Lebanon 'may have to seek IMF bailout if crisis continues for another six months'

The country's economic turmoil and its limited foreign exchange reserves are driving the need for the IMF assistance, IIF says

epa08232595 Supporters of the Free Patriotic Movement, during a protest against central bank in Hamra, Beirut, Lebanon, 20 February 2020. Protesters are demanding to return stolen money that was transferred into accounts in Swiss banks. Moreover, there was a clash between the supporters of the Progressive Socialist Party 'Of Walid Jumblatt', after they blocked the road and prevented the supporters of President Michel Aoun from the Free Patriotic Movement from reaching the central bank, and the Lebanese army and riot police intervened to separate the supporters of the two parties.  EPA/NABIL MOUNZER
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If the unprecedented political and economic crisis continues for another six months, policymakers in Lebanon would have to ask the International Monetary Fund for a bailout package.

Having a stamp of approval from the IMF and its accompanying conditions and timetables to achieve reforms and economic targets would also send a positive signal to the international community and the financial markets, Garbis Iradian, chief Middle East and North Africa economist at the Institute of International Finance (IIF), told media on Friday in Riyadh.

"If in the next six months the situation does not improve, they will most likely have to ask for an IMF bailout," Mr Iradian said. "There should be a political consensus for that though," he said, adding political factions for their own reasons have so far opposed an IMF bailout.

A shortage of foreign currency reserves, he said, is one of the main factors driving the need for an IMF-supervised programme. "The foreign reserves at the central bank are limited .... so it all about availability of foreign exchange [reserves]."

Last month, the IIF estimated Lebanon will require a $8.5bn bailout package from the IMF to break its economic impasse and help it meet its financing needs and restore growth.

The country's long-time parliamentary speaker, Nabih Berri, however has claimed that citizens, who have been protesting since October, would reject an IMF bailout programme that would most likely require the country to float its currency, forcing a major devaluation. It would also mean higher taxes and austerity measures, he said.
An IMF team is already in Lebanon until February 23 for consultations with officials. How the Lebanese policymakers plan to tackle the ongoing political and economic turmoil is on top of the Washington-based lender's agenda, the IMF said in a statement on Tuesday.

The IMF will “take stock of recent macroeconomic developments, and provide broad technical advice on policies to deal with the macroeconomic challenges facing the economy,” Gerry Rice, the IMF’s director of communications and spokesman said in the statement.

Despite its economic woes worsening, Lebanon has not yet requested financial assistance from the IMF. The country reached out to the fund earlier this month seeking technical advice as it faces a looming deadline to repay $1.2 billion (Dh4.4bn) in eurobonds that hit maturity on March 9. Another $700 million is due in April and $600m in June. On Tuesday, Fitch Ratings said Lebanon's financial position points to a likely restructuring of its debt and financial sector.

The economic turmoil faced by Lebanon is a result of a long history of failed attempts to develop a sustainable economic policy and if Lebanon is to take first steps to recovery, it needs a viable economic programme, which could get the International Monetary Fund (IMF) backing.

“These failures reflected fundamental political economy factors and institutional weaknesses,” Mr Iradian said in a report released earlier on Friday. “Such domestic factors, exacerbated by a challenging external environment, led to a steady erosion of confidence in Lebanon and ultimately to the current crisis.”

The Lebanese economy has entered its third consecutive year of negative growth and its public debt has risen to unsustainable levels. In the period from 2011-19, real GDP growth averaged only 0.5 per cent, the current account deficit exceeded 21 per cent of GDP, and the fiscal deficit reached 9 per cent of its gross domestic product. Public debt increased to unsustainable levels, rising from 131 per cent of GDP in 2012 to 164 per cent of GDP at end-2019, according to the latest IIF report.

“With interest payments alone accounting for 53 per cent of government revenues in 2019, the fiscal accounts are stretched too thin to pursue productivity-enhancing social and infrastructure investment,” the IIF's Mr Iradian said.

The Lebanese pound has already lost more than a third of its value against the US dollar in the black market.

The unemployment rate may have risen to over 20 per cent and the poverty rate to around 40 per cent. The average inflation is expected to increase to about 20 per cent in 2020 due to the pass-through effects of the massive black market exchange rate depreciation of the Lebanese currency.

“The imposition of temporary capital controls by banks in November 2019 was vital to avert a meltdown of the financial sector, but lasting capital controls can create additional headwinds to a recovery of economic activity,” he added.