Lebanon received some good news from the International Monetary Fund (IMF) about its reform plans to save the country from a dire financial crunch, with Minister of Finance Ghazi Wazni saying on Friday that the IMF was ready to assist.
Lebanese Prime Minister Hassan Diab and Wazni had earlier sent a letter to the IMF asking for assistance to overcome the country’s financial crisis.
French Foreign Minister Jean-Yves Le Drian also said that France supported the Lebanese government’s economic reform plans, telling Diab in a telephone conversation that France was willing to help Lebanon find an agreement with the IMF, according to a press release from the prime minister’s office.
The statement said that Le Drian had told Diab that France would host a meeting of the International Support Group for Lebanon as soon as the Covid-19 pandemic subsides.
Before Friday’s announcement, the Association of Banks in Lebanon (ABL) said it rejected the government’s economic reform plans, describing them as “unilateral”. The announcement came amidst violent protests in several Lebanese cities and clashes between protesters and the security forces as economic conditions in the country continue to spiral down.
The Lebanese lira is in free fall, and strict policies have been put in place preventing depositors from withdrawing cash from dollar accounts.
Wazni said Lebanon had adopted flexible financial policies and that there would be no change in the official exchange rate. However, this is pegged at 1,500 lira to the US dollar when black market rates have now soared to 4,000.
Wazni said his French counterpart Bruno Le Maire fully supported the economic rescue plans and the IMF’s decision to assist Lebanon. “The plans are pivotal to transforming Lebanon’s rentier economy to a production economy,” Wazni said. “The government is working to support the production sector in industry and agriculture. We are in a real and serious crisis.”
A copy of the draft plans, leaked before they were officially adopted, said there would be no improvement in Lebanon’s economic indicators before 2024 and that production would shrink by 13.8 per cent in 2020 and 4.4 per cent in 2021 before gradually recovering and growing at 3.1 per cent in 2024.
The plans are expected to restructure Lebanon’s public finances and public debt in order to reduce the debt to GDP ratio from 176 per cent in 2019 to 103 per cent in 2024. Lebanon will also need outside funding in the coming five years of between $10 and $15 billion, the plans said.
Restructuring the public debt and the reserves of the Banque du Liban, the central bank and the commercial banks will result in haircuts to depositor accounts, the media has reported. But governor of the Banque du Liban Riyad Salameh said these would not impact some 1.715 million bank accounts containing less than five million lira or $3,000 whose value would be guaranteed.
Depositors with larger accounts will see part of their deposits converted into shares in the banks, however, and those with the largest accounts will see part of them transferred to state assets in proportion to how far they benefited from previously high interest rates. The plans will also restructure the banks and merge some of them.
According to the Lebanese media, the plans do not distinguish between medium and large depositors who earned their capital through private endeavours. Expatriates had not benefited from the policies of the Banque du Liban and other banks, which had “illegally contributed” to problems of debt-servicing and state finances, it said.
“There are great losses in the system, and we must all cooperate in shouldering them in order to relaunch our economy as soon as possible,” Diab said.
“We will try to absorb the losses in a fair way, not burdening those who did not benefit from the policies of the past. But we want contributions from the astronomical interest rates that were in place before and from those who profited from ‘financial engineering’ [controversial banking operations that the governor of the Banque du Liban has defended] and those who broke the law and stole public funds.”
“We can partially rely on the capital of banks and funds overseas, real estate and the assets of the Banque du Liban. We will continue to explore everything that could bring us back to prosperity as quickly as possible,” he added.
Diab said that Lebanon was seeking $10 billion in foreign assistance on top of the $11 billion promised at the 2018 Paris donor conference for infrastructure projects contingent on long-postponed reforms. “The plans will be used to launch talks to restructure the sovereign debt,” Diab said, noting that it would take six to nine months to show reductions in Lebanon’s international bonds worth $31 billion.
The plans predict losses in the banking system by using an exchange rate of 3,500 lira to the dollar, which is close to the current price on the black market and 57 per cent less than the official exchange rate. The losses of Lebanese firms are estimated at 241 trillion lira or $69.9 million at the lower rate of exchange, namely a loss of 177 trillion for the Banque du Liban and 64 trillion for the commercial banks.
The plans suggest the creation of a company to manage public assets that would include key state assets with the exception of oil and gas, the profits of which will increase the capital of the central bank. “Going forward, the government will shift to a flexible exchange rate,” the plans say, adding that the official exchange rate for the lira will be around 4,297 to the dollar by 2024.
As soon as the reform plans were announced on 30 April, the ABL vehemently rejected them as “unilateral” plans on which it had not been consulted.
It said the plans would further undermine trust in Lebanon on the local and international stages and that no details had been given about a timeline for their implementation. It said that the revenue and expenditure measures, and the need for IMF support, were vague and not supported by a precise schedule.
Critics have pointed to the growth assumptions in the plans and the adjustments to public finances, saying that restructuring the domestic debt would have a limited impact. There were unknown repercussions of the global Covid-19 crisis on Lebanon’s public finances, and the plans did not deal with inflationary pressures.
They added that the plans’ promises to promote social inclusion, crucial for Lebanon in its present fragile social and economic condition, needed more detail, especially regarding job retention, the alleviation of poverty and reducing inequality.
The ABL said the plans were biased against the banks, claiming that the banking sector had provided funds to the public sector without seeking to control their expenditure. It was a case of the borrower blaming the lender, the ABL said, and by punishing the banks the government was also punishing Lebanese depositors.
It said there were credible alternatives to the government’s plans, which it would be presenting soon. It concluded by saying that the plans infringed on personal property rights, which are protected by the Lebanese constitution and are a cornerstone of Lebanese society.
“Prosecuting Lebanese people for acts not in the law, then making these provisions retroactive in contradiction to all laws and customs, then embracing practices contradictory to those that guarantee the people’s right to appeal to relevant departments and the State Consultative Council, all this leads to a state of lawlessness,” the ABL stated.
“We call on the leaders of the country to reject [the plans] and hold accountable those who drafted these measures and infringed on the legal and constitutional rights on which the Lebanese state is founded,” it concluded.
*A version of this article appears in print in the 7 May, 2020 edition of Al-Ahram Weekly