IMF message to Lebanon: Completing ALL reforms a condition for financial agreement

“Small depositors must be fully protected"
IMF mission meeting with the Lebanese President at the end of the visit

The statement issued by the International Monetary Fund (IMF) came at the conclusion of a delegation visit it sent to Beirut, confirming what we had previously said that Lebanon will not move to the final stage of signing a financing program without implementing all the reforms required of it.

On the other hand, the Fund left a ray of hope for  Lebanese by stressing that it will continue to engage with Lebanon’s authorities to advance the reform agenda.

Will the “reprimanded” language used in the statement motivate officials in Lebanon to push for the speedy adoption of reforms? The fund said it frankly. “Progress in implementing the agreed reforms (..) is still very slow.”

It does not seem that things will go in this direction in light of the continued reluctance to do what is necessary, and with the country entering the phase of the presidential election, which imposes a different agenda than dealing with livelihood concerns.

The IMF mission headed by Ernesto Ramirez Rigo visited Lebanon on Monday for a period of three days, and discussed with officials the recent economic developments and progresses made in implementing the previously agreed upon procedures under the Staff Level Agreement last April 7  to obtain a facility from the Fund for a period of four years.

At the conclusion of the visit, the Fund issued a statement saying that delaying the implementation of these reforms only leads to increased costs for the state and its residents.

It reminded Lebanese officials that “prior procedures of the International Monetary Fund board must be completed to consider the request for a financial program with Lebanon.”

On the other hand, it stressed that “large losses in the banking sector should be recognized and addressed in advance while respecting the hierarchy of claims” – meaning the hierarchy of distribution of losses – as “small depositors must be fully protected.”

The fund indirectly threw aside recovery plans that were set by banks or economic bodies and which provided for the use of state resources to restore deposits. “Recourse to public resources – assets owned by all Lebanese, with or without a bank account – should be limited,” he said.

The economy is in a severe recession


In the statement, Head of Mission Ernesto Ramirez Rigo said that the Lebanese economy “continues to suffer from severe stagnation in light of the continued stalemate over much-needed economic reforms creating high uncertainty.”

He explained that the gross domestic product has shrunk by more than 40 percent since 2018, with inflation still in the three-figure territory, foreign currency reserves are declining, and the exchange rate in the parallel market has reached 38,000 pounds per dollar.

Ramirez Rigo criticized the delay in implementing the required reforms from Lebanon, saying that “despite the urgent need to take measures to address the deep economic and social crisis in Lebanon, Progress in implementing the reforms agreed under the April agreement remains very slow.”

The IMF statement identifies the measures that have been delayed, in particular:

The 2022 budget, which the House of Representatives has not yet approved, despite approaching the end of the fiscal year. According to the fund, the focus should now shift to preparing the 2023 budget, based on realistic macroeconomic assumptions, with the necessary measures to increase revenues, including the use of a realistic exchange rate (i.e. the exchange rate, which should become the market rate with exchange rate unification) for all tax purposes.

The persistence of exchange rate pluralism “causes significant distortions in economic activity, undermines public sector operations, and creates opportunities for corruption and rent-seeking, leading to excessive pressures on foreign exchange reserves in the Central Bank.” The Fund considers that the adoption of Capital Controls and Deposit Withdrawal Limits Act, which was submitted to the House of Representatives in March, is “crucial to address these issues and reduce pressures on the central bank’s foreign exchange reserves.”

At this point, the Fund considered that the intervention of the Banque du Liban in the “exchange” platform in an attempt to “achieving stability in the exchange rate is ineffective in the absence of the much-needed reforms.”

Reform of the bank secrecy law was passed by Parliament in July, and although it included some positive steps, it fell short of the changes needed to bring it in line with international best practices.

Fund’s urgency to implement the Financial Sector Rehabilitation Strategy, approved by the Cabinet, to allow a healthier banking system to function normally again, attract deposits and support economic activity. The fund stressed the necessity of recognizing the large losses in the sector and addressing them in advance.

Finally, the Fund affirmed its continued commitment to advancing the reform agenda.