As Lebanon restarts IMF talks, experts fear needed reforms won't come

As Lebanon restarts talks with the International Monetary Fund to address its dire economic crisis, analysts warn that political pressure from the country’s international donors could lead to a deal with far fewer economic reforms than IMF demands — thereby emboldening Lebanon’s political elites and exacerbating inequality. Donors have long demanded that Lebanon reach a deal with IMF before they’ll release billions of dollars in development aid. Lebanon’s new government, which was formed in September after a year of paralysis, says it intends to meet that prerequisite. The man leading the charge is Prime Minister Najib Mikati, a 65-year-old telecommunications billionaire. IMF typically imposes reform demands and some forms of austerity on governments in order for them to qualify for assistance. Amer Bisat, an expert on Lebanon’s economy and the head of Sovereign and Emerging Markets Investments at BlackRock, who said he is not speaking on the firm’s behalf, told Devex he predicts Lebanese officials will push for a “skinny deal” with IMF to avoid enacting comprehensive reforms that would threaten their political power. He told Devex he suspects such a deal would merely require Mikati’s cabinet to disclose its 2022 budget, increase the price of utilities, shrink the public payroll, and establish a social safety net for the poorest Lebanese. Bisat added that such a deal wouldn’t meet enough requirements for an IMF loan, but it could provide cover for Western nations to unlock aid to Lebanon. “The main reason why the fund will consider a skinny program is because of political pressure from elsewhere. I think the French and the U.S. are very keen to stabilize Lebanon and avoid it from becoming a failed state,” he said. “Moreover, the fund will be more lenient with Lebanon if the government offers a significant down payment on reform.” “There will be pressure on the IMF to get any deal done, and in the past, the IMF has been complacent when faced with that kind of pressure,” said Alain Bifani, the former director general of Lebanon’s finance ministry. “But I hope they won’t be this time. If they are, it will end up being a negative for the country.” IMF told Devex it had no updates on when negotiations with Lebanon would begin and did not comment further. Following fierce street clashes in Beirut on Thursday, Mikati told the Saudi channel Al Arabiya that the violence would not deter the government from engaging in IMF talks. “We don’t have the option of staying in our current situation by not taking an IMF deal. Things can get worse because we have huge losses that are a ticking time bomb.” --— Mike Azar, an expert on Lebanon’s financial collapse Running out of time With talks between IMF and Lebanon expected to take place any day now, Mikati has his work cut out for him. Lebanon’s currency has lost more than 90% of its value on the black market, while roughly three-quarters of the country’s 6.7 million people have sunk into poverty since 2019. By simply forming a government, Lebanon in September became eligible to receive $1.135 billion in reserve assets from IMF known as Special Drawing Rights. While the sum is vital to keep Lebanon afloat, analysts say the government hasn’t disclosed how it used or plans to use the money. Many commentators fear that Lebanon’s political elites will squander it due to the lack of conditions attached to the SDRs. The ruling elite’s track record doesn’t inspire confidence, experts say. In July, the World Bank said Lebanon’s catastrophe was a result of “deliberate inaction” by its authorities, and that the country’s economic crisis was possibly the third-worst crisis recorded since the mid-19th century. Lebanon’s central bank has tried to cover up its deficit to maintain investor confidence, according to news reports. This month a Swiss news outlet reported that Lebanese Central Bank Governor Riad Salameh intervened in 2016 to stop IMF from publishing 14 pages in its assessment of Lebanon that detailed the country’s looming financial collapse. Salameh denied the allegations. Lebanon’s banks also impeded an IMF deal last year by objecting to the government’s estimate of public debt of $90 billion — a figure that IMF endorsed. The banks complained that they were asked to front too much of that debt. The dispute led IMF to suspend negotiations in July. Assuming banks agree on the government’s calculated losses this time, Lebanon will be expected to devalue its currency — officially pegged at 1,507 Lebanese lira to $1 — to reduce its debt to a figure that it can pay off, according to Mike Azar, an expert on Lebanon’s financial collapse and a former economics lecturer at John Hopkins University. Azar told Devex that Lebanon needs an IMF deal to restructure its debts and save its solvent banking sector, including the central bank. He added that no economy can recover without restoring confidence in the banking sector, since banks must be able to provide loans to the private sector to kickstart growth. While a lack of development aid would exacerbate shortages, accelerate inflation, and shutter even more basic provisions, Azar stressed that donor money alone won’t rescue the country. “The reason the issue is so contentious is because the debt is so large that no single player can just wipe it out, so it falls on the Lebanese public,” he said. “It’s a zero-sum game at this point: the banks want to minimize the loss of their liquidity, and large depositors, which are a politically influential class, don’t want to lose money.” “We don’t have the option of staying in our current situation by not taking an IMF deal,” Azar added. “Things can get worse because we have huge losses that are a ticking time bomb.” Defending the status quo None of the analysts Devex interviewed expressed optimism that the government will improve transparency or adopt structural reforms, even if pressured to do so by IMF. Lebanon’s ruling class may fear that even adopting reforms to secure a skinny deal could prove too politically costly, especially cutting back civil servant wages. In Lebanon, the public sector operates as a patronage network for sectarian political parties. And with an election approaching next spring, the government may be more inclined to increase public sector wages or hire more supporters, rather than meet IMF conditions. Mohanad Hage Ali, a country expert for the Carnegie Middle East Center, said Lebanon could benefit from an independent watchdog in government to monitor public spending. “The IMF and government need to patch up the black hole in which any funding or any aid would be lost,” he said. What’s more, if a skinny deal sharply increases utility prices and taxes, it could exacerbate economic inequality and trigger more unrest. Basic provisions such as electricity, gas, and generator bills are already prohibitively expensive for most Lebanese. And while IMF recommends that the government create a social safety net, Oxfam stresses that a deal should redistribute wealth to the poor, not just cushion them for austerity. In particular, Oxfam advises against raising consumer taxes that would disproportionately affect the poor and instead recommends a progressive income tax along with an extreme wealth tax on Lebanon’s billionaire class. The latter tax would likely face resistance from Mikati, who was recently named in the Pandora Papers investigation for having hidden wealth in offshore accounts. Mikati later claimed that stashing his money abroad is legal. “The IMF doesn’t come without its question marks,” said Dana Abed, a research and policy adviser at Oxfam. “But from where we stand, we don’t want to see strict conditionalities that affect the most vulnerable.”