Aurelia Butler

Lebanon and the IMF have reached a preliminary agreement for a $3bn loan facility, the first significant step towards bringing relief from an economic and financial crisis that has crippled the country since 2019. Two years after the onset of the crisis, the country’s currency has lost more than 90 per cent of its value and nearly three-quarters of its people live below the poverty line, according to the UN.The long hoped-for bailout, announced on Thursday, is vital to stem the further collapse of the economy, but talks between the IMF and Lebanese authorities had repeatedly stalled over economic reforms required by donors. “The [Extended Fund Arrangement] aims to support the authorities’ reform strategy to restore growth and financial sustainability, strengthen governance and transparency, and increase social and reconstruction spending,” the IMF said in a statement on Thursday. Unveiling the deal following a meeting with IMF delegates in Beirut, Najib Mikati, Lebanon’s prime minister, said his government had promised the fund that it would implement wide-ranging reforms. The crisis demanded “a comprehensive reform program” in order to achieve “financial and economic stability and . . . permanent and strong growth”, he said.

Lebanon’s prime minister Najib Mikati (at podium) announces the deal alongside the IMF delegation © Dalati and Nohra/AFP

In its statement the IMF said: “This crisis is a manifestation of deep and persistent vulnerabilities generated by many years of unsustainable macroeconomic policies fuelling large twin deficits (fiscal and external), support for an overvalued exchange rate and an oversized financial sector, combined with severe accountability and transparency problems and lack of structural reforms.”The fund arrangement would extend over 46 months and give Lebanon access to the equivalent of $3bn in special drawing rights. Full approval by the IMF board is contingent on Lebanon implementing a series of measures.

These include a restructuring strategy for the banking sector that limits the impact on small depositors and “recourse to public resources”; parliamentary approval of a bank restructuring law; and external evaluation of the 14 largest banks by a “reputable international firm”.The agreement also requires reform of a decades-old banking secrecy law “to bring it in line with international standards to fight corruption”; completion of an audit of the central bank; parliamentary approval of the 2022 budget; and unification of the multiple official and black market exchange rates for the Lebanese pound that have existed since the crisis started.The announcement is the first indication that Lebanon’s government is taking seriously the need to tackle the crisis, observers say. It also comes weeks before the country is due to hold a general election.But given the Lebanese political establishment’s previous reluctance to implement reforms, the road to full approval by the IMF looked arduous, analysts warned. More

In the last decade, the geopolitical club known as the Group of Twenty (G20) has seemed like an idea that is worthy — but dull. During the 2008 financial crisis, the doughty group (which represents 80 per cent of the global economy) briefly found fame and relevance by forging a collective response to quell the crisis. Since then, it has championed sensible reforms in areas such as financial regulation.But the club is so big and consensus-driven that it has become unwieldy. And its meetings — and communiques — tend to be achingly bland, particularly when the finance ministers get involved. This is no longer the case though. Later this month, on April 20, G20 finance ministers are supposed to meet in Washington. However a spicy drama is currently erupting of the type that might more normally be found in a high school canteen. Most notably, on Wednesday Janet Yellen, the US Treasury secretary, told Congress that “we will not be participating in a number of [G20] meetings if the Russians are there”. This is in protest at Moscow’s invasion of Ukraine and means that she might boycott the April 20 event. That is deeply “awkward” — as a teen might say — for Indonesia, which currently holds the rotating presidency, and thus decides who to invite or disinvite. There are no formal founding rules for the G20, which was created in 1999. But it has hitherto been assumed that a member can only be expelled if everybody else gangs up against them. This, after all, is what has previously happened with the more exclusive Group of Seven club. In 1998 the G7 brought Russia into their ranks, creating the G8; but in 2014 the seven founding members teamed up to exclude it, following the Russian invasion of Crimea. But the problem for Indonesia is that some G20 members, including China, do not want to “ghost” Russia right now. And Vladimir Putin, Russian president, apparently wants to attend a G20 summit later this year. To defuse the row, the Indonesian government might end up having to scrap the joint communique on April 20 altogether. But this leaves the G20 looking impotent. “Compared with its vital role in the global financial crisis, the G20 and its various offshoots can hardly function as the key club for global co-operation given cyber interference, war, possible crimes against humanity, and general superpower struggle,” says Paul Tucker, the former British central banker, who has a forthcoming book on these issues. “That doesn’t rule out its being a useful forum . . . but it won’t be easy because it requires some degree of candour, trust and reliability,” he adds. More bluntly as one former finance minister notes: “The G20 could die.” Should investors care? Yes, for both symbolic and practical reasons. The body was created to forge 21st-century collaboration — and globalisation — when it became clear that the 20th-century Bretton Woods institutions were ill-suited for a post-cold war world. If the G20 now dies that would underscore the reversal of globalisation, and show we face what Ian Bremmer, the political analyst, calls a G-Zero world — one in which nobody is in charge. That is alarming.More tangibly, the G20’s work is badly needed right now. As Yellen herself noted this week, “spillovers from the crisis are heightening economic vulnerabilities in many countries that are already facing higher debt burdens and limited policy options as they recover from Covid-19”. US rate hikes will make those “vulnerabilities” far worse. Consider, by way of example, the issue of sovereign debt restructuring. This is the type of dull-but-important topic the G20 was created to address. Two months ago, it seemed that 2022 could be the year that the group finally started to create a more workable system for restructuring poor countries’ debts. This is urgently needed, since (as I noted recently) the Paris Club system for restructuring debt no longer works well because China sits outside it — at the same time that it has extended two-thirds of low-income country loans. Worse still, the risk of disorderly defaults is rising fast. The crisis now erupting in Sri Lanka (in which China accounts for a big chunk of the country’s loans) is a case in point.The Indonesian government previously seemed in a good position to push for reform, not least because of its ties to China, and lobbying had started for joint commitments to debt transparency. But this has now been derailed. At the very same moment that the G20’s work in preventing disorderly defaults is needed more than ever, it could all fall apart. In pointing this out, I am not arguing that the west is wrong to exclude Russia from the G20; every possible sanction is needed to halt the onslaught on Ukraine. But the key issue is this: if the group now becomes impotent, Washington urgently needs to find other ways to co-operate with emerging market players. Action around the agenda on sovereign debt restructuring would be a good place to start. Moreover, if this type of collaborative initiative does not emerge soon, investors should pay attention. Pouting, ghosting and gossiping are deadly tactics for grown-up governments. Particularly when the global economy is in disarray — and countries like Sri Lanka are suffering from the fallout. [email protected] More

