Lebanon's $3bn deal with IMF expected to fuel 'reform momentum' but difficulties persist

Lebanon’s agreement with the International Monetary Fund last week for $3 billion in funding as part of a four-year deal is expected to fuel “reform momentum”, but the preconditions set by the Washington-based lender will prove challenging because of persisting "political dysfunction and weak governance" in the country, according to S&P Global Ratings.

Pre-conditions set by the IMF include reforms related to the banking sector as well as measures to improve the country’s fiscal position. The completion of an audit of the central bank’s foreign asset position and the unification of multiple exchange rates in the economy are also among the reforms stipulated by the fund. “Some of the preconditions are relatively straightforward, for instance, approval of the 2022 budget, but others are likely to be more difficult, such as a restructuring plan for the banking sector. Consensus about the various options put forward so far appears far off,” the ratings agency said.

The unification of multiple exchange rates will also be a complex task given the weak economic conditions, according to S&P. Lebanon is going through its worst economic crisis since the country's independence in 1943. The country's economy contracted about 58 per cent between 2019 and 2021, with gross domestic product plummeting to $21.8bn in 2021 from about $52bn in 2019, according to the World Bank. That is the largest contraction on a list of 193 countries.

Lebanon's economy collapsed after it defaulted on about $31bn of Eurobonds in March 2020, with its currency sinking more than 90 per cent against the dollar on the black market and inflation rising to triple digits.

The crisis has been compounded by the Covid-19 pandemic and the August 2020 Beirut port explosion, while the war in Ukraine is exacerbating inflationary pressures and further straining food and fuel supplies, the IMF said earlier this month.

Inflation soared to an annual 215 per cent in February, marking the 20th consecutive triple-digit increase of the Central Administration of Statistics' Consumer Price Index since July 2020. The index increased 4.31 per cent from January 2022. “In general, pushing through reforms will be difficult due to long-term constraints on Lebanon's institutional setting stemming from the fragmented political landscape, which is organised along ... the entrenched interests of the country's political and economic elite,” S&P said.

“Additionally, we see a high likelihood that the preconditions for IMF board approval will not be met before the next general elections, to be held in May, given the short time before then. We see a risk that progress on reforms by the end of 2022 will be insufficient for Lebanon to achieve the IMF board's approval.”

The country has all the "necessary reform laws that they [the IMF] are asking for" and they will presented soon, Lebanon's Prime Minister Najib Mikati told The National soon after the deal was announced. “It's the first step towards really going out of this crisis and we are on the right track,” he said, when asked if the accord marked the beginning of the end of the country's economic crisis.

The Lebanese authorities' clear articulation and acknowledgement of the steps they need to take to reform the economy is a "positive sign”, S&P said. Engaging in an IMF programme will create a policy anchor that could unlock further bilateral and multilateral support for stabilising macroeconomic conditions in the country, it said.