Analysis-political blockade and banking blockade could plunge Lebanon deeper into crisis

The emergency gripping the small country sandwiched between Syria and Israel could escalate in the fall if political contradictions leave the state without the executive power to implement reforms or negotiate an agreement with the IMF and IMF donor countries, they said.

In April, Lebanon pledged $ 3 billion in funding with the International Monetary Fund (IMF), on condition that major steps be taken to address the financial crisis, which escalated into a complete crisis in October 2019. In May, reform candidates scored significantly in the parliamentary elections , and the outgoing cabinet adopted a new financial recovery plan.

But this development has since been overshadowed by political stalemate and opposition to the plan from the banking sector, suggesting that one of the world’s worst financial meltdowns could drag on for a long time.

“My view is that as long as political governance does not change, nothing will happen,” said Henri Chaoul, a former member of Lebanon’s IMF negotiating team, who withdrew in 2020 when the then government’s plan was overturned.

Najib Mikati, the caretaker Prime Minister, who is also tasked with forming a new government, is facing an uphill task of forming a cabinet that can gain the approval of the outgoing president and a divided parliament.

The formation of a government in Lebanon is already a process that usually takes months, but which can take even longer if the parties try to gain influence in the event that the presidency remains vacant after Michel Aoun’s term ends in October.

If no cabinet can be formed and no presidential successor appointed before then, Lebanon threatens to fly into unknown territory – without any executive authorized to carry out reforms or eventually reach a final agreement with the IMF and donors.

The economy is declining rapidly: the currency has plummeted by more than 90%, and around 80% of Lebanon’s population now lives below the poverty line.

ARGUMENT ON DISTRIBUTION OF LOSSES

This summer’s influx of tourists and Lebanese foreigners bringing much-needed hard currency will not do much to address the nuclear crisis, which is centered on a $ 70 billion hole in the financial system – more than three times the country’s annual economic crisis. .

The previous parliament has not approved the state budget for 2022, a much-discussed law on capital controls and a reformed law on banking secrecy.

Many had put their hopes in legislators coming to power for the first time to pressure parliament to reform, but six weeks after the election, parliament has not yet held a general assembly.

Members of the finance committee say they did not receive a copy of the government’s economic recovery plan until earlier this week – which was adopted in mid-May. The big blocks say the plan needs to be completely reconsidered.

Critics fear a repeat of a 2020 scenario in which a government rescue package was torpedoed by the Lebanese parliament and the powerful commercial banking sector.

The biggest disagreement about the plan then and now remains the question of how the losses should be distributed. The Lebanese government says the banks and their shareholders should be the first to cover losses – a bail-in – while the banks say the state should use its assets to pay the depositors back in a bail-out.

The Lebanese Banking Association says it supports an IMF deal, even though it opposes the basic way the lender and the government want to allocate losses.

That dispute could derail a final IMF program, the Lebanese transitional economy minister told Reuters.

The IMF has called for the zombie banking sector to be restructured so that the economy can recover – but work on it has not yet begun.

DANGER OF INFLATION

This year’s plan has also met with opposition from the powerful Shia-armed group Hezbollah, which says it needs to be revised. Its ally Amal, led by Speaker Nabih Berri, has also called for all deposits to be kept – an impossible scenario, analysts say given the scale of the crisis.

Critics of the government say the ongoing stagnation is designed to encourage Lebanese citizens in need of hard currency to withdraw their dollar deposits from local currency banks at large losses, in a process known as “lirafication”.

These withdrawals are slowly shrinking the total dollar amount that banks owe to depositors should a financial recovery plan ever be implemented.

If these policies continue and the government tries to appease the population by increasing benefits and wages for the relatively large public sector, Lebanon could find itself in a spiral of runaway inflation.

“Without new revenues, rising wages and benefits, such as the transport allowance, will send the country into hyperinflation,” Nasser Saidi, an economist and former deputy governor of Lebanon’s central bank, told Reuters.

There is little time and precious dollars to be wasted. Expenditure on subsidies and cash injections to keep the Lebanese pound afloat has shrunk 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, condemned the fragmented approach.

Given the stalemate, he told Reuters, “maybe we should ask people to take to the streets.”

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