Top global banking agency proposes an IMF bailout

By many expectations, the country and the economy are expected face a hard landing by June at the latest given no international intervention or comprehensive plan on the part of the new government, according to a number of expert economic observers.
by TK Maloy

27 January 2020 | 17:46

Source: by Annahar

  • by TK Maloy
  • Source: Annahar
  • Last update: 27 January 2020 | 17:46

The Lebanese Central Bank (Banque du Liban) in Beirut. (AP Photo)

BEIRUT: The Institute of International Finance, a prestigious global association of banks and other financial institutions issued a report Sunday calling for a number of drastic reforms, including an International Monetary Fund (IMF) bailout, to halt Lebanon’s collapsing economy.

By many expectations, the country and the economy are expected face a hard landing by June at the latest given no international intervention or comprehensive plan on the part of the new government, according to a number of expert economic observers. Among other key factors, the Central Bank will have potentially exhausted its current account funds by then because of the heavy bond repayments required.

In an executive summary, IIF analysts, including Garbis Iradian, Chief IIF Economist-MENA, suggest an action plan, noting the reforms proposed by the IIF “will be necessary or should be considered to lift Lebanon out of the current crisis."

The executive summary is a follows:

Reducing interest rates; restoring the health of the banking system; sustaining fiscal adjustment; reforming EDL; seeking an IMF program to anchor reforms and secure additional financing; considering debt rescheduling; unifying the exchange rates under stable conditions and position of strength; privatizing the two mobile companies and other public entities to reduce public debt; reducing corruption and establishing a social safety fund.

“Lebanon’s economic deterioration has accelerated dramatically: we (IIF) estimate a contraction of 3.8 percent in 2019, including more than a 10 percent output decline in Q4; the fiscal deficit has widened to 11.6 percent of GDP; public debt has increased to 166 percent of GDP; inflation has increased significantly, and layoffs and forced wage decreases have spiked,” according to the full IIF report.

The report added that to restore growth, the government will need additional capital inflows from official sources.

Expanding on the executive summary, the IIF noted in the full report that ”given the authorities’ track record over the past three decades, it is possible the actual reforms will fall short of what is necessary to restore macroeconomic stability. “

The IIF has projected external financing needs at $24 billion over 2020-2024. In addition to the $11 billion of loans from CEDRE, the new government will need to enact some of the following reforms, including an IMF program (the IIF estimated $8.5 billion) to provide a strong policy framework and catalyze additional financing ($13 billion) to boost the country’s FC reserves.

Additionally, Lebanon should examine the possibility and consequences of re-profiling its domestic public debt.

Also, fiscal reforms need to be initiated to address deep-seated spending rigidities, eliminate the budget transfers to Electricité du Liban (EDL), and raise revenues in ways that minimize the negative impact on the poor, including fighting tax evasion.

The IIF “welcomes” the move by the Central Bank of Lebanon (BDL) and commercial banks to reduce interest rates on all deposits, loans, and public debt. “Continued action on this front would improve liquidity in the banking sector and increase confidence, which would encourage investment and ease the pain of fiscal adjustment.”

According to the IIF report, banks’ financial health will be strengthened through recapitalization and resolution of impaired assets, which will be critical to regaining confidence and support recovery.

Privatization should be part of the economic plan of the new government with a view to increasing investment, reducing the stock of government debt, and improving efficiency. However, the establishment of better oversight and accountability mechanisms is an essential precondition.

Other structural reforms should include fighting rampant corruption and improving the business environment.

Such adjustments can be difficult, and Lebanon is already experiencing rising poverty and inequality. To protect those affected by the current crisis, a Social Fund could be established, financed by foreign grants and recovery of stolen public funds, according to the IIF report.

To reprise, so readers don’t interpret that this is a bailout as such – free money – if Lebanon calls for IMF/or World Bank assistance, the expectations are that state subsidies to EDL would be slashed, thus increasing the cost of electricity at the household level, there will likely be an increase in the VAT, and a variety of hard-hitting structural reforms would be enacted. Including cuts to government employment through attrition – when a civil servant retires they would not be replaced.

Both the IIF and the World Bank provide assistance based on heavy conditionally and loan terms, in which the freewheeling political class of Lebanon will require a new discipline in spending.

Last weekend the new Finance Minister Gazi Wazni met with IMF alternative director from the IMF Sami Geadah on Saturday in what he termed a “courtesy visit,” this follows a Friday visit by Finance Minister Wazni with a delegation from the World Bank including regional director Saroj Kumar Jha.

The minister alluded to talks elsewhere in the government on asking for multilateral assistance.

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The Institute of International Finance is the global association of the financial industry, with close to 450 members from 70 countries. IIF members include commercial and investment banks, asset managers, insurance companies, sovereign wealth funds, hedge funds, central banks and development banks.

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