Lebanon and the IMF: It's not you, it's me - A long distance relationship between Lebanon and the IMF

Opinion Analysis by Cibelle Korban, Staff Writer

March 10th, 2021

Lebanon and the International Monetary Fund (IMF) have had a long distance on-off relationship for over decades where the IMF continues to support Lebanon throughout all of its ups, downs, and turmoil- even through Lebanon’s toxic relationship with its parliament members. It was not until last year when the IMF decided to put its foot on the ground, threaten Lebanon to cut off all their unethical ties with its politicians, and work towards putting the effort to salvage their relationship with the IMF by implementing the necessary social, economic, and financial reforms to be able to benefit from IMF’s monetary proposal to remove Lebanon from its self-induced turmoil one last time. 

Lebanon began negotiations with the IMF back in May 2020 in an attempt to save its fast-sinking economy that has not witnessed such a massive economic collapse since the end of its fifteen-year civil war back in 1990. On one hand, the Lebanese government is in the process of ongoing negotiations with the IMF to develop and implement a monetary rescue plan that defends depositors’ interests and prevents the ongoing currency devaluation that has brought upon this massive economic turmoil. With the Lebanese lira recording more than 10,000 pounds to the dollar in the black market, that is the sole source of foreign currency for importers, inflation records 56.5% in just one year into the economic crisis along with a decline in Lebanon’s GDP. That being said, it is evident that the IMF is Lebanon’s one and only choice to inject capital and mobilize massive aid, but Lebanon refuses to pay the price and continues to be involved in its three-way relationship with the IMF and its politicians. 

Talks between the IMF and Lebanon over an initial 10-billion-dollar bailout have been snagged by disputes between the government and central bank over the scale of losses in the banking system. The IMF is reporting more than 90 billion-dollar losses at Lebanon’s central bank, while banks and lawmakers say it is half that size. Several current and former Lebanese officials, diplomats, international officials, economists, and analysts agreed that talks with the IMF to rescue Lebanon from an economic crisis are going nowhere. Meanwhile, time is running out and two members of Lebanon’s negotiating team with the IMF have quit in a month, over attempts to massage huge financial losses set out in the government plan. 

Ultimately, the country is bankrupt, and is not going to be able to service all of its vast debt, much of which is held by its central bank and local lenders. But no one has come up with an agreed strategy to share out the losses among bank depositors, shareholders, foreign bondholders, and the state. Lebanon must also tackle the cause of the problem: unsustainable government spending handed out by politicians to reward their supporters. The inflated public payroll and its costly pensions will have to be cut. First on almost everyone’s list is Electricite du Liban (EDL), the state power utility, which incurs losses of $2 billion a year. Customs, now under party fiefdom, must be placed under regulatory authority through a single treasury account set up for expenditures and revenues at the Ministry of Finance and exchange rates must be unified. 

Since October, depositors have been largely denied access to their dollar accounts. About three quarters of all deposits are in dollars and the central bank and successive governments have used the banking system to finance the state, in what critics say is a national equivalent to a Ponzi scheme. The Lebanese pound has lost 80% of its value since mass protests against the sectarian ruling oligarchy erupted last October. The social consequences have been terrible. Lebanon’s middle class is sinking. The World Bank estimated in 2019 that some 48% of Lebanese lived below the poverty line. Food prices have doubled, and unemployment has forced many onto charity and food banks. And if the state runs out of the dollars it has been spending to subsidize bread, medicine and fuel – as it must sooner or later without foreign aid – Lebanon will face mass hunger.

The country has failed to initiate the necessary reforms that were required by donors in order to receive international aid. Now, foreign governments and lending agencies have warned about cutting off Lebanon if it continues to behave this way and unless reforms are implemented across a variety of sectors – a typical scenario of authoritative parents scolding their misbehaving child in his/her adolescent years. However, in that scenario, the child actually grows up, learns, and changes. 

Today, the situation in Lebanon is crystal clear. Lebanon is nowhere near an investment spree as the banks continue to tell us sweet lies that our dollars are still present but can only be used in Lebanon. It is up to the state to play a pivotal role in this systematic crisis and aim to clean up banks and institutions to enable them to properly finance public sectors. However, the central bank believes that it will eventually repay all deposits that banks have placed with it through seigniorage revenues that is the revenue from printing out more LBP currency. The battle is not heavily focused on the financial losses incurred but more towards who is to blame and handle this financial burden. The government states that banks in Lebanon have been heavily compensated for their risk in investing in sovereign debt since 1997 and they should handle the losses. These same banks state that they were victims of a failing economic state and call on the government to use its assets to reduce these losses. 

These negotiations have only begun and are forecasted to last for months and even years if no action is to be taken by the Lebanese state to recuperate its losses and admit their monetary wrongdoings. However, by the time this happens, the banking system would have eventually collapsed, the lira devaluated, Lebanese impoverished, and others immigrated.

References

https://www.imf.org/en/Countries/LBN

Abdo, N., Abed, D., & Ayoub, B. (2020). The IMF and Lebanon: The long road ahead–An assessment of how Lebanon’s economy may be stabilized while battling a triple crisis and recovering from a deadly blast.