Michael Young– Getty Image -https://carnegie-mec.org
A regular survey of experts on matters relating to Middle Eastern and North African politics and security.
Sibylle Rizk | Director of public policy at Kulluna Irada, a civic organization for political reform, in Beirut
Lebanon cannot avoid a comprehensive macrofiscal and financial stabilization and recovery plan. The alternative is a catastrophic scenario that would combine hyperinflation, devaluation, unemployment, poverty, and emigration. As a member of the International Monetary Fund (IMF), Lebanon is entitled to seek its advice and assessment of its financial situation. That would require a full disclosure of the Central Bank’s and the banking sector financials to have an exact understanding of the magnitude of the losses.
We already know that Lebanon suffers from a combination of crises—balance of payment, debt, currency, financial sector, productive sector, and so on—that makes it a complex situation by any standard. The restructuring and financial needs are so great that we will probably need both a bail-in, meaning converting a portion of deposits into bank equity in a recapitalization process, after writing off the initial equity, and a bail-out, from foreign donors.
The main issue is political: Who will implement this rescue plan, knowing that Lebanon is also facing simultaneously a regime crisis? Lebanon needs a government able to steer the ship independently from the power system, based on elite-capture of the state, corruption, and clientelism. Competence, legitimacy, and credibility are key for any government that will need to reach out to external help, be it the IMF or any bilateral or institutional donor.
Ishac Diwan | Chaire Monde Arabe at Paris Sciences et Lettres, professor at the Ecole Normale Supérieure, Paris.
Lebanon is in dire need of financial support to help it adjust to the sudden stop of capital inflows. The huge internal and external deficits risk generating an economic meltdown. It is no exaggeration to assume that in the absence of large and quick disbursement of support, collapse and anarchy risk turning the country into a failed state. Under the best of circumstances, the International Monetary Fund (IMF) may be able, with the support of other donors, to come up with a total package of perhaps $20–25 billion over three years to support a rescue package and smoothen the inevitable short-term pain. To do so however, it will demand painful adjustments, including lower state spending, more taxes, privatization, debt reduction, and devaluation. Its goal will simply be to leave behind an economy that can repay its IMF loans within a decade.
In demanding adjustment against its support, the IMF will be in large part the messenger, prompting Lebanon to find an internal consensus on how to repair the wealth destruction brought about by the follies of its politicians. The precise ways in which the adjustment is made will have enormous distributional implications, especially how Lebanon’s huge losses are allocated across society.
Lebanon’s protest movement should not shut down the IMF option beforehand, as there is no other financial lifeline available at the moment. A better option for the movement is to support negotiations and set its own conditions on the rescue plan so that it protects the poor and the middle class. If it turns out that Lebanon cannot achieve an internal consensus on the way forward, then just as during its civil war the Phoenix may have to wait for the ashes before being reborn.
Amer Bisat | Head of sovereign and emerging markets investments at a New York-based asset manager, former International Monetary Fund senior economist, writing here solely in his personal capacity
It is time to demystify the International Monetary Fund (IMF). A full-fledged program is no longer a luxury. Lebanon needs one for three reasons. First, the Lebanese crisis is extremely complicated and seemingly intractable, and the IMF has the relevant and required expertise. Second, the Lebanese government’s reform commitment, to put it politely, lacks credibility. The IMF’s (monitored) conditionality will prove effective in anchoring implementation. Finally, and most importantly, the country’s funding gaps are enormous. Unfilled, the economy will collapse and its foreign exchange reserves will decline further. Realistically, without an IMF imprimatur, other donors will be extremely reluctant to disburse money to Lebanon.
A separate, but related, point is whether the IMF conditions will be painful? Sadly, of course they will. But that’s the wrong question. If the country is serious about dealing with its crisis, the IMF’s prescribed measures will be what are needed anyway. Also, the notion that the IMF is insensitive to political realities and to the social impact of its conditions is outdated. A strong Lebanese negotiating team will be instrumental in shaping the program’s details.
Nisreen Salti | Associate professor in the Department of Economics at the American University of Beirut
What “size” economic emergency program Lebanon needs is unclear, in the absence of any comprehensive inventory and verified consolidated balance sheets. But regardless, two fundamental reforms should precede any consideration of International Monetary Fund (IMF) involvement, whether timid (technical assistance) or robust (full program): reforms with regard to governance and with regard to an economic vision.
The IMF will come with policy prescriptions, some intrusive, with direct winners and losers—privatization, the lifting of subsidies, management of the public wage bill, and so on. There is much discord over the effectiveness and soundness of IMF intervention. But even proponents concede that pushing some of these policies in a system as corrupt and clientelistic as Lebanon’s, without enacting reforms toward better governance, transparency, and the rule of law (all outside of the IMF’s direct purview), is dangerous. It could provide the cover of “IMF conditionality” to further entrench the corrupt elite’s grip on the economy.
IMF bailouts purport to steer economies toward a path of economic growth, macroeconomic stability, and sustainable debt. Even when they include provisions for social safety nets, they do not adopt as objectives any distributional outcomes. But an economy can grow, be macroeconomically stable, and be fiscally responsible, yet distribute income in a highly unequal way. If Lebanon’s collective economic vision is one that aims to correct the alarmingly skewed distribution of wealth and income (a distribution that has resulted from the very policies that have contributed to the crisis), adding a distributional objective to the triad of goals that are already explicit in an IMF bailout will also dictate which path to recovery the country chooses to tread. That may well require some policies that are not squarely in the IMF orthodoxy.
Sami Nader | Director of the Levant Institute for Strategic Affairs, economist, and lecturer at Université Saint Joseph in Beirut
Lebanon’s ruling class has never missed an opportunity to miss an opportunity and engage in real economic reform. The last time this was true was after the CEDRE conference of international donors held in Paris in April 2018, which offered a financial package of around $18 billion, to be implemented in two phase, in exchange for the Lebanese government’s introduction of long-awaited reforms. Yet the Lebanese political system is incapable of reforming, since that would imply a weakening of the country’s political forces who would be deprived of their sources of funding.
CEDRE was the last chance to save the country at practically no cost. Today that is no longer the case. Lebanon is collapsing. The issue is no longer about how to avoid a crash but how to minimize its cost. Reforms, though necessary, are simply not enough anymore. Lebanon need a cash injection of at least $15–20 billion to restructure its public finances and banking system and avoid deep economic recession. No donor is ready to offer such a sum pro bono, as used to be the case in the past when Gulf Cooperation Council countries would give Lebanon money. Lebanon, under the auspices of Hezbollah, has lost his friends and their generous favors. It now needs to borrow money, and the only door on which it can knock is that of the International Monetary Fund.