Lebanon’s crisis needs a thorough reform plan to stabilise economy, IMF staff say

Country also needs to address deep-seated challenges and lay the ground for sustainable and strong growth

Protesters block cars from advancing on a main road in the southern Lebanese city of Sidon during a general strike by public transport and workers unions. AFP

The complex nature of the Lebanese crisis requires a comprehensive social, economic and financial reform programme to stabilise the economy, the International Monetary Fund staff said after the conclusion of their virtual mission meetings with Lebanese authorities.

The country, which faces its worst crisis in more than three decades, needs to also address deep-seated challenges and lay the ground for sustainable and strong growth, the fund's staff said on Friday.

Decisive action by the authorities is needed to tackle the deep-seated problem of corruption and strengthening transparency

Ramirez Rigo,
IMF’s mission chief for Lebanon

The value of Lebanon's currency against the US dollar plunged more than 90 per cent following the government's defaulted on about $31 billion of eurobonds, accelerating the country's economic decline into what the World Bank called last year a "deliberate depression". Inflation soared to 155 per cent last year the about 80 per cent of the country's population live below the poverty line.

Lebanese authorities participated in online discussions with IMF staff that took place from January 24 to February 11 on the framework and policies of an economic reform programme that can be supported by the Washington lender.

Although progress was made during the mission in agreeing on the necessary reform areas, IMF representatives said more work was needed to translate them into concrete policies.

“Obtaining broad-based buy-in for this multiyear programme will be fundamental for its timely and decisive implementation. At the same time, strong upfront actions will be necessary to start turning the economy around and rebuilding confidence,” said Ramirez Rigo, IMF’s mission chief for Lebanon.

The fund's representatives said Lebanon’s economic programme must include “targeted and timebound actions” across five different pillars to “enhance transparency and accountability”.

It suggested restructuring the financial sector to support recovery; reforming state-owned enterprises, particularly the energy sector, to provide better services without draining public resources; and strengthening government, anti-corruption and anti-money laundering as well as countering the financing of terrorism frameworks.

IMF representatives recommended establishing a credible monetary and exchange rate system in the country, and introducing fiscal reforms to ensure debt sustainability and investment in social spending and reconstruction efforts.

There is now a clearer understanding of the unprecedented size of the financial sector’s losses that would need to be addressed transparently, “consistent with the hierarchy of claims while protecting small depositors, as already envisaged by the authorities”, Mr Rigo said.

Lebanon’s economic crisis is worsening and politicians have failed to enact reforms to increase transparency and fight corruption, which would allow for the IMF to provide financial aid to the country.

A first attempt at negotiations collapsed in 2020 because the banking sector disagreed on the previous government’s estimation of the size of its losses, at $69 billion.

They have recently picked up again, but IMF managing director Kristalina Georgieva earlier hinted at difficult negotiations when she said the institution would only support a “comprehensive programme” that would tackle all the country's ills, including corruption.

Lebanon's Riad Salameh was once hailed as one of the world's best central bankers, but his personal finances have come under intense scrutiny. Reuters

Mr Rigo said it will be important to develop a medium-term fiscal strategy that allows the government to invest in “critically needed social spending” to support the people of Lebanon — and enables reconstruction efforts — while being consistent with debt sustainability.

“Decisive action by the authorities is needed to tackle the deep-seated problem of corruption and strengthening transparency, including by accelerating the launch of the procurement commission and lifting the bank secrecy law or amending it in line with international best practice,” he said.

Lebanon's private sector shrunk at a softer pace in January, with business conditions hitting a seven-month high due to a slower decline in output and new orders.

The Blom Lebanon PMI, which measures operating conditions in the country's private sector, rose to 47.1 in January, up from 46.7 in December, and its highest mark since last June. However, it remained below the 50.0 mark that separates growth from contraction.

Lebanon's central bank governor Riad Salameh, once considered one of the world's best central bankers, has also come under the radar of Swiss and European prosecutors.

Scrutiny over his personal finances has increased since the collapse of Lebanon’s banking sector in late 2019.