For the first time in many months, 7 April brought a whiff of hope that the economic and political situation in Lebanon might improve. On Thursday, Beirut reached a “staff-level agreement” with the IMF that could clear the way for a $3 billion Extended Fund Arrangement (EFF) over four years if the government carries out a comprehensive reform programme. The agreement still awaits approval by IMF management and the Executive Board, and the required reforms need to be passed by the Lebanese cabinet and parliament must approve the required reforms that need to be implemented.
The news comes just over two years after the Banque du Liban, the Lebanese Central Bank, defaulted on paying back its massive external debt. Since then, negotiations with the IMF had stalled several times in anticipation of a permanent Lebanese government, as opposed to a caretaker one. Therefore, last week’s announcement of an agreement with the IMF, even if only a preliminary one, marked a turning point, not just economically but politically.
On the same day, several Gulf countries announced that they would return their ambassadors to Beirut, further signalling that Lebanon would once again receive the international and regional attention it needs in order to recover from its dire straits.
The agreement with the IMF requires the Lebanese government to implement a multifaceted reform plan aimed at restructuring the financial sector to enable banks to resume their functions in the domestic market with the necessary capital. It also aims to stimulate economic recovery by boosting private sector activity to generate sustainable growth and reverse the deterioration that had caused the economy to contract by 60 per cent in two years.
The plan also targets budgetary reform. In addition to trimming and reordering allocations to reduce waste, Lebanese authorities will be expected to introduce a more equitable tax system and strengthen anti-corruption and anti-money laundering frameworks. They must also focus on rebuilding foreign currency reserves and curb excessive borrowing from the Central Bank, which is what made the banking sector so vulnerable to begin with.
When the economy flourished, Lebanon had generally been able to repay its debts because it could draw on diverse resources, such as abundant direct foreign investment. However, as waves of instability rocked the region and investment opportunities in Lebanon shrank, especially after the outbreak of the war in neighbouring Syria, foreign currency influxes declined sharply.
As of 2015, the government began to rely on loans from the Banque du Liban to procure the dollars needed to import food, fuel and medicine. After the financial crisis hit in the autumn of 2019, there was no choice but to have the Central Bank foot the bill for importing these basic commodities which would otherwise not have been available due to the lack of foreign currency to pay for them. But even then, no sooner did imported commodities arrive than they quickly vanished from local markets because they were smuggled to neighbouring Syria. As a result, Central Bank reserves fell even faster, plunging from $32 billion to $12 billion in just two years.
Reforms aimed at deficit reduction are essential for restoring confidence in the Lebanese banking system and to rehabilitate the Banque du Liban as a regulator of monetary policy as opposed to debt funder.
Under the agreement with the IMF, the Lebanese government will also be expected to reform state-owned enterprises and public services. The electricity sector requires particular focus because a large portion of the allocations is squandered as the result of unsustainable energy policies. Investment in this sector needs to be redirected in ways that halt unnecessary drainage of precious resources.
One of the “key pillars” of the reform plan is strengthening governance and combating corruption. Therefore, in accordance with the IMF agreement, Lebanese lawmakers will be expected to amend the bank secrecy law to bring it in line with international standards to fight corruption and money laundering, and facilitate the investigation of financial crimes.
Another objective is the restructuring of external debt. In this regard, the agreement invokes the principle of the just distribution of the estimated $69 billion in banking sector losses. As this is one of the most controversial points, no information has been disclosed yet as to how the burden will be distributed. It is clear, however, that the 14 largest Lebanese banks will be subjected to an external evaluation of the measures they had put in place to restrict hard currency withdrawals since the beginning of the crisis.
In late March, the Lebanese parliament rejected a “capital control” bill proposed by the government on the grounds that it required that depositors should sustain most of the burden of the banking sector losses. The government is now in the process of redrafting the text, but this sensitive matter will probably remain unresolved until the above-mentioned evaluation is performed, making it possible to identify the parties responsible of the losses and to work out a just distribution of them accordingly. Still, this does not refute the fact that successive governments and the political elites that formed them were primarily to blame for the bad financial policies and behaviours that caused the drainage on hard currency reserves and shook the confidence in the banking system.
