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Lebanon: IMF lays out requirements for new deal

Daniel Richards - MENA Economist
Published Date: 11 April 2022

 

News out of Lebanon last week regarding the prospect of an IMF deal was the first positive development in months as the authorities have struggled to stop the country’s downward economic spiral. However, while the announcement was certainly a step in the right direction, the IMF’s plan laid out a series of measures that the Lebanese government must take in order to secure its funding assistance. None of these action points were particular surprises as many of the necessary steps Lebanon must take in order to secure the support of the IMF and other international and bilateral partners have long been clear. What has been lacking to date has been the political wherewithal to implement them, and while having the prospect of an IMF deal laid out in writing should help focus government hearts and minds, the inherent challenges in the political system mean that further periods of political impasse and little progress on the economic front remain a strong possibility.

Lebanon’s economy has been in freefall since it defaulted on its international debt in March 2020. This was followed by the pandemic crisis, the Beirut port blast, political instability, and skyrocketing inflation as the currency has collapsed on the parallel market. As we wrote in January (see Lebanon faces a tough start to 2022), we expected real GDP growth to turn positive once more this year with an expansion of 2.9% but this was due largely to base effects following a parlous several years rather than any particular improvement in the outlook. An IMF deal would offer substantial upside risk to our projections, but the IMF statement has made clear the challenge still ahead in this regard, especially as parliamentary elections scheduled for May impose a short timeline before another potential bout of stasis as post-vote horse-trading ensues.

The IMF’s statement laid out a list of eight action points the government must implement before a deal is reached. These largely revolve around the troubled financial system, and how to resolve the issue of who shoulders the burden of the massive losses that have been incurred over the past several years. The first item on the list is a ‘bank restructuring strategy that recognises and addresses upfront the large losses in the sector, while protecting small depositors and limiting recourse to public resources’, with many of the other points aimed at further repairing the sector.

Lebanon CPI inflation, % y/y

Source: Bloomberg, Emirates NBD Research

The final key action point on the list is the unification of the exchange rate and the imposition of capital controls, an issue that has been being debated by lawmakers for some weeks. A draft capital controls law was approved by cabinet in late March but is yet to be signed off by parliament. Some level of exchange rate stability would be a welcome step for ordinary Lebanese, who have seen the value of the currency fall to LBP 24,150/USD on the parallel market, compared to LBP 1,507/USD at the official rate. This has led to an average inflation rate of 125.9% y/y since January 2020. The February print was 214.6%, down from 239.7% in January, but the rise in global wheat prices since the Russian invasion of Ukraine will likely have pushed price growth higher once again in March.

Whether or not the government manages to implement the IMF’s required steps prior to May elections, the public and concrete nature of the requirements will likely lead to a renewed sense of determination by the Lebanese authorities to secure the Fund’s support. If a programme is started, according to the IMF’s statement, it would include restructuring of the financial sector, fiscal reforms, the reform of state-owned enterprises (especially in the power sector, where the state energy provider EdL, has been aa particular drain on resources), strengthening governance and anti-corruption bodies, and ‘establishing a credible and transparent monetary and exchange rate system.’ With the IMF’s support in these endeavours – both financial and through its expertise – the likelihood is that other funding and support would also become available for Lebanon, such as the CEDRE funding pledged in Paris in 2019.