Lebanon’s Cabinet boycott ends but new challenges await amid economic ruin

The government is far from agreeing on a programme of reform

Lebanon’s Prime Minister Najib Mikati attends a parliamentary session in Beirut on September 20, 2021. Reuters

Lebanon’s Hezbollah and Amal parties have pledged to lift their boycott of Cabinet sessions to address the 2022 budget.

But an economist has told The National the path to economic recovery is long and mired with obstacles.

The two parties paralysed the Cabinet with a three-month boycott intended to end the Beirut port blast investigation in which some of their ministers were called for questioning.

During that time, the Lebanese pound depreciated by about 50 per cent, hitting salaries pegged to the official exchange rate and causing poverty to rise to four fifths of the country’s population.

Ministers were still meeting behind closed doors during this time, preparing the 2022 budget required for coming talks with the International Monetary Fund.

During closed-door sessions in December, the committee preparing the technical talks for the IMF concurred that Lebanon’s financial-sector losses amounted to $68.8 billion.

Jean Tawile, an economist, told The National no agreement had been reached on how to distribute the losses among stakeholders, which include the state, the financial sector, depositors and banks.

“The main negotiation was happening with the central bank and the banking sector… They were not including the main stakeholders, the depositors,” he said.

The depositors stood to be the biggest losers in this settlement, he said.

Last week, Prime Minister Najib Mikati signalled that he would need two weeks to present a budget to the Cabinet.

One of many points of disagreement is determining which exchange rate to use in the budget.

The official rate is 1,507 Lebanese pounds to the US dollar, though the black market rate is 24,500 at the time of writing, but reached as high as 33,000 last week.

According to Circular 161 which was released by the Central Bank in December, public sector staff are now able to withdraw their salary in dollars according to the Safraya rate — now at 24,400 - which would then enable them to buy liras at an exchange house at the black market rate.

“In an environment when you have multiple exchange rates, how are they going to do their modelling and forecasting without having a very clear view about what rate they will use?,” Mr Tawile said.

IMF financial aid talks

The IMF has said Lebanon must present a comprehensive plan of economic reform that includes lowering its deficit, cutting wasteful spending and improving tax collection, among many other requirements.

Both the plan and the budget would have to be approved by parliament, a problem for the government of Hassan Diab, Mr Mikati’s predecessor.

“In the past this is how things were blocked … we can see a lot of obstacles,” Mr Tawile said.

“It doesn’t mean that if the government is going to meet that it’s completely solved and the sky is blue and the sun is shining.”

He said budget negotiations can be problematic when the reforms needed, such as cutting wasteful spending, are not in the interest of those in power.

The decision of Hezbollah and Amal to lift their boycott of Cabinet sessions now could have been motivated by the coming elections in May, and a wish to shift debate from the Beirut blast investigation to the economy.

Saeb El Zein, a former managing director with international banks and funds, said the emphasis on economic recovery and the budget reflected the interests of Lebanon’s political class.

“Any deepening economic crisis will affect all the current leadership, not just Hezbollah and Amal, so it’s important that they show they’re doing something,” he told The National.

He said it was unlikely that an agreement with the IMF could be reached before the election. But productive talks with the fund – an online meeting is planned for this month – may at least contain some of the currency movement and volatility in Lebanon.

“To achieve an agreement with the IMF would be a huge political and economic win for the current government. However, from experience, with the parliament, the various interest groups and their leaders, it’s not going to be an easy process,” Mr El Zein said.

“An IMF programme should have been in place by June 2020 … I, myself, thought it was quite easy to address the issues. It’s Economics 101, but in the end politics won. In a way, I gave up on hope.”