In Lebanon, the skeptics are often right. They weren’t immediately optimistic when the International Monetary Fund, President Michel Aoun, caretaker Prime Minister Najib Mikati and Parliament Speaker Nabih Berri announced a staff-level agreement in April through which the IMF would provide Lebanon a $3 billion assistance package over four years if the country managed to enact an array of needed reforms.
Five months later, only the law modifying banking secrecy has been passed by Parliament. But the IMF has called for several important changes to the text before it becomes law. The financial institution’s suggestions were included in a letter it sent several weeks ago and which was leaked last Thursday shortly after Aoun announced that he was sending the law back to Parliament for revision.
Other officials remained relatively quiet on the subject until a meeting Monday between the chairman of the parliamentary Finance and Budget Committee Ibrahim Kanaan, and the IMF’s resident representative in Lebanon Frederico Lima to discuss the reforms needed.
In a brief statement published after the meeting by Lebanon’s state-run National News Agency, the IMF said simply that it saw as “positive” the efforts made by Parliament on the banking secrecy law so far and that the latter was committed to “complete” it.
What needs to be done?
Despite these reassuring statements, today’s stagnation gives rise to fears the preliminary IMF agreement won’t become a concrete assistance program soon.
“The IMF has asked for the adoption of a number of laws: one to amend banking secrecy, another to organize the banking resolution, a third to adopt the state budget for 2022 and a last one to institute formal capital controls,” tax lawyer Karim Daher, who participated in the drafting of some of these texts, told L’Orient-Le Jour.
“But [the IMF] also called for additional steps, including launching an audit of the 14 largest banks by an international firm, finalizing the ongoing audit of Banque du Liban’s foreign currency assets, unifying the exchange rates and implementing a strategy for restructuring the public debt in the medium term,” Daher said.
“The restructuring of debt must be put into law, since it will involve new issues with [debt] securities to replace those that the state will want to exchange,” according to Camille Abousleiman, former Minister of Labor and specialist in the debt securities market. “For the debt in liras, this can be directly included in the state’s budgets,” he adds.
Finally, one part of the IMF file has not been widely discussed amid the public debate. “The IMF has estimated that Lebanon needs $10 billion over four years to get back on its feet, with the right reforms,” said Daher. “It plans to lend $3 billion, and it is up to the Lebanese authorities to start the necessary negotiations with potential donors and investors to find the remaining $7 billion. But for the moment, there is no sign that this process has been launched.”
Meanwhile, Michel Aoun’s presidential term is nearing its end and Parliament, which is tasked with electing the next head of state, could be stalled by the lack of consensus around the new president.
The constitution requires the Parliament in this case to become an electoral college, which means that it can no longer legislate until the lack of consensus is resolved. This is a situation that could potentially last for some time given the fragmentation of political representation since the May 15 elections and tensions surrounding the presidential camp and Hezbollah.
What has been done?
In either case, there is still a lot to be done in a short period of time to convince the IMF to agree to lend $3 billion to Lebanon.
• As confirmed after Monday’s meeting, the law on banking secrecy that passed at the end of July is incomplete. The IMF would thus consider that “80 percent”of the work has been done to bring Lebanon up to international standards since the drafting of the law began more than a year ago, according to a government source with knowledge of the process.
• Submitted by the government in February, the draft budget for 2022 was reviewed by the parliamentary Finance and Budget Committee by the end of August, albeit without consensus on the exchange rate to be taken into account to calculate expenditures and revenues.
• The draft law formalizing capital controls — another IMF requirement — was approved by the government in late March, but the joint parliamentary committees twice decided to suspend debate. The second time around, in August, parliament members decided that they would return to the text once the government had sent its amended economic and financial recovery plan, as well as other related bills. Some voices, however, see the capital controls law in its current state as a form of “amnesty” towards banks that have illegally restricted depositors’ access to their foreign currency funds since the crisis began in 2019.
• The banking resolution law is one of those bills still awaiting further details to be shared publicly as only a few outlines have so far been revealed.
• The recovery plan has been rejected by the banks, some of which are still seeking to have state assets privatized to repay the country’s losses ($73 billion). The final, updated version of the plan has not yet been officially released, but it is already clear that one of its components is to absorb the capital of the banks and collect large deposits, an approach favored by the IMF. However, the plan will not remain valid forever, as the projections on which it was built will “soon be obsolete,” the government source told L’Orient-Le Jour.
• A required audit of the country’s 14 largest banks has not yet begun, according to the same government source.
• There has not yet been an announcement about the results of an audit in recent months of BDL’s foreign currency assets. In May, Deputy Prime Minister Saade Chamitold L’Orient-Le Jour that this audit was being handled by KPMG, an auditing company, and should be “completed soon.”
• Several different exchange rates still coexist in Lebanon, while unconfirmed rumors circulated last week about a possible alignment of the parallel market rate (more than LL35,000 per dollar today) with that of the BDL’s Sayrafa platform (LL28,000 to the dollar).
• Finally, there is nothing to report on the restructuring of foreign currency debt, at least since the last official communication between creditors and members of the government just before the May elections. Total foreign currency debt exceeds $30 billion in nominal terms held by Lebanese banks, the BDL and foreign investors. But the depreciation of Eurobonds has greatly reduced the value of the country’s foreign currency debt. Camille Abousleiman, the former Labor Minister and finance specialist, has been recommending for some time that the state take advantage of this depreciation and make a public offer to disengage from its creditors at a lower cost.
This article was originally published in French at L’Orient-Le Jour.
In Lebanon, the skeptics are often right. They weren’t immediately optimistic when the International Monetary Fund, President Michel Aoun, caretaker Prime Minister Najib Mikati and Parliament Speaker Nabih Berri announced a staff-level agreement in April through which the IMF would provide Lebanon a $3 billion assistance package over four years if the country managed to enact an array of...