On Thursday afternoon, the International Monetary Fund (IMF) published its latest report on Lebanon as part of its surveillance over member states.
The IMF’s mission chief for Lebanon, Ernesto Ramirez Rigo, commented on the report shortly before it was released to the press. The document contains no real surprises but analyzes Lebanon’s broader economic situation.
In particular, it warns of the exorbitant losses caused by the delayed implementation of reforms provided for in the staff-level agreement Lebanon signed with the IMF in April 2022.
The price of delay for deposits
The IMF explained that authorities’ failure to restructure Lebanon’s financial sector between March 2020 and January 2023 resulted in an additional loss of $10 billion to the country’s bank customers.
The IMF considered that, if authorities had begun restructuring the financial sector in March 2020, $71 billion dollars of the $117 billion held by the banks at that time could have been recovered (i.e. approximately 60 percent).
It was in March 2020 that the Lebanese government defaulted on its Eurobonds, in which many Lebanese banks had invested, thereby exacerbating the solvency crisis they had been experiencing since the start of the crisis.
It was also at this time that Lebanon began to approach the IMF to initiate discussions for assistance.
Consequences in spades
According to the IMF, this is just one of the consequences of ongoing reforms delay, citing its damaging impact on confidence and its lever effect on the development of a cash economy dominated by the dollar.
“The exchange rate will continue to depreciate, keeping inflation high. Economic activity will move into informal sectors, further complicating the collection of fiscal revenues. BDL, saddled with unaddressed losses and a lack of credibility, will continue to lose international reserves,” the report said.
It also pointed to a possible acceleration in the emigration of qualified Lebanese job seekers — due to a lack of prospects at home — which will permanently undermine any future prospects of economic growth.
“Investment into physical capital will be limited. Banks will not be able to meaningfully extend credit and real growth will remain subdued. The external position will be highly volatile, with limited aid from multilateral and regional partners. Public debt will remain unsustainable as restructuring is unlikely to proceed without reforms, severely limiting the government’s ability to borrow,” added the IMF.
“Provision of services by the state will be limited, as low revenues and lack of financing will force further expenditure compression (capital investment, employment, and wages). Social conditions will become increasingly untenable,” the IMF continued.
Recommendations and forecast
The IMF reiterated its recommendations for Lebanon: address its net financial losses, which are still hovering around $70 billion (or 300 percent of GDP in 2022) and implement the reforms set out in the staff-level agreement.
The IMF also reaffirmed that, while the staff-level agreement has no expiry date, the data on which it was built will have to be updated when the Lebanese ruling class breaks the impasse in the reform process.
Breaking with its usual practice, the IMF issued a forecast of the country’s main macroeconomic indicators in two scenarios: the first is based on the assumption that reforms will be launched in the short term; the second banks on a continuation of the political status quo that has paralyzed the launch of reforms since last April.
According to the report, the “reform scenario” is based on recent discussions between the IMF and the Lebanese authorities and could “steadily reduce imbalances, rebuild institutions, and set the stage for the rehabilitation and recovery of the economy.”
The restructuring of the banking sector would also be completed in a way to restore the sector’s soundness by prioritizing the protection of small depositors. The IMF assumed this scenario will materialize only if a new president is elected and a cabinet with full powers is appointed.
In terms of figures, this scenario would allow GDP to return to growth in 2024 and bring the inflation rate below 100 in 2025, reaching 12.1 percent by 2027. The debt/GDP ratio would fall from 509.3 percent at the end of 2023 to 80.9 percent five years later, and the current account deficit — the trade balance, plus the income balance, plus the balance of current transfers — would be reduced from 12.5 percent to 6 percent of GDP over the same period.
The status quo scenario, which is based on the continuation of the reform stalemate, contains a number of repercussions cited by the IMF.
GDP would continue to contract by 0.5 percent each year, inflation would fall to 135.1 percent in 2025 before rebounding to 207.3 percent in 2027, and the debt/GDP ratio would peak at 547.5 percent in 2027.
This article was originally published in French in L'Orient-Le Jour. Translation by Joelle El Khoury.