and parliament approval of the 2022 budget.
“The staff-level agreement is just the first step in the process of reaching a final deal with the IMF,” said Nassib Ghobril, chief economist at Byblos Bank. “It is important that Lebanese authorities abide concretely by their stated commitment to reforms, otherwise the agreement with the IMF will not go through.”
The reform programme of Lebanese authorities is based on five key points:
- Restructuring the financial sector to restore banks’ viability and their ability to efficiently allocate resources to support the recovery;
- Implementing fiscal reforms that coupled with the proposed restructuring of external public debt will ensure debt sustainability and create space to invest in social spending, reconstruction and infrastructure;
- Reforming state-owned enterprises, particularly in the energy sector, to provide quality services without draining public resources;
- Strengthening governance, anti-corruption, and anti-money laundering/combating the financing of terrorism (AML/CFT) frameworks to enhance transparency and accountability, including by modernising the central bank legal framework and governance and accountability arrangements;
- Establishing a credible and transparent monetary and exchange rate system
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