BEIRUT: Bank of America Global Research said it is very likely that new Finance Minister Youssif Khalil would unify Finance Ministry and Central Bank efforts regarding talks with the International Monetary Fund and this could also mean that the forensic auditing of the Central Bank’s account would not be completed.
“Director for Financial Operations Khalil to the post of Minister of Finance (MoF) may now unify BdL-MoF views in regards to IMF talks. The privileged BdL access of Minister of Finance Khalil may mean a BdL audit remains unlikely to complete,” BoA said in its report on the financial situation in Lebanon following the formation of a new Cabinet headed by Prime Minister Najib Mikati.
But outgoing Finance Minister Ghazi Wazni said Tuesday said a contract for a forensic audit of the Central Bank would be signed in a few days by the new government with Alvarez & Marsal (A&M), a step aimed at helping the country out of its crisis.
But many experts dismiss the possibility of a complete forensic auditing especially since Parliament’s approval of the total lifting of the banking secrecy will end in three months.
Some of these experts even doubt that Khalil will be eager to complete the forensic auditing since he was holding a key position at BDL.
The report said the formation of a new government after 13 months of institutional vacuum offers an opportunity to stabilize the economy and initiate talks with international lenders.
“However, the poor reform track record, potentially approaching elections, and continued influence of the political class likely make material economic reforms unlikely for now,” Bof indicated.
“In our view, the complex socio-political setup may continue to block major reform efforts. The Cabinet is formed of 24 politically backed ministers; eight each for the President’s bloc and allies, the Prime Minister (PM) bloc, and the Shiite and allies bloc. It includes technocrats such as Deputy PM Chami, an International Monetary Fund veteran.”
The report noted that the broad pro-Hezbollah alliance maintains a majority in the Cabinet.
“The potentially shared allegiance of several ministers suggests the President’s bloc may also hold a blocking third, with veto power exercised at its discretion with a view to preserving chances of presidential succession.”
It also said the potentially approaching elections could become a focus of the Cabinet from late 2021. This would leave little room to negotiate a comprehensive IMF program given the apparent continued lack of domestic consensus on it.
“Political change post-elections could improve reform momentum. On the other hand, a delay to elections may portend continued broad economic policy inaction. The timing of the Cabinet formation (after the removal of subsidies by the outgoing Cabinet and ahead of the introduction of a ration card) may suggest a focus by the political class to support its constituencies ahead of elections, while attributing responsibility for subsidy removal to the outgoing Cabinet.”
The report also warned that the arrival this week of Iranian fuel imported by Hezbollah through Syria may draw US sanctions.
“US official pronouncements appear nevertheless supportive of a plan to import Egyptian natural gas and Jordanian electricity via Syria.”
The report expected the forthcoming ministerial declaration and subsequent parliamentary vote of confidence are likely to shape economic priorities.
“We expect a focus on economic stabilization near-term, ration card management, approaching international and regional donors, and a mandate to restart IMF talks,” the report said.
It added that Lebanon has been suffering from multiple, simultaneous, crises: a Balance of Payments (BoA) crisis, debt crisis, fiscal crisis, banking crisis and humanitarian crisis.
“The status quo over the past 1.5 years, whether by policy design, inaction or paralysis, has forced an economic depression (with real GDP likely to have contracted by 20 percent + over the period), hyperinflation, sharp USD/LL depreciation in the black market, de facto lirafication of bank deposits, shortages in essential goods, large emigration and a material impoverishment of the domestic population.”
It hoped that the humanitarian crisis could be partially alleviated by the introduction of a ration card program.
The program’s funding for a year appears to have been mobilized and is likely to include a World Bank loan (which would add to the government’s external debt stock) and use of the IMF Special Drawing Rights (SDR) allocation.
“However, the program does not appear for now to be funded beyond a year’s horizon.”
The current account has narrowed materially. As of 3Q20, the trailing current account deficit narrowed to $4.7 billion, from $12 billion in 3Q19.
“However, monthly trade data suggests some widening in the trade deficit in 1Q21. The removal of subsidies is likely to start to slow the BdL Fx reserves burn, as we estimate subsidies (50 percent of imports at the peak) generated a usage of $0.4-0.5 billion per month from BdL Fx reserves.”
The report also warned that in the absence of reforms, any parliamentary discussion of a law to allow use of BDL gold reserves could suggest the political class may aim to further kick the can down the road.
“In the absence of a capital controls law, the outflow of currency and deposits stood at a
large $10.8 billion over 3Q19-3Q20. The passage of a capital controls law, which was sent to parliament in late-July, could be sign of a gathering reform momentum.”
It added that the banking sector remains mired in an ongoing deleveraging process.
“Given in part the vested interests of the political class, a banking sector restructuring remains a complex task to complete. Gradual de facto lirafication could take years to complete the process.”
BoA said losses embedded in the BdL balance sheet have increased since 3Q19.
“The decline in the nominal fiscal deficit over 2020 reflects the decline in government fiscal revenues and primary expenditures (sharply compressed in real terms), the halt to servicing of international market debt and the lack of interest payments on BdL’s holdings of domestic debt.”