What’s In It For Lebanon – The IMF Staff Level Agreement
For many in Lebanon, the announcement of the staff-level agreement with the IMF on April 7, prompted rather short-lived sighs of relief. That may be because certain actions are still required before any money flows at this level of agreement, and because the many challenges to its implementation have become clearer only days after the announcement on April 7. Sisyphus had it easy, one could say, in comparison to the anticipated obstructions that the agreement faces including the May 15th elections, as there are limits to what can get accomplished in the few weeks and three holidays between now and the opening of the polls. In particular, the formation of a new Council of Ministers within five months, the election of a president by the new government, and an agreement on a parliamentary agenda must all take place before any reforms can seriously happen.
As one recent US visitor to Lebanon remarked, “The easy part is over…the number of unknowns and lobbying against the agreement have only started.” Despite assurances from Lebanon’s three presidents, top political leaders, the Bankers Association, and other prominent figures and organizations, much must be done to answer the difficult questions ahead. First on the docket is the need for the government to cobble together a banking restructuring plan which clarifies the costs of debt restructuring to current bank depositors, shareholders, and owners. Concurrently, a lame-duck parliament should begin restructuring the electricity sector– a positive first step being the approval of two power plants and the agreements with Jordan and Egypt for electricity and gas supplies – as well as implementing a mechanism for allowing the exchange rate to stabilize so that people have some notion of what their money is actually worth.
The staff-level agreement has yet to be submitted to the Managing Director and Executive Board of the IMF, and their approval depends on the commitments of Lebanese leaders to actions before and after the new government becomes functional. What is at stake is a “46-month Extended Fund Arrangement (EFF) with requested access of SDR 2,173.9 million (equivalent to about US$3 billion). This agreement is subject to approval by IMF management and the Executive Board, after the timely implementation of all prior actions and confirmation of international partners’ financial support.”
There is no guarantee that the international partners are still willing to hand over the more than $18 billion in concessional loans pledged at the CEDRE Conference. Yet their financing is essential to a successful revival strategy. As the IMF statement noted, “Financing support on highly concessional terms from Lebanon’s international partners will be essential to support the authorities’ efforts and ensure that the program is adequately financed and can meet its objectives.”
The recovery agenda tasks both Lebanese parties and the international community with multiplier roles to assume. For example, the Central Bank of Lebanon and the Association of Lebanese Banks must come to an agreement about restructuring the sector including cuts to depositors at various levels to reduce the banking sector’s liabilities. So will depositors be spared from a cut to their accounts above $100K, $150K, $200K? Where and in what time frame will they be able to have access to their money? This will then impact negotiations with the international bond holders who will want to recover as much of their investments as possible. And all of this will affect the restructuring of the banking sector, which will see winners and losers as some banks are able to be recapitalized and others will fall by the wayside. With an agreed national debt of $69 billion, some severe measures will need to be taken, not the least of which is reducing the burden of the public sector (government employees and operations) starting with the electricity sector, eliminating subsidies, and no new taxation.
Many are skeptical that Lebanon can fulfill its side of the agreement based on past behavior. This is the conundrum faced by Prime Minister Najib Mikati’s government. It entered into good faith negotiations with the IMF after two years of failed attempts, and was able to secure an agreement approved by Lebanon’s political elites, but there are no assurances of successful implementation. The961 reported that “Amal Movement’s MP, Yassin Jaber, said earlier that the parliament may approve a capital control law and budget law before the elections, which are part of the IMF’s conditions. However, as the report mentioned, the current government did not work on the rest of the reforms.”
With the elections in full swing, it is doubtful that more than the most basic conditions of the agreement will be met. In fact, Nicolas Nahas, an advisor to Mikati, stated that the reforms will not happen before the elections, since MPs are now busy with their electoral campaigns. He noted that “The agreement is a kind of benchmark of what should come after elections. So, after elections, parliament will start studying quickly these actions and then we shall see how we go forward.”
Hope is in short supply. With more than 80% of the Lebanese people and refugee populations now near or below the poverty leve,l the economy is now maintained in large part from remittances and family support from abroad. Lebanon has the IMF deal in place, but only if it meets its end of the agreement. There may be an awakening and revival of hope by year’s end, if the supply of electricity becomes more regular and less of a burden on the people. The end of the year may seem like a long time away, but much must be done to put the staff level agreement on a solid track to success.
Disclaimer: The views and opinions expressed in these articles are those of the author and do not necessarily reflect the position of the American Task Force on Lebanon, a non-profit, nonpartisan leadership organization of Lebanese-Americans.