“The Lebanese economy is in freefall,” reads the first sentence of the recovery plan Lebanon has finally submitted to the IMF in pursuit of an urgent financial rescue package. That is probably an understatement.
The country that was supposed to arise, phoenix-like, from the ashes of its 1975-90 civil war, propelled by serial foreign aid and loan packages, is now on a path to a crash-landing. Its dire position started to become apparent long before the Covid-19 pandemic.
Postwar Lebanon has, until now, lived on foreign exchange inflows that accumulated to far more than the size of its economy, keeping in place an unsustainable peg to the dollar which destroyed most of its modest industrial base and meant the country imported almost everything it consumed. Lebanon has a vibrant wine industry, for example, but imports the bottles to put its wine in.
In the past five years, as public debt mounted and the current account deficit widened — to 176 per cent and 24 per cent of gross domestic product respectively last year, the government says — a heavily dollarised economy ran out of dollars and juddered to a halt. The government says the economy shrank by 6.9 per cent of GDP last year and expects a further contraction this year of 13.8 per cent — a full-blown depression with an estimated 48 per cent of people already below the poverty line.
Protests that raged in the streets last autumn — and brought down the then government — are resuming now that Lebanon is starting to ease its Covid-19 lockdown. That uprising, demanding a clean-out of the sectarian oligarchs and the warlords in suits who have misgoverned and looted Lebanon since the war, is starting to look festive and forbearing now that rioters are starting to bomb banks.
The banks, long the jewel in Lebanon’s economic crown, and the central bank, the Banque du Liban, are at the heart of this crisis. The banks long offered high interest rates to attract dollar deposits, especially from the far-flung Lebanese diaspora. But Riad Salameh, BdL governor since 1993, began from 2016 offering unsustainable interest returns to the banks to lend on these dollars to the government, through the central bank.
In sum, 70 per cent of total assets in the banking system were lent to an insolvent state. The recovery programme estimates bank losses at $83bn and “embedded losses” at the BdL at $44bn (subject to audit). Together that is well over twice the size of the shrinking economy. Bankers are protesting at government plans to force mergers and recapitalisation, through a mix of wiping out existing shareholdings; fresh capital investment for banks that wish to stay in business, especially by repatriating dividends and interest earnings; recovered illicit assets; and “haircuts” on wealthy depositors.
But the bank recapitalisation plan and hopes that an IMF deal will unlock substantial foreign resources may be optimistic. The recovery plan accepts clearly that Lebanon must enact reforms to access new money. It is more forthright and searching than previous Lebanese to-do lists — but then previous governments have done next to nothing.
Beirut hopes for something like $10bn from the IMF and $11bn from a 2018 soft-loan package — never activated because of its failure to move on reform. On top of that it hopes to free up $15bn-$18bn through a five-year grace period on the foreign borrowings it defaulted on in March. It is uncertain this will be enough to refloat the country, or put an adequate safety net under the poor.
Even if Lebanon’s sectarian elites realise that the alternative is outright collapse, US President Donald Trump and his Saudi-led Sunni Arab allies tend to the view that aiding Lebanon helps Hizbollah, a politico-military state-above-the-state, and its Iranian patron, tighten their grip on the country.
This reform package, moreover, is put forward by a government handpicked by Hizbollah and its Christian, Shia and Sunni allies. It rests on their majority in parliament. That is raising questions about whether its intent to, for instance, recover assets captured from the state or force a consolidation of the sprawling banking sector will be aimed selectively at the Shia movement’s adversaries.
Mr Salameh, the BdL governor, looks exposed. So long in charge of what was thought to be one of Lebanon’s few functioning institutions, many ascribed to him almost magical powers. Now he looks to be revealed as a sort of Wizard of Oz: nothing but a man behind a curtain cranking a machine.
Still, another way of looking at is provided by a former minister and veteran of many frustrated attempts to reform Lebanon: “This [programme] is the first time we’ve really had a good look at ourselves; that is good news”.
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