For Lebanon’s new government, all roads lead to IMF

New Finance Minister Youssef Khalil is seen in Baabda, Sept. 13, 2021. (The Daily Star/Mohamad Azakir)

BEIRUT: New Finance Minister Youssef Khalil will soon discover that restarting the negotiations with the International Monetary Fund under new terms will be easier said than done.

Khalil, who held the position of head of financial operations at the Central Bank for many years, may try to convince the IMF that the old government economic recovery plan should be drastically modified and all the figures mentioned in the old report should be revised.

Speculations on the finance minister's first move mounted in recent days but all sides agreed that sticking to the IMF program is Lebanon’s best option to bail out the country from its deep economic and financial crisis that saw the national currency lose over 90 percent of its value against the dollar.

There was also speculation that Khalil would try to persuade the IMF that the losses incurred by BDL have fallen drastically due to the rise of the dollar rates against the Lebanese pound.

Figures indicate that the BDL still owes more than $76 billion in hard currency to commercial banks, money that banks placed in the Central Bank from depositors' money.

Only about $14.5 billion of these funds remain today, in addition to about $5.03 billion that the BDL lent in hard currency to the state, through the purchase of Eurobonds.

Some sources claim the accumulated losses in BDL’s budget, which it lists under the name “other assets,” were equal to about LL60 trillion at the beginning of this year, which is equivalent to $40 billion at the official exchange rate (1,500 pounds).

At the end of July of this year, it had become about LL82 trillion, or less than $5 billion, according to the black market exchange rate.

“Khalil will probably tell the IMF that BDL’s losses have fallen drastically in terms of dollars and thus the figures of the old economic report by the former Cabinet are no longer suitable,” the source said.

But Khalil’s arrival coincided with the declaration of the Finance Ministry that the IMF would transfer $1.135 billion to Lebanon on Sept. 16 of this year asi part of the fund’s Special Drawing Rights.

The new allocation of the IMF's reserve currency is comprised of $860 million from 2021 and $275 million from 2009, a statement by the ministry said.

A government source told The Daily Star that Lebanon could almost guarantee $3 billion to $4 billion once IMF notices concrete moves to implement financial reforms and restructuring of the BDL and the banking sector.

Despite the importance of this financial commitment from the IMF, many economists and experts stress that Lebanon needs $15 to $20 billion in the next five years from the donor states and international institutions.

Former managing director with international banks and funds Saeb el Zein underlined the importance of having the IMF program mentioned in the ministerial statement and get the Fund involved in all the economic reform steps the government will take.

“The key point the new government should do is to add the importance of the IMF program in its ministerial statement to demonstrate the seriousness of the state to implement reform,” Zein told The Daily Star.

He added that the government can’t just scrap the initial IMF program and restart the negotiations from the beginning.

“Any plan that should be developed by the government must have the initial agreement of the IMF and everything should be coordinated by the fund. The Finance Ministry can’t just simply tell the IMF that it has a new economic plan and to start the talks from zero,” Zein argued.

He also insisted that the Finance Ministry and the Central Bank should jointly negotiate with the IMF and to coordinate in the future with Parliament's Budget and Finance Committee

“The Big mistake that was done last time was that we had an economic recovery plan but did not have the required consensus. Having a plan with the consent of all the main parties will overcome all pending issues,” he noted.

Zein believed that the debt sustainability of the new economic plan will be at least 35 years rather than five years, according to Former Prime Minister Hassan Diab’s economic plan, warning that every day that passes will get worse.

He also favored allowing the Lazard Company, which helped draft the old economic plan, to be involved in the new rescue program of the government.

However, not all economists and financial analysts feel that Khalil is suitable for the job and even questioned the ability of the new Cabinet to adopt a revised economic plan.

A leading Middle East economic expert said Lebanon needs $75 billion steer the country to safe shores, dismissing claims that $4 billion from the fund would be sufficient to put the country on the right track.

“Lebanon’s needs a rescue financial package of about $75 billion for stabilization and reconstruction,” the economist told The Daily Star on condition of anonymity.

He added that banks need a cash injection of $20 billion, infrastructure $15 billion, fiscal transition $10 billion, BDL restructuring $10 billion, balance of payment support $5 billion, private sector financing $15 billion.

“The IMF and international support is imperative but conditional on undertaking a comprehensive set of deep governance, economic, monetary, fiscal and structural reforms,” he explained.

The economist argued that Lebanon was paying the price of an unsustainable, fixed exchange rate and fiscal and debt policies, adding that Lebanon’s financial meltdown and deep depression resulted from deliberate policies by BDL, government and politicians to impose an Inflation Tax & Lirafication to avoid recognizing balance sheet losses and undertaking fiscal, economic and structural reforms.

“The $40 billion losses incurred by the Central Bank were a result of BDL’s decision to defend the pound. This has nothing to do with the financing of electricity,” he added.

The economist expressed serious doubt that Kahlil would be able to persuade the IMF to have a second look at the losses of BDL and banks that were mentioned in the old economic rescue plan of the previous government.

He also wondered how Khalil can cooperate with Alvarez and Marcel to conduct forensic auditing of BDL, especially since the new finance minister has executed the financial engineering that was one of the main causes for the financial bleeding.

However, Nassib Ghobril, the head of the Economic Research at Byblos Bank, saw fit to either drastically or modify the old economic plan or hammer out a new one.

“The suggestions for the new government to adopt, as is, the so-called financial recovery plan of the Hassan Diab government for time constraints reasons are highly misleading,” Ghobril said.

He added that it is better to take the necessary time to develop a plan that is logical, fair, balanced, and comprehensive and is pro-growth, instead of rushing to utilize a plan that representatives of the private sector have labeled as harmful to the economy and squarely rejected key components of it.

“There is also a need to involve stakeholders in developing the new plan, so the plan gets the necessary buy-in that the International Monetary Fund is looking for before it signs on this program, as from the experience of the IMF in other countries, the successful implementation of a structural reforms plan requires the full support of local stakeholders,” he noted.

Ghobril said the previous government did not consult or take the opinion of stakeholders in developing its plan, and it parachuted it on the economy and the private sector.

“It seems that the suggestions to rush in the Diab plan have to do with the central point of adopting the so-called losses of the financial sector in that plan. But the plan puts the entire burden of the crisis and the losses from the default on the Eurobonds on the financial sector only.”

He added this is why there is a need for a new plan that distributes the “losses” in a logical and fair way, starting with the public sector.

“This is why the Association of Banks in Lebanon submitted in May 2020 an alternative plan that the new government needs to examine and take into consideration.”





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