Mikati signals difficulty in agreeing financial recovery plan

BEIRUT — Prime Minister Najib Mikati indicated on Thursday difficulties in agreeing a financial recovery plan critical to steering Lebanon out of its devastating economic collapse, calling it a "Kamikaze operation."

A plan for addressing a $70 billion hole in the financial system is seen as the starting point for talks with the International Monetary Fund and vital to reviving the paralyzed banking system.

An IMF spokesperson said talks with Lebanon that began last month would end this week. "Those discussions I would characterize them as progressing well, but extensive work still required in the period ahead," Gerry Rice told a news briefing.

"The economic recovery plan is not easy … We think it is a difficult process, a Kamikaze operation," Mikati said in a televised news conference after the cabinet approved the 2022 state budget.

Lebanon has been in crisis since late 2019 when the financial system unravelled under the weight of huge public debts, sinking the currency by more than 90 percent and plunging a majority of the population into poverty.

"The recovery plan is not easy, not easy, not easy and is taking all this time," Mikati added.

He said that what had been reported in the media about the plan was untrue. "We have a number of options and we are discussing them with the IMF," Mikati said.

A draft recovery plan seen by Reuters last month proposed converting the bulk of $104 billion of hard currency deposits in the banking system to Lebanese lira, with only $25 billion being returned to savers in US dollars.

A previous recovery plan drawn up by a government in 2020 was shot down by commercial banks, the central bank and powerful political parties who disagreed over the size and distribution of losses, torpedoing IMF talks at the time.

Though the government has yet to formally cancel the old pegged exchange rate of LL1,500 to the dollar, the new budget for the first time applies a rate much closer to the market value for customs transactions of around LL20,000.

'Stabilization budget'

"The main problem with this budget is that it's not anchored against a holistic economic recovery program," said Mohamad Faour, assistant professor of finance at the American University of Beirut. He added that the inclusion of multiple exchange rates would continue to "distort economic activity."

The IMF has recommended unifying exchange rates.

The budget projects spending at LL47 trillion with a deficit of around LL8 trillion, Mikati added, equal to around $330 million at the parallel market rate Thursday.

He did not say what GDP growth forecast had been used in drawing up the budget, or give the deficit as a percentage of GDP.

Mikati said this deficit was set to increase when spending for the crippled state electricity sector was approved.

The budget still requires the approval of Parliament.

"This is a stabilization budget," Samir El Daher, an economic adviser to Mikati, told Reuters.

"It's like someone is falling from the 7th floor of a building and you want them to land on their feet, not on their head. There's still a long way to go after it's approved."