Earlier this month, a mission from the International Monetary Fund visited Lebanon, meeting the President, Prime Minister and newly appointed government to discuss potential support. The new administration in Beirut has shown a keen interest in renegotiating a deal to essentially update the staff-level agreement reached with the IMF in April 2022.
More than five years into the financial crisis, successive governments have yet to take any meaningful steps towards recovery. Despite the new authorities’ verbal commitment to a deal, negotiations will be tough. If history is any guide, several deeply entrenched political and lobby groups will attempt to derail reforms or, at the very least, shield their vested interests.
In an interview in March 2020, at the height of the Covid-19 pandemic, I argued that the country would not be able to solve its crisis without an IMF programme to unlock international funding. I warned that “the longer the crisis, the more difficult it becomes to overcome”. The rationale is simple.
Lebanon’s crisis was technically caused by enduring balance of payments deficits. The IMF was established after the Second World War to manage the global system of exchange rates and international payments.
The IMF’s track record is mixed – although it has helped some economies recover, such as those of South Korea, Poland, Turkey and Brazil, others – Argentina, Greece, Pakistan and Egypt – have struggled under its programmes, often due to domestic resistance or flawed execution.
For Lebanon, however, an IMF programme can be a turning point and is the only credible way to stabilise the economy. This is for three reasons.
First, Lebanon needs money. It is not true that defaulting on external debt in March 2020 was the reason why the country’s access to capital markets became impossible. The country’s access to capital markets dried up well before the 2020 default.
A key indicator of this is the rapid increase in the share of Lebanese pound-denominated debt held by the central bank, the Banque du Liban. This rose from 32 per cent in 2014 to 61 per cent in 2020. An agreement with the IMF will ensure access to $3 billion in financing over four years.
Second, the programme will unlock additional financing. The $3 billion alone will not meet gross financing needs, but it will ensure support from western partners, GCC states and international institutions, with the programme serving as a stamp of credibility.
Third, the greatest advantage of an IMF-programme in the Lebanese case is that it will compel the country’s political class – and its backers in the financial lobby – to implement long-blocked structural reforms that the economy desperately needs.
In many countries, the IMF is often accused of promoting “right-wing” or “neoliberal” policies that disproportionately affect the lower and middle classes. Although this argument oversimplifies reality, the fund’s recipe is often more progressive than the policies pursued by the Lebanese government over the years.
The IMF will support the country’s reform strategy to restore growth and financial sustainability, strengthen governance and transparency, and increase social and reconstruction spending. The required reforms include restructuring the financial sector and restoring public finances coupled with the restructuring of external public debt, which I estimate at $46 billion currently.
It also involves reforming state-owned enterprises, particularly in the energy sector, strengthening governance and anti-corruption frameworks, and establishing a credible new monetary and exchange rate system.
The comprehensive and broad nature of such reforms will shake the foundations of Lebanon’s economic system and alter its economic dynamics for the greater good.
In the interview mentioned previously, I stressed that technical solutions were available but the remedy to the crisis was – above all – political, emphasising that we must regain our military and monetary sovereignty.
That journey appears to have begun. The Lebanese state now seems determined to regain control over all its national territory with the help of its legitimate armed forces. The wheels are finally turning. Some obstacles remain, but the direction is set – there is no turning back.
Monetary sovereignty will rest with the next central bank governor. In this sense, the name – not merely the profile – of the next governor will be a vital indicator of the government’s economic and monetary policies going forward.
The next governor will be a Governor Extraordinaire. He – there has been a lack of female candidates – will be a key member of the team that will negotiate with the IMF. His primary task will be restoring the central bank’s credibility after years of scandal.
He also will present a plan for banking sector restructuring, ensure the transparency and accountability of such a process by abolishing banking secrecy, and advance Anti-Money Laundering and Terrorist Financing (AML/CFT) measures, including the illegal financing of Hezbollah following the Israeli war.
In this context, the state of confusion among some senior bankers – and the shameless campaign they have been waging to push a ridiculous narrative about a global conspiracy against the sector – is neither innocent nor surprising.
The lessons from the IMF’s past three decades are clear. First, political will matters and countries that commit to real reforms succeed while those that resist fail. Second, balanced policies and well-managed fiscal policies lead to sustainable recovery. Third, countries that restructure debt early recover faster.
The Lebanese people must accept one reality: no reform, no money. It’s absurd to believe that a crisis has no financial burden. You cannot heal a wound without first cleaning it. The key, however, is to ensure that those who benefited the most assume the larger share of the cost.
The killing of the financial recovery plan in 2020 by the traditional political parties – across the spectrum – and financial groups is still fresh in many people’s memory. The new government has the moral and national duty not to bow down this time.
