Will Lebanon ever be able to pull off reforms needed to secure IMF loan?

Lebanon's economy has contracted by around 30 percent since 2017, its currency lost 90 percent of its value, its unemployment rate skyrocketed and over half of its households are below the poverty level.

To combat its economic crisis, Lebanon needs significant financial assistance. Therefore, it struck a deal with the International Monetary Fund in April 2022 on a $3-billion loan needed to save the country's economy.

But almost a year after the agreement was signed, officials have yet to implement the reforms needed to launch the 46-month financing programme.

Ernesto Ramirez Rigo, who headed an IMF delegation that visited Lebanon on Thursday, said the fund believes the country "is at a very dangerous moment, at a crossroads" and without a change in policy, it will remain in a "never-ending crisis".

Earlier in September, the IMF had condemned Beirut's "very slow" progress on implementing these reforms. Now parliamentary elections scheduled for mid-May are approaching and all eyes are on the country's legislators.

So what are the requirements and what is causing the approval delay?

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1. Tackling weak governance

Reforms require the cooperation of all of the country's institutions (the presidency, the government and the parliament) but political inaction has been a hallmark of the Lebanese economic crisis.

Since last year, the country has had no president and only a caretaker government, amid persistent deadlock between rival blocs in parliament.

Former President Michel Aoun left office on October 31 after completing a six-year term, without lawmakers agreeing on a successor.

The country has also been without a fully functioning government since May, with Prime Minister Najib Mikati and his cabinet having limited powers in their current caretaker status.

"It can take months for religious sects and political parties to agree on a prime minister, while efforts to form a government often get bogged down in political horse-trading," reporters Dana Khraiche and Maria Elena Vizcaino report for Bloomberg.

"While a caretaker government could still draft laws, its prerogatives are limited and it may not be able to sign off on a deal with the Washington-based lender or drive through measures with potentially long-lasting ramifications," they added.

As part of the agreement to tackle weak goverance, the IMF said "the reforms to enhance transparency must be centred on strengthening the anti-corruption framework and improving the performance of state-owned enterprises, particularly the energy sector."

It said this should also include audits of the central bank and the electricity provider.

2. Implementing fiscal strategy

The government estimates losses in the financial system total more than $70 billion, the majority of which were accrued at the central bank. To tackle this, the IMF says Lebanon must implement a new fiscal strategy.

It called on Lebanon to combine deep debt restructuring and reforms "to restore credibility, predictability and transparency of the fiscal framework".

It also said to expand the social safety net that is "essential to protect the most vulnerable."

3. Restructuring of financial sector

The IMF has called on Lebanon to recognise "upfront the losses at private banks and the central bank."

The fund wants these financial sector losses to be distributed in a way that preserves the rights of small depositors and limits recourse to state assets, though powerful politicians and banks have pushed back, delaying the recovery.

"Suffice it to say that the loss is so large that there will unfortunately have to be a distribution between the government, the banks and depositors," Rigo said.

Still, he said that the IMF would "never walk away" from helping a member country and there was no deadline for Lebanon to implement the reforms.

In order to recognise the losses at private banks and the central bank, it suggests Lebanon run evaluations of each of the country's largest 14 banks with external assistance.

In addition, it suggested the country should audit the central bank’s foreign asset position and pass a banking secrecy law, both of which authorities have done as well as passing a 2022 budget.

But the IMF's statement on Thursday said the revised banking secrecy law should be amended again "to address outstanding critical weaknesses".

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4. Establishing credible monetary, exchange rate system

As reforms drag, the market value of the Lebanese pound reached historic lows against the US dollar this month, prompting hundreds to take to the streets and protest deteriorating living conditions on Wednesday.

The pound has been fluctuating at more than 100,000 against the greenback – a dizzying plunge from 1,507 before the economic crisis hit in 2019.

The currency plunge has been devastating for those on public sector salaries, and has triggered price hikes on imported fuel, food and other basic goods. Supermarkets this month started to price items in dollars.

Lebanese banks have imposed draconian withdrawal restrictions since then, essentially locking depositors out of their life savings and infuriating the Lebanese.

Therefore, the IMF calls for "the unification of multiple exchange rates and accompanied temporarily by formal capital controls."

"That’s a step the central bank has refused to take alone. It wants parliamentary backing amid concerns that a full currency liberalisation would unleash a new cycle of price rises at a time when food and fuel costs are surging," reports Bloomberg.

But Rigo insists that Lebanon should move towards a market-determined exchange rate, rather than maintaining multiple rates including the central bank's Sayrafa exchange rate, which is not set by market forces.

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