European Central Bank policymakers were split last month over how to tackle soaring inflation with some wanting interest rates to rise this summer, setting up a more heated debate when they meet again next week.A number of ECB rate-setters pushed for “a firm end date” on its net bond purchases to prepare the ground for raising interest rates in the third quarter, warning that otherwise the bank risked “falling behind the curve” on inflation, according to the minutes of the governing council’s March meeting. But others argued for a “wait-and-see” stance because of uncertainty over the economic impact on the eurozone of Russia’s invasion of Ukraine. They feared the war could “result in a technical recession”, which is defined as two consecutive quarters of negative growth rates.The ECB decided on a “balanced compromise” to scale back its bond purchases more quickly and to end them in the third quarter unless a sharp downturn occurs, while deferring the decision on potentially raising interest rates.Analysts said the minutes showed ECB policymakers were shifting in a more “hawkish” direction in favour of more quickly removing its monetary stimulus. “The hawks have the upper hand,” said Frederik Ducrozet, a strategist at Pictet Wealth Management.Since last month’s meeting, annual inflation has hit a new eurozone record of 7.5 per cent. The figure for March is likely to strengthen calls from the hawks for the central bank to bring an end to nearly eight years of bond purchases and negative interest rates.Investors are pricing in 0.6 percentage points of rate rises by the ECB before the end of this year, which would take its main deposit rate back into positive territory for the first time since 2014, up from its current all-time low of minus 0.5 per cent.Several ECB policymakers have said they expect the central bank to raise rates this year and some, such as Klaas Knot of the Netherlands and Pierre Wunsch of Belgium, have said it could do so twice this year.Policymakers have been sparring ahead of their meeting next week. Joachim Nagel, president of Germany’s central bank, said soaring inflation “worries us all” and predicted “savers may soon be able to look forward to higher interest rates again”.But ECB executive board member Fabio Panetta said most eurozone price pressures came from energy markets and other factors outside the central bank’s control, so it would “have to massively suppress domestic demand to bring down inflation”. Tightening monetary policy too soon would “would mean considerably lowering real activity and employment, knocking down wages and income,” Panetta warned, reflecting the views of more dovish council members.While some policymakers questioned the reliability of ECB forecasts showing that inflation would fall back below 2 per cent in 2024 as “puzzling”, others said that “in the new environment resulting from the war, bold steps were even less justified and could further dent confidence,” according to the minutes.Christine Lagarde, the ECB president, tweeted on Thursday that she had tested positive for Covid-19, adding she had “reasonably mild” symptoms and would work from home in Frankfurt until fully recovered. If Lagarde is still testing positive next week, she is expected to join the governing council meeting and press conference via video link. More

