BEIRUT — It has been one year since the Lebanese government and the International Monetary Fund reached a staff-level agreement that would see the IMF loan Lebanon roughly $3 billion over a four-year period, conditioned on a series of reforms to Lebanon’s monetary, fiscal and financial laws and regulations.
Most of the legal changes that the IMF is requesting prior to a final agreement have not been implemented, or, as in the case of the banking secrecy law, have been amended in ways that do not meet the IMF’s approval. As the country’s devastating economic crisis stretches into its fourth year, Lebanon’s political parties remain deadlocked, leaving the state with no president and no fully empowered government. Few serious policies to address the impoverishment of most of the population have been undertaken. A key dispute over the distribution of losses in the financial sector continues to drag on, with holders of primarily small- and medium-sized bank deposits enduring massive de facto haircuts on dollar withdrawals and illegal capital controls in the meantime. Some influential bank shareholders and their allies refuse to accept losses to their capital.
L’Orient Today sat down with caretaker Deputy Prime Minister Saade Chami, who is in charge of the government’s negotiations with the IMF, on March 31 to get his view on the status of negotiations amid the current political impasse in the country.
In our interview, Chami described the progress toward a final agreement with the IMF as “very slow” but stopped short of saying it was completely halted. He lamented the lack of progress towards a deal, which he described as Lebanon’s best available option. Chami characterized the IMF conditions as reforms that Lebanon ought to undertake with or without an IMF program, arguing it would be better to do them with an IMF agreement rather than without, and that an agreement could open the door to additional international funding.
This interview has been edited and condensed.
L’Orient Today: How was the visit of the IMF mission last week?
Chami: The last IMF team visited Lebanon recently to conduct an article IV consultation, and it was not, as perceived by some, a program negotiation. Under Article IV of the IMF, every country will undergo a periodic consultation process either every year or every couple of years. And since Lebanon has not been in the IMF’s board for the past three years, the board wanted to have the Article IV consultation with Lebanon this year. This way, the board members can really know what is going on in the country after an absence of about three years.
The mission issued the concluding statement, which was direct, and said what we had been saying for a long time. In summary, it said that Lebanon would go into a long-term crisis if we don't do all the reform measures that we agreed to under the staff-level agreement (SLA). Out of the 10 prior actions required to go to the board for a final agreement, the cabinet executed three of those before we became a caretaker government. There were seven left: four within the Parliament in the form of draft laws and three in the central bank and the Banking Control Commission. The Parliament approved the 2022 budget and amended the banking secrecy law but some of the changes to the law proposed by the government are not satisfactory. There remains the bank resolution law and the capital control law, which came out of the joint committees significantly different from those that the government proposed. The prior actions in the central bank are still pending.
L’Orient Today: The 2022 budget was criticized by some observers for having unrealistic macroeconomic projections and being based on a LL15,000 to the US dollar exchange rate, which was not accurate at the time it was released. It still satisfied the IMF precondition?
Chami: It did, for the simple reason that the IMF, when they said that the budget 2022 should be passed, they did not really specify what kind of budget they wanted, and it was called an emergency budget since it needed to be prepared in a short time after the government took office. Therefore, the Ministry of Finance did not really have enough time to do a reform- based budget. So the IMF, they agree that this prior action has been satisfied.
L’Orient Today: How would you describe the progress towards a final agreement over the last year?
Chami: Very slow, to be absolutely frank and candid with you. I know that some of the laws are extremely complicated and complex in nature. At the same time, we are under an emergency, and we should do our utmost to implement the reform agenda including by having a cell in Parliament, and also in the government, to work continuously and under very strict deadlines to push ahead these reforms since time is of the essence. We do not have the luxury of time, it's really crucial that we do this as quickly as possible.
L’Orient Today: You characterized it just now as slow, but slow would mean moving. Is it slow but moving or is it stalled?
Chami: No, it is moving at a very slow pace. I cannot say it is completely stalled. But under the political circumstances, and the constitutional debate that is raging in the country as to whether the Parliament can legislate in the absence of a president, the process of reform has almost stalled when Parliament cannot meet to legislate.
But my view is that we should do everything we can right now. The draft laws in Parliament should be discussed and finalized by the relevant parliamentary committees, and this would pave the ground for the general assembly to approve them when a president is elected. If we wait until a president is elected and a new government is formed, there is a chance that this will probably take a few months judging by recent history.
L’Orient Today: It seems from the outside that there is a certain lack of urgency within the political system. And I wonder, is that a lack of will?