But can the current Lebanese government, which is the product of the same elites, succeed where previous governments have failed?
The government will certainly be under public scrutiny to see if it has the ability to pass and implement the required economic reforms which inherently threaten the class that benefits directly from the lack of transparency concealing monopolies on how resources are allocated and syphoned off, and enables the smuggling of imported commodities to Syria and the spiriting of depositors’ bank assets to foreign accounts.
Even presuming the best intentions, it is unlikely that the government will be able to have parliament to pass the necessary legislation before its term ends in mid-May. The political scene is very fraught at present, what with the electoral rivalries and intense polarisation ahead of the polls. This is hardly a climate conducive to the consensus-making needed to usher in the far-reaching and essential reforms the IMF requires.
If the necessary legislation is not forthcoming by the time elections are held, the reforms will have to wait until the new parliament forms a new government, because the current one will either have resigned or remained a caretaker government, in which capacity it would be unauthorised to approve a final agreement with the IMF. Forming a new government in Lebanon is no easy task. It took some 13 months to form the current cabinet.
On the other hand, the composition of the new parliament after the elections might result in a surprise to the traditional political elites if the forces of change that have emerged from the grassroots uprising manage to win a significant number of seats in the forthcoming legislature. At that point, the problem of forming a government will not be limited to the usual tugs-of-war between the familiar rivals that have long dominated the Lebanese political scene. The contest between the established and emergent political elites will add a new dynamic that could further prolong the haggling processes involved in forming a new government.
Meanwhile, news of the return of the Gulf ambassadors brought a welcome breeze from that direction as it signals a return of Saudi Arabia’s political involvement in Lebanon and an end to the diplomatic spat triggered by the remarks the former Lebanese minister of information made five months ago about the Saudi-led Arab Coalition’s intervention in Yemen. The Saudi Ambassador to Lebanon Walid Bukhari marked his return by hosting Ramadan Iftar banquets for Saudi Arabia’s friends in Beirut. Bukhari is probably preparing to back political forces opposed to the Iranian influence in Lebanon under the banner of affirming Lebanon’s Arab affiliation.
The return of the Gulf ambassadors just as Lebanon reached the preliminary agreement with the IMF is no coincidence. The approval of that agreement is not just the key to unlocking the four-year Extended Funding Arrangement, but also to obtaining grants and facilitated loans from Lebanon’s friends, foremost among which are the Gulf countries which had ceased their financial support for Lebanon some years ago. In addition to the $3 billion package from the IMF, the Banque du Liban Governor Riyadh Salameh anticipates another $15 billion from other countries and financial institutions. The message that Riyadh has delivered through the return of its ambassador is that Saudi Arabia will once again become one of Lebanon’s main supporters if the government meets the IMF’s conditions concerning reforms. But if the IMF is concerned primarily with fiscal matters, Riyadh is focused on reorienting Lebanon’s political compass and curtailing Hizbullah’s political grip on Lebanon.
At the same time, the return of the Gulf ambassadors to Lebanon coincides with a more widespread optimism generated by a broader trend to reduce regional tensions, the approaching return to the Iranian nuclear agreement with the West and a Saudi-Iranian rapprochement that has led to the recent truce in Yemen. These developments suggest that there is room for compromise in the Saudi-Iranian rivalry in Lebanon which, in turn, encourages hope that the forthcoming parliamentary elections in Lebanon will go ahead as planned, despite concerns that they might be postponed or even called off. The coalitions and alliances shaping the contours of the electoral map are nearly set and the campaigns are poised to take off. But the staff-level agreement with the IMF plus the return of the Gulf ambassadors have reassured the Lebanese that they are still on course to election day.
The hope now is that the polls will lead to a change in the make-up of the governing elites and eliminate some of the most corrupt, thereby facilitating reforms and sounder governance.
*A version of this article appears in print in the 14 April, 2022 edition of Al-Ahram Weekly.
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