The International Monetary Fund said on Thursday that Lebanon was in a “very dangerous situation” and that “everybody will have to take losses” in the acute financial crisis that has locked depositors out of their savings and led to much of the population being pushed in poverty.
The IMF urged Lebanon’s leaders to enact much-needed reforms, saying the process had been “very slow” considering the country’s devastating financial situation.
“The delays can only increase the cost on the Lebanese people; we urge the authorities to accelerate the process, and to start finally completing the necessary prior actions,” said Ernesto Ramirez Rigo, who led an IMF delegation visiting Beirut this week for meetings with the government, central bank officials and experts.
The meetings are part of a consultation under Article IV, which is held every year for all IMF member countries and involves assessing a country’s financial conditions, reviewing existing policies and exploring options for reform before the publication of an annual report.
The IMF delegation met caretaker Prime Minister Najib Mikati and his deputy Saade Chami.
The stakes are high: billions of dollars in relief funding from the IMF, which could pave the way for releasing other international funding and foreign investment to ease Lebanon out of more than four years of economic crisis.
Lebanese and IMF negotiators reached a staff-level agreement in April last year that depended on an economic recovery plan and a series of crucial reforms.
But Lebanese leaders have failed to reach agreement on how to resolve the crisis despite an economic recovery plan adopted by the government in May.
“Time has gone by, it’s almost a year since we have reached an agreement,” Mr Rigo pointed out.
One of the main bones of contention is the allocation of financial losses between the main stakeholders: the government, the banks and depositors.
Mr Chami, the architect of the recovery plan, has estimated that the hole in the financial sector amounts to $73 billion.
“The numbers are on such a scale for a country as small as Lebanon that everybody will have to take losses,” Mr Rigo said, stressing that the IMF does not have updated numbers as it would need an audit of the major banks.
“Lebanon is very unique because of the complexity of the balance sheets between the central bank, the commercial banks and the public sector, but also the size of the losses, it’s hard to find a place similar to this one,” he said.
The negotiations with the IMF notably stalled on the state’s contribution to cover the financial losses.
Mr Rigo said the state’s participation should be minimal to maintain public debt sustainability.
“Any solution needs to ensure that there is debt sustainability. Lebanon is in default … it doesn’t have the capacity to recapitalise the system; that would have been the easy solution, but it can’t do that,” he said.
The IMF called for a fair allocation of losses while protecting the value of small depositors as much as possible. Based on these recommendations, the recovery plan initially put the state’s contribution at a few billion dollars, while placing the brunt of the losses on bank shareholders and big depositors.
However, Lebanon’s banking association, the banking lobby, some MPs and others have been calling for bigger government contributions to bail out large depositors.
The option was first ruled out by the government, with Mr Chami labelling the selling of the government’s assets as “a reverse Robin Hood”.
But the issue is still being debated, preventing the talks with the IMF from moving forwards.
Mr Rigo questioned the equity of using public assets to bail out depositors.
“It is a major concern, people who are not bancarised [who do not hold a bank account] and even new generations will settle losses. There is an issue of intergeneration equity as much as an issue of capacity,” he said.
Several required measures have been enacted by the authorities, including the approval of a budget for 2022, an audit of the central bank’s foreign assets and a revised law on banking secrecy
But a law on capital control, with the “objective to protect liquidity” and to ensure depositors have access to their savings, has yet to be enacted, Mr Rigo said.
However, the law on banking resolution, another prior condition imposed by the IMF which is intended to set the criteria for bank viability, “is advancing very well”.
The IMF has provided additional comments “but it’s going in the right direction”, Mr Rigo said.
He called for the multiple exchange rates that have emerged since Lebanon’s economic collapse began to be unified, including the Sayrafa platform managed by the central bank, which he said was not driven by the market.
“Lebanon is at a dangerous crossroads, and without rapid reforms will be mired in a never-ending crisis,” he said.
Updated: March 23, 2023, 6:21 PM