Lebanon’s next government must pass reform test to get €25bn in rebuild aid
LEBANON may be in line for $298m (€250m) in emergency aid after the Beirut port blast, but the more than $30bn (€25.5bn) some estimate it may need to rebuild its shattered economy will not be forthcoming without reform.
Such change could be stalled by the resignation of Lebanon’s government, while a financial rescue plan drawn up in April is likely to have to be reviewed and possibly even ditched by a new administration, two financial sources close to the plan said.
Forecasts for financial metrics such as debt to GDP and the parallel exchange rate contained in the rescue plan, which had already struggled for support before last week’s explosion, now look unrealistic, one of the sources added.
That is likely to push back creditor talks to restructure Lebanon’s international sovereign debt.
Lebanon had begun International Monetary Fund (IMF) bailout talks in May after defaulting on its foreign currency debt.
However, these were put on hold due to lack of progress on reforms and differences over the size of financial losses.
While Prime Minister Hassan Diab’s cabinet remains as a caretaker government after its resignation earlier this week, Lebanon’s already diminishing foreign reserves are set to be eroded faster to pay for the rebuilding of Beirut’s port and other infrastructure.
Devising a credible economic plan will therefore be the main test for whoever ends up running Lebanon, which faces tumbling net capital flows amid an intensifying scramble for hard currency.
“The best gauge of the government’s sovereignty will be the economic plan they draft,”
Carlos Abadi, an adviser to the Association of Banks in Lebanon, told Reuters.
In the wake of the blast, Lebanon’s external financing needs for the next four years swelled to more than $30bn from $24bn, Dr Garbis Iradian at the Institute of International Finance (IIF) estimated.
“In order to overcome the US veto at the IMF, the next government will have to produce a plan which is premised on the positioning of the economy for future growth, without the possibility of billions being diverted for nefarious purposes,” Mr Abadi said.
The IMF reaffirmed its support for Lebanon on Sunday, before the government’s resignation, but also the need for reforms – a point stressed by French President Emmanuel Macron last week.
With the number of Lebanese living in poverty nearing half its population, these reforms range from setting up social safety nets to protect the most vulnerable to ensuring Lebanon’s wealthy elite share the burden of financial losses from bank recapitalisations.
Mr Macron also called for an audit of the banking system, a comment that has triggered wariness among some bankers fearful the government may use the data to spare “family and friends”.
Loïc Kervran, a member of the French parliament and chair of the France-Lebanon committee, told Reuters such an audit would aim to uncover “unorthodox” practices which could have led to losses.
Foreign donors have said that, outside humanitarian aid, no money would be given to Lebanon without reforms.
Some countries are particularly concerned about the influence of Iran through Hezbollah, a Shia Islamist political group and guerrilla army designated as a terrorist organisation by the US, which helped form Mr Diab’s government.
Economist Dr Toufic Gaspard said that as long as Hezbollah controlled the levers of power, economic recovery would be hampered as the group would not accept reforms such as border and customs controls.
“This is the sword of Damocles hanging above everybody’s head... if this situation is not addressed, I don’t see how we can have a sustainable solution,” Dr Gaspard added.
Meanwhile, with limited external funding support, surging inflation and the parallel exchange rate plummeting to 9,290 Lebanese pounds per US dollar by 2021 under a worst-case scenario, Lebanon will continue to sink, said the IIF’s Dr Iradian.
Lebanon’s central bank has told local banks to extend zero-interest US dollar loans to those impacted by the blast for repairs, which analysts say will come from official reserves.
Talks were put on hold due to lack of progress on reforms