Lebanon and the IMF: Entrenching the ruling elite
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On 7 April 2022, the IMF announced in a statement that it had reached a preliminary agreement with the Lebanese government, whereby Lebanon would receive a $3 billion loan from the institution over a 3-4 year period.
The country would then need to pay back this loan over a subsequent period spanning 4 to 10 years, at an interest rate averaging between 3% to 4%.
The approval of such a loan by the IMF is tied to three main conditions. Firstly, prior completion of a set of initial reforms by the Lebanese authorities.
Secondly, a “confirmation of international partners’ financial support” – which is basically a commitment for additional financing to be provided by other multilateral and bilateral donors. And finally, the approval of the loan facility by the IMF management and its Executive Board.
While this financing facility of about $1 billion per year is well below Lebanon’s current foreign financing needs, it is seen by the Lebanese ruling elite and also by the country’s main donors as a cornerstone for the potential roll-out of a larger foreign support package.
"During the past two and a half years the ruling elites have managed to shield their wealth from the economic and financial crisis, shifting its impact onto ordinary citizens"
International donors believe that bringing on board the IMF as a necessary entry point for any new foreign assistance would potentially guarantee that economic reforms would be implemented and shield the disbursed funds from massive corruption in the country.
However, this is not the first time that conditionality in foreign assistance had been tried in the Lebanese context.
France together with the main international donors to Lebanon, including the World Bank and the IMF, have organised the Paris 1, 2, and 3 conferences between 2001 and 2007, which provided foreign loans to the Lebanese government in exchange for general reform commitments (reducing public debt, reforming the electricity sector, etc.).
Ten years and several billion dollars in loans later, the country had an even larger public debt (almost 180% of GDP), more electricity cuts, and persistent corruption in almost all institutions.
In 2018 another donor conference was organised in Paris, the CEDRE conference, where international institutions and several countries pledged $11 billion mostly in loans to finance the modernisation of the country’s infrastructure.
Contrary to the previous conferences, the package was conditional on the Lebanese government implementing budgetary and sectoral reforms, mostly in the form of austerity measures, tax hikes, and privatisation of public assets.
None of these were implemented, the conference was a complete failure, and the country’s ruling elites used the reform plan’s collapse to dilute their responsibilities and trade blame with each other.
Following the October 2019 uprisings and the economic and financial collapse of the country, the Lebanese authorities rehashed their 'reform package' and tried yet again to secure foreign funding.
Yet this time around they were ‘forced’ by international donors to go through the IMF first, and in effect talks with the institution began mid-2020 based on a ‘new’ reform program that now had not only the spiralling public debt problem to deal with (including the default on foreign debt) but also a major loss within the financial sector and a massive currency devaluation.
Despite several shortcomings, the 2020 financial recovery plan was the first to openly acknowledge the shortcomings of the Lebanese Central Bank’s financing of the public debt by siphoning off bank depositors’ funds.
It also estimated a figure for the financial sector losses (at around $70 billion) and proposed an allocation of these losses based largely on public debt write-offs and bail-in of commercial banks’ shareholders (estimated at more than $20 billion shareholder capital write-off).
And precisely because of this, the commercial banks’ lobby, together with the central bank leadership and the main ruling politicians, torpedoed this plan later in 2020 by producing through various accounting manipulations alternative financial losses estimates up to half the amount reported by the government’s plan.
This was not surprising, given that most banks in the country are controlled by the political class. Talks with the IMF were subsequently halted for more than one year and a half, resuming in September 2021 with the formation of a new government headed by the businessman billionaire veteran politician Najib Mikati.
The announcement on 7 April 2022 of a preliminary agreement with the IMF thus raises several questions.
What has changed since the last discussions almost two years ago? Have the Lebanese ruling elites agreed on a reform plan and an allocation of the financial losses? Are there reasons to believe their plan now is more credible and could start steering the economy towards a recovery path?
In fact, during the past two and a half years the ruling elites have managed to shield their wealth from the economic and financial crisis, shifting its impact onto ordinary citizens who witnessed their purchasing power deteriorate, their jobs and businesses destroyed, and their lives shattered.
"The ruling elite has been able to smuggle more than $7 billion out of the country, while continuing to delay the enactment of capital controls legislation"
This ‘laissez-faire’ policy of allowing the economy to collapse was surprisingly described by a World Bank report in the Fall of 2020 as a “deliberate depression, orchestrated by the country’s elite that has long captured the state and lived off its economic rents”.
Researchers at Triangle went further and called this a “shadow financial plan”, describing in detail how the Central Bank, commercial banks, and their political allies across the ruling spectrum managed to reduce losses within the financial sector while protecting the large wealth amassed by the ruling elites.
Through this deliberate shadow plan, the ruling elite has been able to smuggle more than $7 billion out of the country, while continuing to delay the enactment of capital controls legislation.
In parallel, the Central Bank created within the banking system another category of ‘Lebanese dollars’ that exchanged at 3,900 LBP/$ instead of the official peg of 1,515 LBP/$.
As of April 2020, ‘new fresh’ and ‘old’ dollars were created within deposits, with ‘old’ dollar accounts opened prior to November 2019 effectively frozen and depositors only able to get small sums either in lira at the beginning of and late last year or in dollars, but up to a $500 total ceiling.
The central bank later introduced other dollar exchange rates for various key imports and then created an internal currency trading platform with a semi-controlled rate. All in all, the creation of these multiple exchange rates fuelled the black-market rate, and the currency depreciated by more than 15 times its 2019 value in under three years.
Commercial banks have profited from this environment by first getting rid of more than $6 billion of their government debt foreign currency bonds on the international market at very low prices.
Then they managed through the Central Bank’s accommodating policies to reduce their liabilities to depositors in foreign currency by almost $14 billion and write off most of their loans to their customers and sell government bonds to the central bank.
And to implement all of this, the central bank has printed money like never before, deepening further the devaluation and contributing to rising inflation.
A leaked version of the 2022 government reform plan now shows that the estimated commercial banks’ shareholders' bail-in is now at a maximum of $12 billion (down from the 2020 estimate of US$ 20 billion).
"By having allowed the national currency to dramatically devaluate, the financial sector and the ruling elite have managed to reduce their liabilities and shift losses away from their wealth and towards the general public"
The plan also shows that most losses and future plans are now evaluated at a currency rate of 20,000 LBP/$, compared to the 2020 plan where the exchange rate was assumed at 3,500 LBP/$.
Therefore, by having allowed the national currency to dramatically devaluate, the financial sector and the ruling elite have managed to reduce their liabilities and shift the losses away from their wealth and towards the general public.
The IMF statement also indicates that bank restructuring, which was a heavily contentious point under the 2020 plan, is now going to take a gradual approach through the “external evaluation” of said banks, while the 2020 plan proposed outright mergers and the creation of new banks.
And while the IMF calls in its statement for the “cabinet approval of a bank restructuring strategy that recognises and addresses upfront the large losses in the sector, while protecting small depositors and limiting recourse to public resources”, what is in fact happening is that the IMF is indirectly endorsing the outcomes of this ‘shadow plan’, that has basically impoverished the majority of the population and allowed the banking sector to shift most of its losses onto public funds and the general public.
With no clear accountability or fundamental change in political and financial governance systems, the IMF-backed agreement would provide yet another lifeline for a ruling elite that has proved not only its unreliability but also its deliberate self-protection during these difficult times.
Jad Chaaban is an economist and political activist. He is an Associate Professor of Economics at the American University of Beirut (AUB) and a visiting scholar at Paris-Dauphine University and INSEAD.
Follow him on Twitter: @JadChaaban