Chami: I am sure that the two are related, when you have a lack of will you do not feel the urgency to move, right? There is no political will to really forge ahead with the required reforms, because some of the reforms are probably not popular. And you know, given the degree of populism in Parliament now, it would be difficult for politicians to come out and face their constituents with the hard facts and say, “you know, we have problems on our hands and we have to deal with it otherwise the situation will become unbearable.” This will require statesmen that can take bold decisions and lead the public opinion instead of being led by the public.
L’Orient Today: Do you feel that there's still a consensus in the Parliament or in the cabinet for an IMF deal?
Chami: No, from what I have just described, for sure there's no consensus.
L’Orient Today: What about in the cabinet?
Chami: When the plan was presented to the cabinet back in May of last year, it was approved. True, a few ministers objected or abstained. I cannot say there was complete consensus in the cabinet at the time the reform program was discussed. But the majority decided to approve it and hence every member of the cabinet should abide by this decision. And not only this, the three presidents [the prime minister, the president and the Parliament speaker] issued statements in which they approved … the SLA one year ago, on April 7, 2022.
L’Orient Today: We heard that, last year, some banks were accepting of the SLA. But now, most people say that the banks are against an IMF deal — they don't want a distribution of losses following the IMF’s hierarchy of claims. Has the banking industry turned against an IMF deal?
Chami: I would argue otherwise and say that at the beginning there was a lot of resistance from the banking sector to accept the concept of hierarchy of claims, which includes, among other things, the wiping out of shareholders’ equity. At that time, ABL [the Association of Banks in Lebanon] came out strongly against the plan.
With time, a few banks came to the fold, but there are still some pockets of resistance within ABL. Banks who are supporting this program came to realize that there is no way out of respecting this hierarchy of claims which is an international standard. There are still many banks who are in denial and who are trying to fight it. This would suggest some sort of split between banks — those who say, “okay, come on, we have to accept reality, we have to deal with it.” While others are saying it is not “our fault” but the fault of others. Of course it’s not only their fault but nonetheless they bear a large part of the responsibility.
L’Orient Today: How much of the resistance is coming from so-called “populism” from the political parties versus the very large depositors who stand to lose the most money asking their friends in Parliament to oppose this?
Chami: I cannot deny this, but at the same time, I do not have the proof. However, you are raising a good point. Historically, in Lebanon, there has always been a connection between politics and the business sector, and especially the banking sector. Let me put it this way, I wouldn't be surprised if there are vested interests that put pressure on members of Parliament not to go ahead. Because when one says that banks have to pay the cost for whatever mistake they committed, you can notice some resistance from some political corners and some time from so-called economists and financiers who work for the banking sector.
L’Orient Today: But they have not communicated directly to you that these are their red lines, or, the large depositors haven't privately shared their point of view?
Chami: No, I am sure they will not share it with me. Because everybody knows where I stand on this issue. That is why I am under criticism from different groups, which, to me, is a sign that I am doing the right thing.
L’Orient Today: Barbara Leaf [the US assistant secretary of state for near eastern affairs] said [last Thursday] that there's no choice but to have an IMF deal and the IMF mission basically said the same thing in their statement, that without an IMF deal, Lebanon will experience prolonged depression. But not everyone agrees, some people will say that the IMF deal is not worth it. What do you think is the future for Lebanon without an IMF deal?
Chami: I always say that politicians and members of Parliament who are representing the people of Lebanon have the choice to go ahead with an IMF program or to deal with the problems without an IMF. Without an IMF program, the kind of measures that we need to take are harsher, more difficult and more painful to the population.
First, I believe we cannot at this juncture get out of the crisis without a lot of help from the outside. Because we don’t have the resources. Spending in the budget is less than a billion dollars when it used to be $17 billion — what do you do? There is no room to cut spending. It would mean that you paralyze the public sector completely. Or you raise taxes in a way that hits economic activity. So, you have the choice, but the measures are extremely painful, the population will suffer.
Given the difficulty in having a balanced budget in the short term, any deficit would need to be financed by the central bank, which translates into printing money which comes with its adverse impact on the exchange rate and inflation. One of the requirements of the IMF is to forbid the central bank to finance the budget deficit. With an IMF program, the budget deficit would be financed by foreign money, and we would avoid such an outcome.
Second, I hear a lot of voices saying that $3 billion from the IMF will not do much. But this is only seed money, as it will open the doors for other donors to help Lebanon. In your question you referred to Barbara Leaf, but I can tell you that all donor countries have been very clear on this front and indicated on multiple occasions that they will not contribute $1 to Lebanon unless there is an IMF program.
Third, in the absence of an IMF program, we will not be able to negotiate in good faith with Lebanon’s Eurobond holders, and will not be able to go back to the international financial markets.
