The IMF criticizes the slow implementation of reforms in Lebanon

LEBANON. "Despite the urgent need to act to resolve Lebanon's deep economic and social crisis, progress in implementing the reforms agreed upon in the April Stabilization and Association Agreement (Editor's note: April 7, 2022) remains very slow." The message sent, in the form of a statement Wednesday, September 21, 2022 by the International Monetary Fund (IMF), is clear. It summarizes the general impression of the members of the delegation of the institution. This team has just completed its mission in Beirut (September 19 to 21, 2022) with as a roadmap, for the first time, the assessment of Lebanon's progress in reforms. "Delaying their implementation only increases the costs for the country and its people. Completion of prior actions is necessary for the IMF Executive Board to consider the request for a financial program with Lebanon. We will remain engaged with the authorities to advance the reform agenda," the text continued.

To obtain this IMF credit facility of $3 billion over four years, the Lebanese government has indeed committed to a list of ten reforms including two laws, one on capital controls and another on banking secrecy. The texts were adopted by Parliament in July 2022, but were sent back to the deputies for revision. The financial advisor to the Lebanese Banks Association had simply deemed the draft "illegal" or "in the alternative, unconstitutional" in June 2022.

The IMF acknowledges that the bank secrecy law "contained some positive measures", but is very critical overall. "It fell far short of the changes needed to bring it into line with international best practice. We welcome the fact that Parliament is addressing some of these shortcomings, which are fundamental to fighting corruption, removing obstacles to effective supervision and restructuring of the banking sector, to tax administration, and to investigating financial crimes and recovering misappropriated assets."
 

Lawmakers have yet to pass the 2022 budget. For the IMF, "the focus must now be on preparing and approving a credible 2023 budget for macroeconomic purposes. The Fund says it will have to be based on "realistic macroeconomic assumptions, with the necessary measures to increase revenues, including the use of a realistic exchange rate for all fiscal targets. This should allow for a significant increase in social and investment spending and an adjustment in public sector spending to revive the basic functioning of the public administration at a time when public services are disappearing, with a notable impact on revenue collection.

Faced with Ernesto Ramirez Rigo, head of the IMF delegation, who was surprised by the ambiguity that reigned at the level of executive and legislative authorities, especially regarding the realization of the reforms needed to move the Lebanese economy forward, Michel Aoun, President of the Lebanese Republic, pointed to "domestic actors" as responsible for the slowdown of progress in this area. According to a statement from his office, the Lebanese president referred to "several obstacles that have arisen on the part of a number of parties that have delayed the achievement of what was required and constitutes the beginning of the economic recovery process. These obstacles have aggravated the rate of deterioration of the economic situation".
 

Yet IMF support remains absolutely essential for the country, which has been in default since March 2020 and whose currency continues to weaken. According to a study conducted in July 2022 by Hopkins University (United States), the Lebanese pound (LBP) is the third currency that has lost the most value against the U.S. dollar since 2020 (91.96% drop). It is even ahead of the Syrian pound (5th with a drop of 77.11%), even though the country is at war.

Eight out of ten inhabitants are below the poverty line. "The Lebanese economy remains seriously depressed by the persistent impasse on essential economic reforms and by a high level of uncertainty", comments Ernesto Ramirez Rigo. The head of the delegation drives the point home: "GDP has contracted by more than 40% since 2018, inflation remains in triple digits, foreign reserves are shrinking, and the parallel exchange rate has reached LBP 38,000 per USD. Amidst collapsing revenues and drastic spending cuts, public sector institutions are failing, and basic services to the population have been drastically reduced. Unemployment and poverty are at historically high levels."

In May 2022, Olivier de Schutter, an expert commissioned by the UN Human Rights Council, called Lebanon a "failed state" and was very harsh on governance: "impunity, corruption and structural inequalities have been built into a venal political and economic system designed to fail those at the bottom, but it doesn't have to be this way."

The Humanitarian Fund for Lebanon (LHF) on Wednesday, September 14, 2022, granted $8 million to "address the urgent needs of vulnerable people." Led by the Humanitarian Coordinator for Lebanon and managed by the UN Office for the Coordination of Humanitarian Affairs (OCHA), the LHF will thus be able to help fund seventeen multi-sector projects in the education, child protection, shelter, and water, sanitation, and hygiene sectors in areas of greatest need.
 

The IMF delegation's statement also said that "large losses in the banking sector must be recognized and addressed up front, while respecting the hierarchy of claims. Small depositors must be fully protected and recourse to public resources - assets belonging to all Lebanese citizens, with or without a bank account - should be limited. A useful reminder in the current situation and as the overnight capital controls imposed by commercial banks in 2019 have frozen accounts.

During the first fortnight of September 2022, a dozen desperate Lebanese came to rob their own bank in order to withdraw their savings. The Association of Lebanese Banks decided on Thursday, September 22, 2022, to close "indefinitely" all Lebanese institutions until further notice. It calls for protective measures from the state to reopen the doors of banks, justifying its decision by the risks too great for employees and customers inside the branches.

Nothing has been going on for months in Lebanese banking institutions. In January 2022, the public prosecutor at the Court of Appeal of the Mount Lebanon region (center) issued a ban on leaving the country against Riad Salamé, governor of the Central Bank of Lebanon (CBL) since 1993. He is suspected of money laundering and transferring funds abroad.
In March 2022, the Lebanese judiciary froze the assets of five major banks (Bank of Beirut, Bank Audi, SGBL, Blom Bank and Bankmed) as part of its investigation into transactions carried out by these institutions. Two months later, the International Monetary Fund called for audits of the country's 14 largest banks and asked Parliament to approve an emergency banking resolution law. Lebanese banks were one of the main lenders to the Lebanese government before the financial collapse of 2019.

Facing President Michel Aoun, Ernesto Ramirez Rigo stressed "the need to restore confidence in the financial and banking sector represented by the Bank of Lebanon and the banks, given the loss of confidence in these two sectors."

On Tuesday, September 20, 2022, Emmanuel Macron met with Lebanese Prime Minister Najib Mikati in New York, on the sidelines of the United Nations General Assembly. The President of the French Republic reaffirmed his "unwavering support" and recalled his "constant commitment" to respond to the urgent needs of the Lebanese population through French humanitarian action and by structuring international aid. He also insisted on the fact that "Lebanon can only sustainably recover by implementing a serious program of structural reforms", while "commending the efforts of Najib Mikati in this regard" and "called to continue in this direction".

The IMF delegation revealed to Michel Aoun that it had hoped to sign the final financing agreement with the Lebanese government in late September or early October 2022, after the parliamentary elections in May 2022.