Lebanon: Lebanon sinks deeper into the economic abyss as IMF talks stall
Economic conditions have deteriorated significantly in recent months amid spiraling inflation, the Covid-19 pandemic and sociopolitical instability, after the country defaulted on its debt for the first time ever in March. Moreover, in early July, talks with the IMF over a mooted USD 10 billion bailout were reportedly suspended due to political infighting and the lack of reform progress. The bailout and associated reforms will be vital to restore financial and economic stability, and could also help unlock USD 11 billion in additional funding pledges made by international partners at the 2018 CEDRE conference. In the absence of an agreement, the economy is likely to continue to deteriorate, and recession is forecast for this year and next.
Recent data highlights the perilous state of the economy. The private-sector PMI languished deep in contractionary territory throughout Q2, while huge declines in construction permits and cement deliveries in March point to a collapse in construction, formerly an important growth driver. Moreover, while the Lebanese pound is still officially pegged at LBP 1507.5 per USD, this rate is now only available for essential imports, and the pound has lost most of its value in the parallel market in recent months. This has spurred inflation, which hit 56.5% in May, crushing consumers’ purchasing power and raising the specter of famine. A resurgence of social unrest in June further darkens the economic picture, notwithstanding the easing of lockdown measures—the country’s only international airport reopened from 1 July, for instance.
At the end of April, the government presented a rescue plan that forms the centerpiece of its efforts to attract IMF support. While the plan does contain a detailed audit of the state’s finances and acknowledges steep losses in the banking sector, it has been criticized for lacking a comprehensive roadmap for reform and is unlikely to convince the Fund.
As Maya Senussi, senior economist at Oxford Economics, noted:
“The plan put forward fails to show commitment to reform and meaningfully address state expenditure, including the sprawling public sector payroll. Large part of the blame is placed on banks, which are also seen as a focal point for any future adjustment. […] Any plan will require, among other policies such as an official LBP devaluation, decisive steps to restore debt sustainability.”
Lebanon’s banks have criticized the rescue plan and announced alternative proposals. In addition, tensions have spiked between Banque du Liban and the government, with Governor Riad Salamé disagreeing over the IMF and government’s assessment that the Central Bank has accumulated roughly USD 50 billion in losses.
According to Daniel Richards, an economist at Emirates NBD:
“The growing animosity between the government and the banks will make it more difficult to reassure external observers of the potential to reform.”
Moreover, two senior financial officials have resigned in recent weeks, including Alain Bifani, the long-serving director general of the finance ministry. In his resignation speech, Bifani criticized the government for failing to commit to deep reforms. The lack of political unity led the IMF and the government to temporarily pause negotiations in early July, pending the adoption of a common approach to the talks on the Lebanese side.
Our panelists appear downbeat about the prospects for a notable turnaround in the country’s economic fortunes in the short to medium term. They see GDP collapsing this year and forecast a further, albeit softer, decline in 2021, while the fiscal deficit and public debt are seen staying extremely elevated over the same period. Even if an IMF program is eventually agreed, the country’s deep-seated structural problems, fractured political system and poor track record of reforms will likely continue to hamper the economy.