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Lebanon has been unable to enroll in an IMF program since the collapse in 2019. Without first achieving political reform, which would allow for the removal of the political system that currently forbids any measures that go against its interests, Lebanon will not be able to execute any pathway of economic and financial restoration.
This article was translated from Arabic.
When negotiating loan programs and agreements for structural economic change, governments frequently have concerns about the requirements set by the International Monetary Fund (IMF).
As evidenced by the recent agreement between Tunisia and the IMF in mid-October 2022, which included raising tax bills, lowering wages for public sector employees, and eliminating subsidies on basic materials, all of which sparked objections from trade unions, these conditions frequently include harsh measures at the social level.
In the context of Egypt, the final agreement reached with the IMF on December 16, 2022 included a transition to a flexible exchange rate that would cause the local currency to devalue over time. As a result, the purchasing power of Egyptians’ incomes relative to the cost of imported items decreased.
Additionally, the Egypt IMF program from years ago mandated the development of privatization initiatives as well as the gradual exodus of the military and the government from a number of economic sectors.
Due to the possibility of public unrest and resistance to the demands made, the IMF’s programs present a considerable challenge for governments engaging in negotiations with the Fund. In order to avoid any political ramifications that could endanger the stability of governance in these countries, policymakers may attempt to mitigate the social effects of the IMF’s plans throughout the course of protracted negotiations.
Lebanon and the IMF: A Unique Case
Lebanon presents a unique case in the context of negotiations with the IMF. Despite multiple attempts, the Lebanese state has failed to reach a final agreement with the Fund more than three years after the financial collapse.
Unlike other countries, the complexities of negotiations with the IMF in Lebanon are not linked to harsh social conditions imposed by the Fund, as the Lebanese state has already implemented policies harsher than those typically demanded by the IMF.
Since the collapse in 2019, Lebanon has gradually lifted subsidies on the import of fuel, food and medical supplies, in addition to most medicines. The state also refused to adjust the wages of public sector workers despite the local currency losing 97% of its value.
Additionally, the Central Bank stopped providing dollars to importers, which resulted in a correlation between the pricing of all commodities and the dollar’s value on the black market.
These measures are in line with the IMF’s customary demands, which include lowering public sector salaries, removing subsidies, discontinuing exchange rate subsidies, and cutting back on state investment spending.
As a consequence, unlike the majority of the Fund’s experiences in other nations, the Lebanese state had almost no qualms with all these requirements, therefore they were not a subject of discussion during the Fund’s negotiations with Lebanon.
The IMF’s demands, which have an impact on the political system and financial elite in Lebanon, are the biggest barrier to negotiating a final deal between Lebanon and the Fund. Despite having established a preliminary arrangement in principle with the Fund in April 2022, the Lebanese government has been unable to satisfy any of the requirements necessary to advance to the final agreement stage.
Lebanon’s name did not appear on the Executive Board of the IMF’s agenda, indicating that the Fund’s negotiations with the Lebanese state have stagnated. The files of Tunisia and Egypt were included on the agenda of the Executive Board of the IMF in late 2022 to follow up on the implementation of agreements with these countries.
Why Lebanon needs the IMF
A few weeks before announcing a default on its sovereign bonds in February 2020, the Lebanese government requested technical assistance from the IMF. This marked the start of a protracted negotiation process.
It is important to note that the amount of funding requested from the IMF does not exceed than $3 billion, which is a modest sum when compared to the estimated $73 billion in losses in the Lebanese financial system, according to estimates from the Lebanese government.
The rationale for an IMF program in Lebanon is more related to the confidence it can give the financial recovery plan than it is about the amount of funding. Restoring market stability and persuading holders of public debt bonds to reschedule debt under new terms, interests, and values hinge on this confidence.
The IMF’s program can also contribute in reviving the banking system and drawing in foreign aid and investments upon restructuring. International institutions and foreign countries have frozen most aid, loans and investments to Lebanon pending an agreement with the IMF.
As an outcome of a lack of trust in the performance of the Lebanese political class and banks, adopting a new program with the IMF has become an essential step for Lebanon to overcome its current predicament.
The IMF is viewed by the international community as an institutional oversight framework that, by allocating funding in quarterly installments and monitoring the state’s implementation of structural reforms, ensures Lebanon’s commitment to fiscal adjustment.
Obstructing Lebanon’s negotiations with the IMF
The IMF identified a number of steps that Lebanon needs to take before signing a final agreement.
However, the country has failed to comply with most of these demands as they conflict with the interests of senior politicians and influential bankers. This is due to the interconnected interests between the financial elite and the political system, which greatly affects the executive authority’s ability to implement financial reforms.
Developing a strategy for restructuring the ailing banking system in a manner that safeguards small depositors and restricts the use of public funds to bailout banks is one of the actions that the IMF has requested.
This would entail allocating the early losses in bank balance sheets to the stock and capital of bank owners who took on risks and profited from prior earnings. IMF guidelines have not, however, been followed in the implementation of this step to date.
In order to ascertain the magnitude of cumulative losses and their causes, the IMF has asked for a thorough audit of the Central Bank and commercial banks’ operating budgets. This investigation is currently pending. Its results would reveal the dubious activities that involved political figures and banks in the past and contributed to the loss of depositor funds in Lebanese banks.
Under pressure from the international community, Lebanon contracted a foreign consulting company to conduct a thorough criminal audit of the Central Bank’s budgets in September 2021. However, due to the difficulties involved in obtaining the required data, this audit has not yet been completed.
The IMF also asked for the Bank Secrecy Law to be lifted in a bid to investigate and uncover prior financial crimes, recover looted public funds, as well as to allow for the restructuring of banks after assessing their financial status.
This stipulation has not been followed through, as doing so would expose the role of Lebanese politicians in past crimes and misappropriation of public funds. It also conflicts with the objectives of Lebanese banks, who have refrained from disclosing precise data in order to prevent incurring losses in repaying depositors’ money.
If past administrations had created credible strategies to avert the stage of total collapse and created a sustainable economic model, Lebanon might have had better alternatives than the IMF. However, after falling into financial ruin, the government was left with no real options.
Over the previous three years, Lebanon has been unable to enroll in an IMF program. It is additionally improbable that Lebanon will soon enter a loan program with the IMF due to the continued conflict between the terms of the IMF and the interests of the most powerful individuals in the country.
Without any safeguards or other alternatives, the country will continue to descending downward into a never-ending spiral of financial collapse. It is evident that without first achieving political reform, which would allow for the removal of the political system that currently forbids any measures that go against its interests, Lebanon will not be able to execute any pathway of economic and financial restoration.