World Bank delivers reform program to Salam government

BEIRUT — Prime Minister Nawaf Salam chaired, late Thursday morning at the Grand Serail, the closing meeting of the visit by the International Monetary Fund (IMF) delegation, which arrived in Beirut last week and was led by the mission chief Ernesto Ramirez Rigo.

“The goal was to take stock [...] in order to prepare for the next IMF visit, which, in my opinion, is scheduled between late summer and early autumn,” said Finance Minister Yassine Jaber at the end of the meeting, according to the state-run National News Agency (NNA). “Progress has been made, we now have a clearer idea of the program, and it is imperative to quickly address the banking issue, which remains a priority. The problem of depositors must also be resolved so that they know what will happen to their deposits,” he added.

Later in the afternoon, the Fund also provided an assessment of this latest visit in a statement — the third since the negotiation process with Lebanon was restarted, following Joseph Aoun’s election as President and the formation of Salam’s government earlier this year. Lebanon sent a delegation to Washington for the IMF and World Bank spring meetings.

Banking Restructuring, an 'Absolute Priority'

According to information reported in the media as well as from our own sources, the IMF considers certain aspects of the draft law incompatible with international standards — such as allowing the pooling of depositors’ accounts across all banks and setting the recovery cap based on that total, permitting banks to contest independent evaluations conducted before resolution and to request a second evaluation, or exempting public agency deposits entirely from the resolution process.

Adopting a bank resolution law that meets the Fund’s expectations thus represents an essential step in a process the IMF views with cautious optimism, emphasizing the scale of the challenge the country has faced since the economic crisis erupted in 2019, further worsened in recent years by the war between Israel and Hezbollah.

In its statement, the delegation also stressed that restructuring the banking sector remains an “absolute priority” to allow it to function normally again — financing the economy, protecting depositors as much as possible, and moving away from a cash-based economy. “Given Lebanon’s significant reconstruction needs, limited fiscal space, and inability to borrow, the country will require substantial support from its external partners, provided on highly concessional terms,” it added.

According to the statement, discussions focused on several reform areas, which appear to outline a draft for what could become the next preliminary agreement (Staff-Level Agreement, SLA) between Lebanon and the Fund: restoring the banking sector’s viability and protecting depositors to the greatest extent possible; achieving fiscal and debt sustainability while strengthening social safety nets and rebuilding institutional capacity; establishing credible frameworks for monetary policy and the exchange rate regime; enhancing governance and transparency; improving anti-money laundering and counter-terrorism financing mechanisms; and finally, reforming public enterprises.

In his remarks, the Finance Minister also mentioned ongoing work on “auditing the accounts of all administrations and public institutions in Lebanon.” He cited customs reform as another priority area, involving the modernization of equipment, rehabilitation of buildings, and strengthening of pre-import inspections.

FATF Grey List

While already emphasized as a key pillar of reform, “strengthening Lebanon’s anti-money laundering and counter-terrorism financing regime” seems to have gained even greater importance since the last SLA signed in April 2022.

Jaber recalled that the growth of a cash-based economy in Lebanon — one of the crisis’s hallmarks — led less than a year ago to the Financial Action Task Force (FATF) placing the country on its grey list of jurisdictions deemed non-compliant, urging it to implement an action plan prepared by its authorities to get off the list. The IMF statement clearly indicates that effective implementation of this action plan will be among the conditions Lebanon must meet to convince the IMF Executive Board. This does not mean Lebanon cannot access an assistance program while still on the grey list, but it must be on a clear path to removal when subscribing to it.

Upcoming Milestones

Although neither the IMF nor Lebanese officials have explicitly addressed the matter, the upcoming annual meetings of the IMF and World Bank, scheduled for October in Washington, are expected to mark a decisive stage in the negotiation process between Lebanon and the Fund, similar to the spring meetings last April. It is also around this time that FATF will hold one of its three annual meetings, during which it formalizes its evaluation results. Before then, additional IMF missions will likely take place, and it is highly probable that the Governor of the Banque du Liban, Karim Souhaid — who also attended Thursday’s meeting — will travel to Washington to advance related issues under his responsibility.

If Lebanese leaders maintain their current momentum, further details about a potential program, including its amount and duration, could then be confirmed—the 2022 SLA had foreseen a $3 billion disbursement over four years.