What reforms does Lebanon need to gain international support?
When French President Emmanuel Macron laid out an ambitious roadmap to save Lebanon from economic collapse and rebuild Beirut after a deadly explosion last year, the first step he demanded of politicians was to form a capable government. to implement reforms.
Such a move would have enabled Lebanon to access billions of dollars in debt relief, loans and other projects at a time of severe financial crisis.
A year later, Lebanon’s fragmented political parties finally agreed on a cabinet headed by triple Prime Minister Najib Mikati.
But 13 months of lockdown as politicians competed for ministerial portfolios eroded the international community’s confidence in the country’s leadership as the economic crisis deepened.
The economic collapse devalued the local currency, pushed more than 70 percent of the population into poverty and created shortages of subsidized goods such as fuel and medicine, imported in scarce dollars.
Experts and diplomats said The National they are cautiously optimistic about the new government and will closely monitor its first actions in the weeks to come.
“What is expected of this government is very simple: organize appropriate elections on time and engage with the IMF, because this is the only way out of the crisis,” said Sami Nader, director of the ‘Levant Institute for Strategic Affairs.
Mikati on Friday promised to hold the 2022 parliamentary elections on time last week. The last Lebanese elections held in 2018 were postponed for five years.
Diplomatic sources and experts all said The National that the government’s priority should be to relaunch negotiations with the International Monetary Fund.
The previous government launched talks last year for a program that would lift the country out of crisis after Lebanon first defaulted on its debt.
Deliberations collapsed when the government, parliament and the central bank argued over the central bank’s loss count.
“Whatever they do, the most important thing is for ministers to agree on an economic plan,” Nader said, stressing that when negotiations collapsed last year, the government itself was divided. On the question.
To get an IMF program, Lebanon would have to undertake sweeping reforms that have been demanded by international lenders and Western countries for years.
These include the overhaul of a bloated public sector, starting with the bankrupt country’s public electricity company. Electricité du Liban’s budget absorbs about a quarter of Lebanon’s annual public debt, yet the country has not had 24-hour electricity for thirty years. Other reforms include the fight against corruption and a forensic audit of the central bank.
While the new finance minister signed a new audit contract this week, a previous attempt last year was unsuccessful. The central bank refused to provide Alvarez & Marsal with the appropriate documents to perform the audit, citing bank secrecy issues.
The new government’s economic team has close experience with the IMF and the World Bank, which is a positive sign, a Middle Eastern diplomatic source said. The National.
“But the political decision-making process is controlled by Hezbollah,” they said.
The Iran-backed group has previously said it will not oppose an IMF plan, but Hezbollah has an anti-American ideology and generally opposes austerity measures.
“This will create challenges for the government and the Lebanese people do not have the luxury of time,” they said.
One of the government’s first tasks is to update its financial recovery plan and move forward to the negotiating table with the IMF with unified figures for banking sector losses.
All the concrete steps taken with the IMF, World Bank and creditors will give positive impressions regionally and internationally, the source said.
“Donors have always expressed their willingness to lend their support when such steps are taken. “
The Lebanese pound is officially set at 1,507.5 to the dollar and BdL currently finances imports of wheat and certain medicines at this exchange rate.
The IMF will likely request the removal of this peg, as it is no longer viable and does not represent the real value of the Lebanese pound, which has fallen by around 90%. This essentially means the removal of subsidies, which is another demand of the international community.
“But politically speaking, these are very expensive measures. Especially before the elections, ”said the source.
Parliamentary and presidential elections are scheduled in eight months, after which the current government will resign.
“Given the government’s short term of office, the most anticipated outcome is wise management of the crisis.
Lebanon suffers from shortages of fuel and subsidized medicines because the central bank does not have enough foreign exchange to continue financing imports of subsidized products. The country depends on fuel to generate electricity.
Gasoline shortages have created long power cuts, sometimes up to 24 hours a day, hampering the work of hospitals and creating hour-long lines at the gas station.
An IMF program will likely go hand in hand with removing subsidies and replacing them with social safety nets for the poor in order to avert a humanitarian catastrophe.
Parliament approved more than half a billion dollars in cash assistance in June to fund ration cards for 500,000 families, which are expected in part to be funded from the BDL’s dwindling foreign exchange reserves. .
A Western source said how the ration card money will be paid out will be “an important test.”
“There are fears that during an election year the cards could be used for political purposes,” the source said.
The political class rooted in Lebanon has been criticized internationally for its corruption and mismanagement of the country’s finances, which has led to financial ruin.
The country does not have a unified list of needy families. Sectarian political parties often use financial aid to maintain their patronage networks.
Mr. Macron had invested significant political capital to develop a French roadmap to save Lebanon supported by the international community.
While Lebanese politicians have failed to implement the reforms, France and the EU have stepped up the pressure with threats of sanctions against politicians obstructing government formation and engaging in corruption, in the aim to push for reforms.
After the formation of the government, the French presidency issued a press release stressing “the need for all political leaders to respect the commitments they have made to allow the implementation of the reforms necessary to prepare the future of Lebanon and allow the international community to provide it with decisive assistance. . “
Diplomatic sources said they would closely follow the government’s ministerial statement to assess its resolve to deal with the crisis.
The plan, which has not been made public, outlines the government’s program for the country and is expected to be discussed and approved by parliament next week.
Mikati has previously said negotiations and IMF reform will be on the agenda.
Another test for the new government is how it will allocate more than $ 1.1 billion in Special Drawing Rights (SDRs) – an IMF asset – which was due to be delivered in dollars on Thursday.
“What they will be used for will be a telling test for the international community,” the Western diplomat said.
He added that adopting a budget for the years 2021 and 2022 is another measure of good governance that the international community expects from the government.
Lebanon has not adopted a budget for the year 2021.
Updated: September 17, 2021, 2:13 PM