Lebanese officialdom is hailing the April 7 preliminary loan deal with the International Monetary Fund (IMF) as a major breakthrough. After seven months of negotiations, the IMF announced that it would lend Lebanon $3 billion USD to resolve its ongoing financial crisis, now steadily approaching its fourth year. The term of the loan –– when and if it happens –– will be 46-months. It will greatly serve the interests of Prime Minister and tycoon Najib Mikati, who came to power last September promising to push IMF talks forward. The credit is also music to the ears of the country’s octogenarian president Michel Aoun, whose term ends in next October and who is desperate for a success story before leaving office.
Deputy Prime Minister Saadeh al-Shami raised eyebrows on April 5 by announcing that both the state and its Central Bank were “bankrupt,” a terrible way to end the Aoun era. Aoun and his son-in-law Gibran Bassil are blamed for most of Lebanon’s economic woes, including the collapse of the Lebanese lira and the meltdown of the country’s once-thriving banking sector.
It might be too early for them to rejoice, however, due to a Catch-22 in the IMF loan.
For starters, the $3 billion USD loan is a mere fraction of what Lebanon had originally asked for: no less than $9-10 billion USD. Secondly, the loan is not final and still needs to be approved by the IMF board. It will not see the light of day unless the Lebanese government takes a series of deep, serious, and painful reforms. These measures include floating its exchange rate, monitoring future government spending, revamping the electricity sector, combating corruption in the public sector, permitting external evaluation of the country’s 14 major banks, and introducing two laws, one for capital control and another for banking secrecy.
$3 billion USD loan is a mere fraction of what Lebanon had originally asked for.
These conditions are very hard to meet, Mounir Younis, a ranking Lebanese economic journalist, told Inside Arabia. If they were met, however, then they would “dismantle the network of political and financial interests, and it might open the door for accountability.”
Ukraine War Effects
Officially, the Central Bank exchange rate still stands at 1,507 Lebanese Pounds (LP) to the American dollar. Yet on the black market, it’s now trading anywhere between 24,000-25,000 LP. As recently as October 2019, the Central Bank’s exchange rate had stood at 1,500 LP to the dollar, a rate preserved since the early 1990s. The Central Bank fears that currency liberation will lead to a hike in prices at a time when food and fuel expenses are already on the rise due to the Ukraine War.
Lebanon imports 96 percent of its wheat from Ukraine and Russia, and has enough at its storehouses to last until early summer. The war took Lebanon by surprise, having failed to secure alternative supply chains or to strengthen its wheat reserves. As a troubleshooting measure the Mikati government has gone for smaller bread bundles, hoping that will save its reserves, reducing bundle weight from 1.75 grams to 1.125 grams, while increasing their price by 550%, from 2,000 LP to 13,000 LP (for family-size bundles).
The IMF conditions also require Lebanon to reach an agreement with international creditors on how to settle the country’s external foreign debt after Lebanon announced its default in March 2020. That decision was taken to save what remained of the Central Bank’s thin reserves to buy wheat, fuel, and medicine.
The IMF conditions require Lebanon to reach an agreement with international creditors.
Lebanon needs the money to pay for many things, and to restore its credibility among international investors. Non-military needs of the Lebanese Army, including medicine and insurance for soldiers and officers, cost the state $100 million USD annually. Other expenses include wheat importation, salaries for the public sector, medicine, gasoline, and heating fuel.
These expenses, of course, do not include rebuilding what was destroyed of Beirut by the port explosion –– also known as the “Beirut Blast” –– on August 4, 2020, which tore down half the city, killed over 200 citizens, and displaced hundreds of thousands. According to the World Bank, fixing that damage alone will cost anywhere between $3.8-4.6 billion USD.
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Donors at the Cedar Conference, an international donors meeting held in France in April 2018, had agreed to provide Lebanon with $11 billion USD. However, the pledge came with a series of conditions that then-Prime Minister Saad al-Hariri simply could not meet. Among other things, Hariri was required to reform the public sector, combat corruption, and clip the wings of Hezbollah.
The subsequent successful talks with the IMF took off after Lebanon had lost faith in unblocking that $11 billion pledge. Stalled at first by the resignation of Prime Minister Hassan Diab, in light of the Beirut explosion in August 2020, they resumed under Mikati in September 2021. Days after assuming office, Mikati secured a tiny IMF loan worth $1.235 billion USD, but its effects did not trickle down through society, but only helped improve the exchange rate, albeit briefly.
The collapse of Lebanon’s banking sector has plunged 75 percent of Lebanon’s six million residents into poverty (including 1 million Syrian refugees). Many had their razor-thin deposits stored in American dollars, which have now been locked by banks due to a shortage of foreign currency, with no indication as to when their funds might be released. Depositors were allowed to withdraw their savings in small amounts, but only in Lebanese currency, which lost its value, resulting in major inflation. In 2021, Lebanon’s inflation was estimated at a whopping 145 percent.
The collapse of Lebanon’s banking sector has plunged 75 percent of Lebanon’s six million residents into poverty.
Lebanon’s gross domestic product (GDP) collapsed from $52 billion in 2019 to $22 billion in 2021. The price of basic goods has gone through the roof, affecting the quality and quantity of Lebanese households’ shopping carts. On top of that, the government imposed a stringent COVID-19 lockdown, which combined with a chronic electricity problem(resulting in no more than 1-2 hours of power per day), forced those with financial means to switch to diesel generators, while those with limited means did without. The price of diesel was already too high for most families, now selling at 331,000 LP/gallon –– about half the monthly salary of an ordinary Lebanese citizen.
On March 30, the Mikati cabinet approved a capital control draft law. While it still needs to be approved by parliament before its term ends on May 21, the draft sets terms and conditions for bank withdrawals in Lebanese pounds and foreign currency.
“The Capital Control Law should have been passed when the crisis started two and a half years ago,” Younis told Inside Arabia. Such a measure could have preserved what remained of the country’s foreign currency, he suggested, but delaying it until today only gave “politicians and influential people time to smuggle their money outside the country, at the expense of ordinary depositors who were banned from wiring their savings and forced to withdraw them in ‘mediocre’ sums.” Director of Public Finance Alain Bifani accused bankers in July 2020 of smuggling as much as $6 billion USD out of the country since October 2019.
The new draft law allows withdrawal of only up to $1,000 USD or its equivalent in Lebanese currency, with no provision for when and how depositor money will be restored in full.
Whether the Capital Control law will see the light of day is yet uncertain, given the significant conditions imposed by the IMF. Too much is at stake for Lebanon’s political elite, which is intertwined with the banking moguls. So far, all frontline politicians have expressed a desire to meet the IMF conditions, but that might be easier said than done.