Fourth, the presence of the IMF will instill some discipline in economic policies instead of leaving it up to politicians at this difficult time. The constant monitoring of the program implementation through periodic reviews will ensure that we are doing the right things because if we deviate from the program, financing will stop since the $3 billion will not be paid in one shot.
Let me finally say one thing on this topic: we need to undertake reforms with or without an IMF program. In that case, why would we object to the IMF?
L’Orient Today: One of the IMF conditions is to unify the exchange rate. With the 2022 budget, the government established the LL15,000 rate. It’s been four months since that budget was passed and we now have a customs rate, an EDL [Electricité du Liban] rate, dollar tax rates — it seems that we’re not getting any closer to unifying the exchange rate. We keep making new ones actually. Your thoughts?
Chami: Don’t get me started on this. Yes. I keep saying the country cannot efficiently operate with multiple exchange rates as this creates many distortions, a lot of arbitrage, benefiting some groups at the expense of others, and at the cost of depositors. And this, a multiple exchange rate, is for me, a harmful system. There is a need to unify the exchange rate. Now, at the beginning, I was of the view that we should not unify the exchange rate and have a floating exchange rate in the absence of other measures because, if you unify the exchange rates from a position of strength, when you have all the measures come together, then probably you can avoid what we call in economics “overshooting” of the exchange. Which means, we overshoot its true value.
But now, one year later, I am of the view that we should unify the exchange rate as soon as possible. This could be costly in the short term as the exchange rate could “overshoot” its true value but now I believe that the cost of not unifying the exchange rate is much higher.
L’Orient Today: As a member of the government, you are against multiple exchange rates, but the Finance Ministry continues to put out decisions enabling multiple rates. There doesn’t seem to be an agreement within the government.
Chami: The Ministry of Finance has probably been buying time. The government or the Ministry of Finance is trying to do it gradually in order not to hit the population with the increase in cost of all imported goods, as we rely heavily on imports for our consumption. Imports last year reached a level that is close to that before the crisis, standing at $19 billion. While part of this is due to the increase in international prices, a major part was because people were importing nonperishable goods in order to stock in anticipation of a change in the exchange rate. Ideally, the best way of changing the rate is for example to take a decision over the weekend. Monday comes and we have a new exchange rate that applies to everything. We have been buying time for a long time — but there is no time to be bought anymore.
L’Orient Today: And you think that your colleagues at the central bank, the Finance Ministry, the cabinet, that they have the same view on the need to unify?
Chami: Everyone agrees that the exchange rate should be unified, but, and this is normal, we don’t see eye to eye on when it should be done and how. Some people say “okay, but you cannot raise it all at once because this will impact the cost of living for the population.” And others believe it should be done, and then, if there are adverse impacts, we can deal with it using other policies.
L’Orient Today: The 2023 budget, do you feel that the process is on track to rectify some of the deficiencies we saw last year?
Chami: The Ministry of Finance is working on the budget, and I understand it should be ready soon. We should sympathize with the Ministry of Finance, because they do not have the resources to do the budget on time. The IT system is not working properly, and there are only a few employees working on the budget given the strike and the low salaries in the public sector. The public sector is paralyzed. Some of the delay on reforms is not only our fault but because of difficulties getting engagement from international partners.
L’Orient Today: I imagine that the IMF will be watching the 2023 budget closely to see if it presents a realistic framework. If the 2023 budget has the same level of detail as the 2022 budget, do you foresee that being an issue? The revenue side wasn’t very clear, the EDL Treasury advances weren’t included, the exchange rate used was not the real exchange rate. If the 2023 budget looks like that. Would that cause an issue for IMF negotiations?
Chami: I am sure it would raise flags with the IMF. I am hoping that this year’s budget includes reform measures that will be in line with the reform program. The salaries in the public sector have to be corrected, but this needs to be financed by increasing revenues in a way that will not affect the most vulnerable. And above all, we need to use one exchange rate in the budget. This is not only to satisfy the IMF, but this is what should be done, regardless of whether we have an IMF program or not.
L’Orient Today: What next steps can the public expect in the next few weeks or months? What is the future of the IMF negotiation process in the short term?
Chami: The future of the IMF program depends on what we do; it is as simple as that.
The IMF is sitting and waiting for us to move. The issue is not that the IMF will withdraw from Lebanon — by the mere fact that we are not doing much, it is as if we are withdrawing ourselves from the program. And that is the danger. Because if we lose this SLA, and if the new government wants to negotiate another agreement, I am afraid the conditions will probably be much harsher. Not only because the IMF will become stiffer, but also because things will deteriorate further and the measures needed to correct this deterioration will become more difficult.