After dithering and division, Lebanon’s government has concluded the only way it can refloat its sinking economy is by going to the IMF. That would be just in time. While it is a shopworn adage that countries cannot go bankrupt, Lebanon palpably has. It has accumulated losses at its central bank, Banque du Liban, which the government estimates at $44bn — about equal to annual economic output, though this is shrinking so fast nobody can be sure — while the government reckons the banking sector, the erstwhile jewel in Lebanon’s crown, has losses of $83bn.
The crisis long predates the coronavirus pandemic. The economy began juddering to a halt last October, when a civic uprising brought down the then government of sectarian oligarchs and superannuated warlords. The spark was an obtuse tax on WhatsApp phone calls. The reason was rage at a governing class that has looted the state since the end of the 1975-1990 civil war.
Put another way, 70 per cent of the assets of a bloated banking system were lent to an insolvent and kleptocratic state, which last month defaulted on its foreign debt. It seems astonishing it was able to defy gravity for so long. But it is explicable in terms of BdL policies. The central bank’s governor since 1993, Riad Salameh, continued to attract dollars from Lebanon’s diaspora and around the Middle East by offering ruinously high exchange rates. He called this “financial engineering”. Some economists, including former central bankers, called it a Ponzi scheme.
Depositors in Lebanese banks, where 70 per cent of deposits were in dollars, are being denied access to their savings. They were rationed to withdrawing about $500 a month. That practically ceased with the providential excuse of bank closures because of the Covid-19 emergency. Billions were transferred abroad by the political and business elite before the crisis took hold, bankers say. Bank withdrawals or credit card payments are priced at the official rate of 1,507 Lebanese pounds to the dollar, which was last week worth an average 3,700 in the parallel market.
This divergence is fuelling inflation. Unrest is resuming, despite the virus lockdown. The government, selected by the same old sectarian power brokers but which includes talented technocrats, has been edging closer to the IMF since February, while waiting for its political overlords to conclude there is no alternative. Even Hizbollah, the Iran-backed Shia politico-military movement that acts as a state-above-the-state and — with its Christian, Shia and Sunni allies — has a parliamentary majority, seems to have realised only the IMF could unlock the finance Lebanon needs to survive and rebuild.
Three previous French-led bailouts contained essentially the same to-do list of reforms that never happened. The last, $11bn soft-loan package agreed in Paris in 2018 remains locked up for the same reason, while the Saudi-led Sunni powers now refuse to support what they see as an Iranian proxy.
There is no alternative. The government’s latest rescue plan, approved late last week, understates Lebanon’s external financing needs, even allowing for debt restructuring. It also dodges to what extent it will “bail in” bank depositors — confiscating wealth to recapitalise a bust system. This is explosive. Last week’s firebombing of banks in north Lebanon is a portent.
“By failing to tackle the core imbalances of the Lebanese economy, the scenario of no or very limited external support [without an IMF programme] would considerably increase the risks of a complete collapse”, the government’s 53-page blueprint warns. Hopefully its ultimate masters think so too.
