Abu Dhabi, UAEThursday 29 October 2020

Lebanese PM and IMF head discuss country's worst economic crisis in three decades

Teams from the International Monetary Fund and Lebanon will meet to explore reforms needed to restore stability to the country's economy

epa08398899 A protester shouts slogans during a protest at Al Nour Square in Tripoli, northern Lebanon, 03 May 2020. Anti-government protesters from across Lebanon arrived in the Lebanese city of Tripoli to show support of demonstrators of the city after the alleged death of a protester Fawaz Al Samman in clashes with the Lebanese army on 28 April 2020. EPA/WAEL HAMZEH
epa08398899 A protester shouts slogans during a protest at Al Nour Square in Tripoli, northern Lebanon, 03 May 2020. Anti-government protesters from across Lebanon arrived in the Lebanese city of Tripoli to show support of demonstrators of the city after the alleged death of a protester Fawaz Al Samman in clashes with the Lebanese army on 28 April 2020. EPA/WAEL HAMZEH

Lebanese Prime Minister Hassan Diab and International Monetary Fund managing director Kristalina Georgieva discussed the government’s plan to rescue the economy from its worst crisis in three decades.

“I had a productive call with Lebanon’s PM @Hassan_B_Diab today to discuss the government’s Recovery Plan, which is an important step forward to address #Lebanon’s economic challenges,” Ms Georgieva said in a tweet on Monday.

“We agreed that our teams will soon start discussions on much-needed reforms to restore sustainability and growth for the benefit of the Lebanese people.”

Lebanon formally asked the IMF for a loan of at least $10 billion (Dh36.7bn) on Thursday. The economy has buckled under the weight of mounting debt that forced the country to default on eurobonds in March.

Lebanon's gross domestic product is set to contract 12 per cent this year, according to IMF projections. The country's debt ballooned to $92 billion at the end of January, making it one of the highest debt-to-GDP ratios worldwide.

In total, Lebanon has about $31bn in bond maturities and the bulk of that is held by local financial institutions, with lenders and the central bank accounting for 33.4 per cent and 43 per cent, respectively.

Deposit flows, which financed the country’s deficits and shored up its banking system, have dried up while credit has been frozen and the Lebanese pound has lost more than half of its value against the US dollar.

Long-running political disputes and successive changes of government have prevented Lebanon from carrying out structural reforms needed to unlock pledges worth $11bn by international donors.

The Association of Banks in Lebanon rejected the government's rescue plan and said it was "not consulted" by Mr Diab's administration.

“The association is an essential part of any solution, as the economy requires a strong banking sector capable of playing its role as a means of social integration and growth by granting credit to individuals and companies,” ABL said, a day after the government submitted its request to the fund.

The government’s recovery plan is comprised of measures to adjust the exchange rate regime and restructure public debt and the financial sector.

It also intends to bring about fiscal consolidation and structural, social and environmental reforms while seeking international financial aid.

The programme assumes an exchange rate that fixes the pound at 3,500 to the US dollar – more than double the peg that has existed since 1997.

There are plans to move to a flexible system in the future through a float or a crawling peg, where the rate is frequently adjusted in line with market conditions.

Furthermore, the plan assumes that the country will receive external financial support and the government will successfully execute the reforms in full.

It also assumes that the government will reach a debt restructuring agreement with creditors this year.

The government’s programme envisages the restructuring of the central bank and commercial lenders.

It estimates the central bank’s losses at 117 trillion pounds ($77.6bn/Dh285bn) and impaired liabilities at 121tn pounds.

Commercial bank losses incurred as a result of the crisis and restructuring of public debt are estimated at 186tn pounds.

ABL, however, said that "the local restructuring process, as outlined in the plan, would further undermine confidence in Lebanon, domestically and internationally”.

“At the same time, the plan cited key elements for restoring and strengthening investor confidence, such as an effective anti-corruption strategy, but not being detailed – raising questions about the timing of implementation," it said.

"In fact, the plan is likely to hinder investment in the economy, and therefore the prospects for recovery.”

ABL said the government’s plan does not address inflationary pressures, and may lead to high inflation.

It also said “the social inclusion component of the plan ... requires further explanation and detail, particularly on the following three priorities: job retention, poverty alleviation and inequality reduction.”

ABL said there was an urgent call "for a constructive dialogue" and promised to play its part in supporting the country while adhering to its “fiduciary duties as we have done in the past”. It also called for concrete action and consensus among all concerned parties.

“Every day that passes without reform exacerbates the situation,” ABL said.

It said it intends to present to the government a plan to mitigate the effects of the recession and pave the way for sustainable growth.

Updated: May 5, 2020 02:39 PM

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