Nearly half of UK businesses expect the Russian invasion of Ukraine to result in lower sales and a growing proportion say rising energy and input prices are prompting them to curb their investment plans, according to official data published on Thursday.Of the nearly 3,000 companies interviewed for a Bank of England survey in March, 48 per cent said they expected the Russia-Ukraine war to hinder their year-ahead performance, with an average impact of 3 per cent lower sales.More than one in four businesses are also worried about rising input costs and a similar proportion is concerned about higher energy prices, sharply up from February, March data published by the Office for National Statistics showed on Thursday.Jack Sirett, head of dealing at the global financial services company Ebury, said that businesses were enduring “a perfect storm” as a series of cost increases kicked in, including a rise in energy bills and national insurance contributions. He added that “simply keeping the lights on will take a larger toll than usual on all businesses”.The government announced on Thursday an energy security strategy to tackle soaring prices and reduce reliance on Russian oil and gas.But Stephen Phipson, chief executive of Make UK, the manufacturers’ organisation, said: “These projects cannot be delivered quickly and at a time of spiralling energy costs and a myriad of other financial burdens on business, industry desperately needs urgent action on the part of government to reduce energy prices in the short term.”In the three months to March, businesses forecast that average inflation for the year ahead would rise to 5 per cent, up from 4.6 per cent in the previous three months and the highest since records began in 2017, according to the monthly decision maker panel survey run by the BoE with academics from Stanford University and the University of Nottingham.Businesses also reported widespread supply chain disruption, absences due to sickness and trading difficulties.Over a quarter of businesses experienced global supply chain disruption in the past month, a proportion that rose to 52 per cent among manufacturers, ONS data showed. More than one in five also reported lower than normal levels of exports, with additional paperwork, higher transport costs and new customs duties among the top challenges faced by exporters. Another one in six businesses also said they were paying sick leave for employees with Covid-19. Struggling with high inflation, supply chain disruption and worsening sales expectations, businesses have cut their investment intentions, which could limit future economic and living standards growth. In March, businesses expected investment to be 5.3 per cent lower than normal levels in the second quarter, sharply down from a minus 1.3 per cent forecast only the previous month, the BoE data showed.Separate official statistics showed that business investment failed to grow since 2016 and was still 9 per cent below pre-pandemic levels in the last quarter of 2021. More

The author is economics professor at Kozminski University in Warsaw and a former finance minister of PolandRussia’s invasion of Ukraine takes its toll. Most tragic are the terrible loss of life and human suffering, but the material destruction too is enormous. Before the war, the IMF forecast an increase this year in Ukraine’s gross domestic product of as much as 3.6 per cent. Now the Economist Intelligence Unit assumes that it will drop in real terms by an alarming 46.5 per cent.According to Ukrainian prime minister Denys Shmyhal, taking into account the damage already done and the expected fall in production in coming years, the losses will exceed $1tn, of which the destruction of infrastructure amounts to $120bn.In the current phase of the crisis, humanitarian and military aid is most urgent. There will come a time, however, when the shots will cease. The day after, not only immediate help but long-term support will be essential. Understandably, Ukraine aspires to join the EU. It should be admitted over time, but not by any extraordinary procedure or express path. Ukraine must meet the conditions of membership, as is expected of other countries that are candidates for entry. In the case of Ukraine, the de-oligarchisation of the economy is of fundamental importance. For years, corrupt economic and political structures have held back the country’s development. In purchasing power parity, Ukraine’s per capita GDP in 2021 was only 74 per cent of the 1989 level.To support Ukraine’s reconstruction, the EU should create a special long-term financial vehicle — a European Fund for the Reconstruction of Ukraine. Successive multibillion-euro tranches should finance infrastructure investments and human capital development. Launching such a fund, to which the European Commission should invite the UK, Norway and Switzerland, will not be easy. It will prove far more expensive than supplying weapons to fight the Russian aggressor.The EU plans to spend hundreds of billions of euros in financing the bloc’s economic recovery from the pandemic. No less costly will be the energy transformation and transition to renewable energy sources. The EU must not turn away from the arrangements made at last year’s COP26 summit to combat global warming. Even in such an extraordinary situation as the war, it must not be forgotten that climate change is the greatest challenge facing humanity.The second instrument of aid for Ukraine should be deep cuts in its foreign debt. I know from experience how much this matters. In 1994, as Poland’s finance minister, I signed an agreement with the London Club to halve the debt to private banks. This amounted to $6.3bn, which was then 5.7 per cent of our GDP. It was a boon to the public finances but, more crucially, allowed access to world capital markets and opened Poland to western investments.Ukraine’s public debt at the end of 2021 amounted to about $94bn, or 61.7 per cent of GDP. Of this sum, foreign debt is about $57bn. The west can afford a far-reaching reduction in these obligations, or even their complete cancellation. Ukraine’s partners should declare their intention to help, linking stage-by-stage debt reduction to progress in de-oligarchisation and the building of a social market economy in place of corrupt state capitalism.The third form of assistance to Ukraine requires Chinese involvement. A decade ago, Ukraine was not asked to join the so-called “16+1” mechanism, the eastern European part of China’s Belt and Road Initiative. Now, as soon as a ceasefire is announced, President Xi Jinping should call President Volodymyr Zelensky, invite Ukraine to join the group and declare his readiness to help rebuild the shattered economy.Such an act would not be anti-Russian, anti-EU or as a sign of Chinese expansionism, but an expression of China’s willingness to join the process of overcoming the Ukrainian crisis. It could also revive the somewhat rickety course of the BRI in our part of the world. China has significant overcapacity in the construction industry and is looking for opportunities to use it abroad. It has extensive experience in infrastructure investments, including roads, bridges, tunnels, ports, airports, railway lines, power grids and internet networks. Chinese companies have shown they can adapt to the most diverse conditions abroad, from south Asia, the Middle East and Africa to some European countries. Taken together, a European fund, debt cancellation and Chinese assistance would give a tremendous boost to Ukraine’s recovery from the war’s destruction. As soon as political conditions permit, Ukraine must be helped economically, because it cannot cope on its own. More