Lebanon's economic model of a high interest rate regime that attracted billions of dollars in deposits is "broken" and the country is committed to carrying out a four-point recovery plan that it hopes to finalise before the end of the year.
Finance minister Ghazi Wazni told an investor presentation webcast on Friday that the economic model needed "an urgent complete overhaul with a recovery plan enabling Lebanon to start anew".
“The government has committed to develop a comprehensive recovery plan and engage into required structural reforms,” he said.
Mr Wazni said the recovery plan is expected to tackle imbalances in the economy.
It should also reform the country's banking sector, which includes both commercial banks and the central bank, to reshape the sector "in line with the support needed for the development of the productive economy".
Wide-scale fiscal reform that is intended to generate "reasonable primary surplus over the medium to long term", is another target.
The government's coffers have been sapped by debt servicing, civil servant salaries and the state-run utility company Electricite du Liban's annual deficit of about $2 billion (Dh7.34bn).
"Over recent years, the Lebanese economic model consisted [of] financing the chronic external imbalance of our economy [for instance in our energy sector] by attracting dollar inflows at a very high cost through the balance sheets of commercial banks and Banque du Liban," Mr Wazni said.
"This spurred the growth of our banking sector with a size rapidly surpassing more and more what was needed to support the real economy.
“This in turn created ever mounting pressures on the government budget, with public debt skyrocketing and essentially financing the constant need of our economy for dollar inflows.”
This headlong rush, Mr Wazni said, “eventually went too far and the confidence bubble has now burst”.
Lebanon's debt-to-gross domestic product ratio of 166 per cent is one of the highest in the world, according to the Institute of International Finance.
Its public debt increased 7.6 per cent to $91.64bn year on year as of December 31, 2019.
In addition to the large debt, the country faces a foreign currency shortage, a Lebanese pound that has depreciated 40 per cent against the dollar in a parallel market, rising inflation, a shrinking economy and an over-sized banking sector, "which has de facto become insolvent", Mr Wazni said.
A third element of the government's turnaround strategy is comprised of structural reforms aimed at "enhancing growth notably through the development of the productive economy and investment to rebuild infrastructure", he said.
Structural reforms are an important element to the country being able to unlock $11bn pledged by international donors at the 2018 Cedar conference in Paris, and any potential assistance from organisations such as the World Bank or the International Monetary Fund.
A final component of the reform agenda is "a full restructuring" of the government's debt – both Lebanese pound and dollar-denominated debt – "targeted at durably alleviating its weight on the budget and regaining normalised borrowing capacity," Mr Wazni said.
On March 23, Lebanon said it would stop paying all dollar-denominated eurobonds as it seeks to come up with an exit plan from its worst economic crisis in three decades and tries to restore stability and preserve its foreign exchange reserves.
That announcement came after the government defaulted on $1.2bn of eurobonds that were due on March 9.
The decision affects 29 eurobond instruments. In total Lebanon has about $31bn in bond maturities.
The bulk of the debt is held by Lebanese financial institutions, with banks accounting for 33.4 per cent and the central bank 43 per cent.
“As you can imagine, this government has a full agenda over the coming months to design and implement its comprehensive recovery plan and conduct its public debt restructuring. Our aim is to finalise this ambitious turnaround agenda before year-end 2020,” Mr Wazni said.
He said the government "commits to engage into transparent and good faith discussions with Lebanon's private creditors in order to find a credible and sustainable solution to Lebanon's structural debt problem".