Political and banking stalemate could plunge Lebanon deeper into crisis

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BEIRUT — Lebanon’s untamed financial crisis is emerging as a new threat as it enters a fourth year, with political paralysis dampening hopes for reforms that could unlock foreign support and avert social unrest, analysts say , lawmakers and former officials.

The urgency gripping the small country wedged between Syria and Israel could snowball in the fall if political divisions deprive the state of executive authority to enact reforms or strike a deal with the IMF and countries donors, they said.

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In April, Lebanon agreed to $3 billion in financing from the International Monetary Fund (IMF) subject to key measures to address its financial crisis, which descended into a general crisis in October 2019. In May, the Reform candidates have obtained significant results in the legislative elections. and the outgoing cabinet adopted a new financial recovery plan.

But those developments have since been overshadowed by political deadlock and opposition to the banking sector plan, suggesting that one of the world’s worst financial meltdowns could last even longer.

“My view is that until political governance changes, nothing will happen,” said Henri Chaoul, a former member of the IMF’s negotiating team in Lebanon, who resigned in 2020 when the government’s plan of the time was cancelled.

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Najib Mikati, the caretaker prime minister also tasked with forming a new government, faces an uphill battle to cobble together a cabinet that can win the approval of the incumbent president and a hung parliament.

Cabinet formation is already typically a months-long process in Lebanon, but could drag on even longer as parties try to secure their influence in case the presidency remains vacant after Michel Aoun’s term ends in October.

If divisions prevent the formation of a cabinet and the appointment of a presidential successor by then, Lebanon risks floating rudderless in uncharted territory – without any executive authority empowered to push through reforms or possibly sign a final agreement with IMF and donors.

The economy is collapsing rapidly: the currency has collapsed by more than 90% and around 80% of the people of Lebanon now live below the poverty line.

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RANKING ON THE DISTRIBUTION OF LOSSES

The summer influx of Lebanese tourists and expats bringing much-needed hard currency will do little to address the heart of the crisis, which centers on a $70 billion hole in the financial system – more than threefold the total annual economic output of the country.

The former parliament did not pass the 2022 state budget, a highly controversial capital control law or a reformed bank secrecy law.

Many had hoped the new lawmakers would launch a parliamentary push for reform, but six weeks after the election the body has yet to hold a general session.

Members of the finance committee say they only received a copy of the government’s financial recovery plan – agreed in mid-May – earlier this week. The big blocks say this plan needs to be completely overhauled.

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Critics fear a repeat of a scenario from 2020, when a government bailout was torpedoed by Lebanon’s parliament and the powerful commercial banking sector.

The main split on the plan, then and now, remains how to allocate the losses. Lebanon’s government says banks and their shareholders should be on the front line to cover losses – a bailout – while banks say the state should leverage its assets to repay depositors in a bailout.

The Lebanese banking association says it supports an IMF deal even though it opposes the fundamental way the lender and government want to allocate losses.

The dispute could derail a final IMF program, Lebanon’s acting economy minister told Reuters.

The IMF has been pushing for the zombie banking sector to be restructured to allow the economy to recover – but work on this has yet to begin.

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INFLATION HAZARD

This year’s plan has also faced opposition from the powerful Shiite armed group Hezbollah, which says it needs to be revised. Its ally Amal, led by parliament speaker Nabih Berri, has also called for the preservation of all deposits – an impossible scenario, analysts say, due to the scale of the crisis.

Critics of the government say the continued stagnation is aimed at pushing Lebanese citizens in need of hard currency to withdraw their dollar deposits from local currency banks at huge losses in a process known as “larification”.

These withdrawals are slowly reducing the total dollar amount that banks will owe depositors in the event that a financial recovery plan is implemented.

If this policy continues and the government tries to appease the population by increasing the benefits and salaries of the relatively large public sector, Lebanon could sink into runaway inflation.

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“In the absence of new income, rising wages and benefits such as transport allowances will send the country into hyperinflation,” Nasser Saidi, an economist and former deputy governor of the central bank of the country, told Reuters. Lebanon.

There is little time and little precious money to waste. Spending on subsidies and liquidity injections to support the Lebanese pound has eroded the country’s foreign exchange reserves from more than $30 billion in 2019 to $11 billion today, according to the central bank governor.

Opposition MP Ibrahim Mneimneh, a member of the finance and budget committee and a longtime political activist, decried the piecemeal approach.

Given the traffic jam, he told Reuters, “we may have to ask people to take to the streets.”

(Reporting by Timour Azhari and Maya Gebeily; Writing by Timour Azhari; Editing by William Maclean)

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