Lebanon’s deputy prime minister says the country’s political deadlock should not stand in the way of the government’s attempt to make reforms that would unblock an International Monetary Fund loan to appease its creditors. Market participants, on the other hand, do not expect debt restructuring to be possible until the political impasse has been eased.
Since Michel Aoun’s term ended in October 2022, Lebanon has been unable to come to a political settlement or elect a new president.
Saade El Shami, deputy prime minister, told GlobalMarkets that should not prevent ministers from drafting crucial legislation to meet the IMF’s demands.
“We must interpret the constitution with an open mind,” he said. “Since the vacancy of the presidency has extended beyond a reasonable limit, and given the dire economic situation, it is incumbent upon the government to assume its responsibility and care to the urgent needs of the people.”
The Lebanese Parliament is stuck. Some MPs are boycotting parliamentary sessions they consider unconstitutional, while others want to press ahead with legislation.
This is delaying important economic and financial reforms demanded by the IMF as conditions for a $3bn loan over a four year period.
They include restructuring the banking sector, unifying the multiple exchange rates, capital controls, fiscal policy and reforms to the banking secrecy law. “The IMF team is ready to support the authorities with technical assistance and policy advice,” said an IMF spokesperson.
El Shami says much more can and should be done to prepare the reforms and draft the bills. “Lebanon’s political paralysis should not prevent us from working on many reforms, regardless of whether there is an IMF deal,” he added.
Out of options
Faced with a budget deficit of about 24% of GDP or $500m, according to its 2023 draft budget, the government is running out of options to service its debt.
Wassim Mansouri took over in July as interim governor of the Banque du Liban from Riad Salameh, now being investigated for corruption in multiple countries. Mansouri has said the BdL will neither print Lebanese pounds nor lend dollars to the government.
Unlocking the $3bn would help Lebanon negotiate with creditors and attract foreign financing. But to convince all partners, the government would need to show discipline in its conduct of economic and financial policies.
Most observers believe Lebanon cannot begin to recover without first forming a functioning government. “The government knows exactly what needs to be done,” said Adnan Mazarei, non-resident senior fellow at the Peterson Institute for International Economics. “There are issues with restructuring its debt and addressing the hole on the balance sheet of the central bank.”
In August, Fitch Ratings affirmed Lebanon’s rating at Restricted Default. “We do not expect significant progress on the remaining IMF prior actions and on debt restructuring until a president is elected and a government with full powers is in place,” it said.
But Mazarei said Lebanon’s political class had no interest in reform.
“The reform package needs to be undertaken by an elite who are the beneficiaries of the current status quo,” he said. “The international community is willing to help Lebanon, it’s Lebanon that isn’t willing to help itself.”