Lebanon faces tough question in IMF bailout offer
(MENAFN- Gulf Times) In its candidacy for IMF support, Lebanon must answer a question it has eluded since the economy imploded two years ago: how should it distribute the huge losses caused by its financial collapse? So far, the answer has been bluntly simple: ordinary Lebanese have paid the price when they see savings evaporate, currency collapse, and basic commodities 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 than his predecessor in the IMF talks, in part because it is now more widely recognized politically that a deal with the IMF is the go-to route to aid.
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.
Many analysts are deeply skeptical about whether the government can undertake significant reforms, even if it can start negotiations with the IMF, or resolve issues like fuel shortages.
The World Bank has criticized Lebanon for its “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 a deal 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.”
The IMF said it had made courtesy calls with members of the new government and stood ready to engage.
The government said it would renew and expand last year’s plan, which included figures approved by the IMF. The plan made the banks angry, 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.
The finance ministry and the central bank should now work better together to agree on losses.
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. – Reuters
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