Beirut, 31 March 2022 (TDI): A senior official of the Lebanese government revealed that Lebanon is in talks with the International Monetary Fund to sign a deal.
This would be a progressive step to draw a line under one of the world’s worst financial crises in over a century. The economy is on the hook of hyperinflation with the currency in freefall after the government defaulted on over $30 billion in international debt.
According to Deputy Prime Minister Saadeh Al Shami, as important legislation moves through parliament, Lebanese officials are elatedly hopeful that they will be able to achieve a staff-level deal with the Washington-based lender before the ‘May elections’.
An IMF delegation is in Beirut. Lebanese authorities hope to conclude the way forward for disbursement of up to $5 billion in aid by signing the ostensible Memorandum of Economic and Financial Policies.
It could unlock $11 billion in other financial commitments made to Lebanon in the past few years. Deputy Prime Minister is heading the Lebanese side in the negotiations and stated that they are working toward reaching an agreement with the IMF as soon as possible.
At last, the success of Lebanon in achieving a lifeline is still related to the passage of indispensable reforms in the face of a menacing crisis that has left its financial system with an estimated $69 billion in losses.
The negotiations have taken on new urgency, with the country’s foreign reserves depleting by more than a third in a year to below $12 billion, as it braces for another inflation spike from the rise in food and energy prices.
However, Lebanon’s track record of procrastination and dithering in the face of crises may pose a risk to any deal. The IMF refrained to comment on the status of discussions with Lebanon or the expected timeline for reaching an agreement.
According to IMF Spokesperson, Gerry Rice, the fund is still “closely engaged” with Lebanese authorities, and “discussions are progressing well.”
In the case of Lebanon, an agreement would provide a key support network for a government that has allowed its decades-long currency peg to unravel as dollar inflows dwindled in 2019.
The banking system has been in crisis ever since, with de-facto capital controls in place but without official support.
After being declared a defaulter Lebanon began bailout talks with the IMF and conscripted a plan to streamline its entire debt stock of more than $90 billion, which would have largely wiped out the capital of the country’s banks.
The negotiations came to a halt as the country’s major debt holders, local lenders, and the central bank, lobbied for a different slant to assessing and distributing the cumulative losses.
The government, led by Prime Minister Najib Mikati is in a race against time to get a bailout because it wants to have drafted the laws and reforms ready for the newly elected parliament to pass.
If it falters again, the elections would yield a new cabinet and risk further delays. According to Marwan Barakat, Chief Economist at Bank Audi, without a deal, Lebanon is on the brink of the incessant threat of an even more precipitous economic decline this year.
Further devaluation of the currency is being expected after it has already lost 90% of its value. One of the IMF’s key demands is a ‘capital controls law’ that standardizes the withdrawals, payments, and transfers abroad along with a ‘reform plan’ for the energy sector and the state budget of 2022.
The government has already approved a proposal to restructure its loss-making energy firm. It plans to bring a draft bill on establishing official capital controls to parliament for approval.
An economic recovery programme is also in the pipeline, which would assist in addressing $69 billion in financial sector losses. Banks previously rejected the notion of a deposit haircut.
They asked that the sovereign pay its debt to the Central Bank, in exchange for reimbursement of a portion of the $80 billion owed to commercial lenders.
As the economy continues to deteriorate, the Association of Banks in Lebanon, an industry lobbying body, is highly probable to take a different tack.
Lenders strive to adhere to Central Bank directions to pay depositors while also under increasing pressure from local and international courts to cover consumer liabilities from their limited foreign currency reserve.
Deputy Prime Minister Saadeh Al Shami said; “I understand where everybody stands on what should be done to get out of the crisis, but there is a realization that things can’t continue like this and we should come together for the sake of the country.”