Lebanon’s fix: Denial and conspiracy theories

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The widening deficit in the balance of payments is forcing the Central Bank to burn through its cash reserves at an accelerating rate.

by Elias Sakr -Source: Annahar

In recent weeks, Finance Minister Ali Hassan Khalil persistently reminded of an agreement between the current government, the central bank and local lenders on securing 11 trillion lira in long-term financing for the treasury at a 1 percent rate.

Yet, the Association of Banks has distanced its members from this arrangement, denying that it had agreed to a deal that would cut its profits short.

The Central Bank is now expected to shoulder the burden of providing the government a lifeline as it struggles to borrow from international markets amid the sharp rise in Lebanese eurobond yields.

By lending the government money, the Central Bank is increasing the supply of lira in the market, thus fueling imports and bolstering demand for US dollars that the institution is running short of.

In the first five months of 2018, Lebanon’s balance of payments deficit soared to around $5 billion, an amount that surpassed the total deficit recorded over the previous year.

In fact, the balance of payment would have been negative for eight consecutive years, had it not registered a small surplus in 2016 due to swap operations undertaken by the Central Bank.

The widening deficit in the balance of payments is forcing the Central Bank to burn through its cash reserves at an accelerating rate. This is coinciding with regional geopolitical instability with local ramifications as tensions are deepening between the Lebanese Western-backed camp and its Iranian-sponsored rival.

Amid these tensions, a reversal in the balance of payments deficit trend is unlikely.

Capital outflows fueled by political and security tensions are expected to continue amid no signs of a near resolution to the Iran-US showdown. On the other hand, remittances are not expected to reverse trend as oil-producing countries in the Gulf and Africa, where the bulk of Lebanese expats have been employed or operating businesses have yet to recover.

This leads to the conclusion that the Central Bank will continue to burn through its reserves, and most likely at a faster rate.

Barring a politically-motivated capital injection by GCC countries, one which seems highly unlikely as the Iranian-sponsored Hezbollah tighten its grip over Lebanon amid the escalating tug of war between Tehran and the US-Saudi camp, the central bank will eventually drain its reserves to unsustainable levels in less than a year, assuming a decline at the average rate recorded in the first five months of the year.

At some point along the road, a currency devaluation will have to be considered.

But this is not the only risk associated with lending the government.

Recently, the IMF cautioned the Central bank against subscribing in treasury bonds below market rates. This would weaken the Central Bank’s balance sheet and erode the institution’s credibility, the IMF warned.

Moody’s, on the other hand, said the deal could amount to a default; an outcome that will similarly materialize if the central bank also refrains from taking action and forces the government to borrow at high rates amid a ballooning public debt.

Such a default will have serious repercussions, particularly on local lenders and the Central Bank, which holds the bulk of the debt.

Simply put, Lebanon is running out of options and is unlikely to avert an economic and financial collapse without foreign support.

President Michel Aoun, however, disagreed last week and accused those behind “rumors of an imminent economic and currency collapse” of seeking to “sabotage Lebanon.”

Only a month earlier, Prime Minister Saad Hariri had warned that Lebanon faced a Greek-like debt crisis; a crisis that required a total $330 billion in bailout programs since 2010 to keep Greece afloat.

The finance minister, a close aide to Parliament Speaker Nabih Berri, Hezbollah’s Shiite ally, went as far as to suggest debt restructuring, rattling markets before backtracking on his statements.

Foreign Minister Gebran Bassil, Aoun’s son in law and the leader of the largest Christian party, warned that failing to cut public wages would leave civil servants with no salaries.

The banking lobby, on the other hand, leaked news of its intention to sue Moody’s following the release of its latest negative report on Lebanon.

These conflicting statements that range between denial and conspiracy theories either reflect the government’s failure to fully grasp the magnitude of the crisis or the ruling class’ unwillingness to prioritize national interests, or both.

In fact, the conspiracy theorists who accuse the West of seeking to undermine Lebanon’s financial stability to later offer the country a lifeline in exchange for settling refugees, are the same people betting that the international community will eventually pull Lebanon back into safety despite their evident failure to enact reforms and promote the rule of law.

It is about time for the Lebanese to hold those in power accountable.

 

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