Lebanon needs IMF assistance more than ever before.

Feature16.03.2020Kristof Kleemann - Project Director
kk-ARTICLE1

Lebanon is on the brink of bankruptcy. For the first time in the history of the country, the government has failed to repay its public debt. Last weekend, Prime Minister Hassan Diab announced that his country would not be able to pay back parts of the massive foreign debt it has accumulated over the last decades. Since the decision was taken, commercial banks and bureaus de change remained closed, or opened its doors only for a few hours. Following months of public protests and demonstrations against the systemically corrupt structures of the banking system, the future remains uncertain, both for the country political elite and for every Lebanese citizen. 
 
Prime Minister Diab's decision was received as highly controversial. Many fear that Lebanon could suffer a similar fate to that of Argentina. After all, the South American country is still living through the negative legal and political implications of a national debt default. In fact, the decision of Diab seemed rushed. It is true that the Prime Minister promised a whole package of measures that economists have long been calling for. These measures include reducing government spending, improving tax collection, or reforming the hopelessly inefficient electricity industry. However, he did not answer the question of how to finance what is likely to be a painful period of adjustment. A group of leading economists estimate, that the Lebanese economy will shrink by at least 10 percent this year. And the effects of the COVID-19 pandemic are not even taken into account yet. The Lebanese pound has already plummeted by 40 percent; and according to official estimates, inflation could reach an annual rate as high as 10 percent. Meanwhile, the leading consumer association states that prices have risen by 45 percent since October 2019.
 
Nasser Saidi, a former Minister of the Economy and Industry and first Vice Governor of the Central Bank from 1993 to 2003, expects Lebanon to be in dire need of a budget stabilisation fund of at least 20 billion USD in order to support economic reforms. This would require a buy-in from the International Monetary Fund (IMF); a notion the government, and especially Hezbollah, have rebuffed so far. Other traditional donors for Lebanon, however, are nowhere to be seen: Saudi Arabia has already limited its financial aid in recent years and will not support a government backed by Hezbollah. Iran is struggling with its own economic crisis and is particularly hard hit by the current coronavirus pandemic. The EU and France have also turned their backs on Lebanon, calling for meaningful reform efforts in exchange for any kind of support. Consequently, Ibrahim Jouhari, independent scholar and partner of the FNF, stresses: "Lebanon is evidently out of options but one: relying on the IMF. There is an urgent need for injecting fresh dollars into the financial system."
 
Despite this, the government is still trying to compile a reform plan without assistance from the IMF. Against that backdrop, the government's strategy is bound to fail: Over 100,000 people have lost their jobs in recent months or are on short-time work schemes. Many companies have had to close shop. The World Bank warned that up to 50 percent of the Lebanese population risks falling below the poverty line. In addition, the economic crisis also carries the danger of increasing tensions within Lebanese society. While protests have so far been mainly nondenominational, religious turmoil could easily erupt. 
 
Prime Minister Diab must therefore act responsibly and in the interest of the country as a whole. The right diagnosis was made. A encouraging first step, but reform does not come for free. Diab's government must now show its willingness to bring the country forward and engage with the international community to find a sustainable solution for its economic and financial mess. To do so, however, the government must leave behind the notion of being able to rebuild the nation's economic shambles without financial support from the IMF.