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The new Lebanese government has vowed to face one of the worst economic collapses in history.
The path to be followed includes reforms planned by donor nations and institutions like the World Bank and the International Monetary Fund, which have repeatedly stated that they will release funds as soon as they see changes.
In return, Lebanon receives billions in aid.
The alternative is to delve deeper into a depression, which has posed the greatest threat to Lebanon’s stability since the 1975-90 civil war.
Successive governments have failed to make changes due to Lebanon’s sectarian political system. So what reforms must his new Prime Minister Najib Mikati undertake, and can he be successful, where others have not?
“IMF talks will not be a walk in the park,” said a former Lebanese negotiator at the IMF talks.
“It will be very difficult to meet the requirements.”
The reforms
Many of the reforms affect the financial and banking system, the epicenter of the late 2019 collapse that largely paralyzed Lebanese banks.
The main cause was decades of borrowing from a corrupt state, much of it from the banks, which depended on a steady flow of dollars from overseas to keep the system going. The crisis deepened as these inflows slowed.
Instead of the fixed dollar peg that underpinned the system for two decades, several exchange rates have arisen.
The IMF’s recommendations include reorganizing public finances, reorganizing banks and restructuring national debt.
It has also recommended that up-front losses at private banks and the central bank be recorded in a way that protects smaller depositors and that a credible monetary and exchange rate system be put in place that includes the standardization of multiple exchange rates and is accompanied by formal capital controls.
“The size of Banque Du Liban’s (BDL) losses is critical: you cannot do financial programming or plan a financial package for Lebanon without knowing the size of BDL’s losses. These issues were raised but not resolved last year, â€said Nasser Saidi, a senior economist and former minister. “You are the elephant in the room.”
Donors also want reforms to improve transparency and fight corruption. One focus is the energy sector, which, although one of the main burdens on the treasury, has failed miserably in terms of electricity supply.
Many of the reforms were set out in a French roadmap last year, including a review of the central bank.
What about the last government’s efforts?
The previous administration drew up a financial recovery plan that included losses of around $ 90 billion in the financial sector – a figure approved by the IMF.
But while the cabinet was installed by many of Lebanon’s key political actors, almost all of them turned against the plan and denied the scale of the losses.
Some leaders said bank deposits should not be touched even if the currency collapse has destroyed the value of savings by up to 80%.
Attempts to conduct a central bank forensic review have stalled amid disputes over banking secrecy.
Former Prime Minister Hassan Diab’s government also tried to push ahead with energy reforms to build new power generation capacity. This was derailed by objections from the presidential faction who wanted to build a power plant in a Christian area.
Diab, an academic with no independent political position, resigned seven months after the Beirut port explosion.
Can Mikati be successful?
While some state officials are sounding the alarm about the collapse or fragmentation of Lebanon, some believe the severity of the crisis should encourage politicians to make decisions that they previously opposed.
But the time it took to agree on the Mikati government – an agreement that was only reached after close contacts with France – shows that factional interests continue to have priority and point to the political minefield to which it is exposed will be.
As a billionaire, Mikati has political and financial skills.
One of the main issues to address is the central bank’s objection to the distribution of losses in the financial system, the former negotiator said.
If Mikati’s government starts successful negotiations with the IMF, it is unlikely to receive any funds before the turn of the year, the negotiator said.
The newly appointed finance minister, Youssef Khalil, was a senior central bank official and is close to his veteran governor, Riad Salameh. He was chosen by Nabih Berri, the Speaker of Parliament, who had been a pillar of the system for decades.
“For example, in restructuring the banking system, there are little things to do for each individual bank at a certain level, there is a lot of work that has not been done,” said Mike Azar, a financial advisor from Beirut.
Over the past two years, public sector losses have risen as the economy continues to shrink and its ability to absorb shocks weaken, Azar notes, adding that central bank losses and government debt-to-GDP ratio are more than Reached 700%.
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