While on a ten day visit to Lebanon, the International Monetary Fund (IMF) delegation took stock Thursday of the economic and financial situation in the country, dwelling on Lebanese authorities’ failure to implement the reforms promised as part of a staff-level agreement with the IMF.
The delegation made this assessment as it concluded its oversight mission in Lebanon, which is an IMF member state, in accordance with Article IV of Articles of Agreement.
“We think Lebanon is at a very dangerous moment, at a crossroads,” said Ernesto Ramirez Rigo, who heads the IMF delegation to Beirut, in a press conference held in the afternoon in the absence of any Lebanese official. “We are in a situation where the status-quo and continuation of the policy of inaction is going to leave Lebanon in a never-ending crisis.”
“In a situation where the status quo continues, we would expect at a minimum a stagflation (a phenomenon combining slowing growth and strong price increases). In a worst case scenario we could see hyperinflation (out-of-control inflation), which will impact the quality of life of many Lebanese in the years to come,” he said.
During the Thursday press conference, Rigo conveyed the very clear message that, while the IMF remains indefinitely committed to Lebanon and April’s staff-level agreement, it will not yield on the distribution of the financial losses accumulated by the country.
BDL and banks in the same basket
The losses accumulated by the state, Banque du Liban (BDL) and commercial banks are roughly $70 billion, according to an anonymous source close to the government, or more than three times the current GDP.
“The losses are so large that everyone will have to assume part of them,” Rigo reiterated.
“Credible restructuring of the financial system to restore its viability and support economic recovery” is one of the major tasks to be implemented, according to a statement published on the IMF website after the press conference.
This work requires “acknowledging and addressing upfront the large losses incurred by the central bank and commercial banks, respecting the hierarchy of claims, protecting small depositors, and limiting the recourse to the public sector,” which is already overly indebted, the delegation stated in its conclusions.
“Viable banks should be restructured and recapitalized under a time-bound plan, and unviable banks should exit the market,” the statement continued, calling for the amendment of the banking secrecy law passed in October in order to carry out the necessary audits. The delegation also called for the publication of the special audit of the central bank, among other demands.
During the press briefing, Rigo dismissed the argument that the banking crisis was limited to liquidity in dollars, considering that the banks were facing a “capital deficit.”
A banking source who declined to be named told L’Orient-Le Jour that the IMF put BDL and the banks in the same basket, “whereas the bulk of the banks’ losses are linked to the fact that the central bank cannot return their deposits.”
Visit to the Saudi Embassy
The issue of losses and banking sector restructuring is only one of the pillars of the IMF’s recommended reforms, along with fiscal, public administration and business environment reforms.
The IMF delegation advocated for these recommendations — presented as an “alternative path,” according to the statement, that will lead Lebanon to growth — in front of all figures it met with in Beirut, including Prime Minister-designate Najib Mikati, MPs, BDL executives or the members of economic organizations.
However, it did not meet with the Association of Banks in Lebanon (ABL), according to the above-mentioned banking source, who said that ABL Secretary-General Fadi Khalaf was present at the meeting with the economic organizations.
Ernesto Ramirez Rigo also visited the Saudi embassy on Wednesday to discuss the Lebanese situation with Ambassador Waleed Bukhari. The kingdom, a potential contributor to Lebanon’s recovery and which just restored its diplomatic ties with Iran and Syria, wants the future Lebanese president to have the “profile” of “rescuer” of the economy, according to sources quoted by al-Markazia news agency.
Rigo criticized Parliament, which he said had the means to advance the reforms despite the presidential vacuum by passing the laws listed in April’s staff-level agreement. These laws are a prerequisite to unlocking a $3 billion aid package but the amount could change as needed, the mission head said.
Rigo also said that the draft capital control law that the joint parliamentary committees finalized in January was less in line with the IMF’s requirements than the version that was finalized by the government in March 2022.
He did not address the exchange rate system that the IMF believes Lebanon should adopt — whether it be a new pegged parity, Currency Board or full dollarization. Rigo said this question was difficult to answer at this stage.
He said the current BDL-led system, which involves a plethora of exchange rates, is not sustainable and that it contributed to the melting of the country’s foreign exchange reserves— currently less than $10 billion, compared to $36 billion before the 2019 crisis.
This article was originally published in French in L'Orient-Le Jour. Translation by Joelle El Khoury.
While on a ten day visit to Lebanon, the International Monetary Fund (IMF) delegation took stock Thursday of the economic and financial situation in the country, dwelling on Lebanese authorities’ failure to implement the reforms promised as part of a staff-level agreement with the IMF. The delegation made this assessment as it concluded its oversight mission in Lebanon, which is an IMF member...