Lebanon faces painful reforms to unlock foreign aid

French, British ambassadors say electricity reform and anti-corruption work among conditions to unlock billions in aid.

Billions of dollars in potential aid for Lebanon are likely to come with painful strings attached, placing Lebanon in unfamiliar terrain as it is forced to either reform or watch its crisis-ridden economy sink even further [File: Mohamed Azakir/Reuters]
Billions of dollars in potential aid for Lebanon are likely to come with painful strings attached, placing Lebanon in unfamiliar terrain as it is forced to either reform or watch its crisis-ridden economy sink even further [File: Mohamed Azakir/Reuters]

Beirut, Lebanon – Gripped by an epic financial crisis made worse by the coronavirus pandemic, Lebanon is seeking $20bn in foreign aid to pull its collapsing economy back from the brink and finance state spending for the next two years.

The government’s financial rescue plan hinges on securing some $10bn in aid from the International Monetary Fund (IMF) – with which it will formally start negotiating on Wednesday – as well as roughly $11bn favourably termed loans and grants previously pledged by international donors.

But those funds will not be released without strings attached, placing Lebanon in unfamiliar terrain as it is forced to either reform or watch its economy sink even further.

Overdue reforms

Some $11bn in so-called “soft” loans pledged by wealthy states and international organisations at the CEDRE conference organised by France in 2018 were conditional on structural reforms that the last Lebanese government never implemented.

Those funds are unlikely to materialise now unless the current government starts making good on previously agreed overhauls. 

“The bottom line remains external finance will neither flow, nor be productive for the Lebanese people, in the absence of the Lebanese authorities implementing comprehensive economic reforms,” Chris Rampling, United Kingdom Ambassador to Lebanon, told Al Jazeera.

“CEDRE’s focus on reform implementation and accountability to the Lebanese people are still vitally important,” he added. “The magnitude of the challenges Lebanon faces, and the reforms needed, are now much greater.”

Since the 2018 CEDRE conference, Lebanon’s debt-laden economy has gone into a death spiral that’s seen inflation soar, businesses shutter and tens of thousands of people thrown out of work. 

In March, the government defaulted on a foreign debt repayment for the first time in the country’s history. The banking sector is at risk of buckling as it faces estimated losses north of $80bn, thanks to assets tied up in non-performing loans and government debt. The Lebanese pound has lost about two-thirds of its value against the United States dollar on parallel markets since August as remittances dry up and foreign exchange grows ever more scarce. 

Lockdowns to stem the spread of COVID-19 have only exacerbated these problems.

The IMF reckons Lebanon will experience one of the worst recessions in the world this year, with its economy forecast to shrink by a staggering 12 percent.

Many missteps led Lebanon to this point, but most blame decades of mismanagement and corruption for the demise of a nation that has all the ingredients for prosperity: a highly educated population, natural beauty, a rich history, a legendary hospitality sector and a large and successful diaspora. 

Bruno Foucher, France’s Ambassador to Lebanon, told Al Jazeera that CEDRE money “is still on the table, but the ball is in the court of the Lebanese government”.

Foucher said Lebanese officials should prioritise reforming the crippled electricity sector, which bleeds about $2bn a year from state coffers and yet still fails to provide round-the-clock power 30 years after the end of Lebanon’s civil war.

Greater transparency, good governance, financial stability measures, and crackdowns on corruption and tax evasion – along with an independent judiciary – are also crucial for achieving a successful economic transformation, Foucher added.

“Only then will confidence be restored, both among the Lebanese and within the international community, who will continue supporting Lebanon,” he said.

France pledged roughly $660m in soft loans and grants to Lebanon at CEDRE, while the UK pledged roughly $70m.

Similar reform demands are also being made by the World Bank – the single-biggest donor at CEDRE, having pledged upward of $4bn.

Saroj Kumar Jha, World Bank Group Regional Director for the Mashreq, concurs that Lebanon’s government must prioritise financial stabilisation and instituting “important anti-corruption and governance measures and electricity reforms,” as well as strengthening the social safety net for the country’s poor.

“Such a reform path would send a positive signal to the international community to help Lebanon face this unprecedented crisis,” he told Al Jazeera. 

Pain to prosperity 

It bodes poorly that previous governments have failed to enact CEDRE reforms, because experts say the IMF will likely demand even more painful measures as a condition for releasing aid.  

The nature and size of the problem in Lebanon is gargantuan,” Amer Bisat, a senior emerging markets investor and former IMF economist, told Al Jazeera. “It will break every record globally.”

The IMF is unlikely to unlock aid immediately, and will instead probably require the government to implement a host of economic overhauls before a programme is even formalised, says Bisat.

“It will want concrete action before it takes the case on board,” Bisat said.

Implementing structural reforms is often unpopular and requires tremendous political will. But that could be in short supply in Lebanon’s highly fractured political landscape, and especially given the country’s history of receiving help from wealthier nations with few conditions attached. 

Political parties could very well fear alienating their political base, and fomenting social unrest if reforms make already mounting economic hardships that much more difficult to bear.

But Lebanon cannot afford not to change. Its economy desperately needs the dollars an IMF programme could deliver to finance state functions and pay for imports. An IMF bailout would also complement CEDRE soft loans that route capital toward growth-boosting infrastructure projects and capital investments.

The IMF is likely to ask for formal capital controls, replacing the informal ones the country’s banks have had in place since November, said Bisat, who added that the fund will also be looking for Lebanon to devalue its currency and abandon its 23-year-old official peg to the US dollar.

The international lender could also require Lebanon to sell off state assets and recapitalise its banking sector – as well as aggressively restructure its debt and reform its pension system, said Bisat. Progress would be checked on a quarterly basis, with cash dispersals contingent upon improvements.

Bisat is under no illusions as to how painful these reforms will be for the Lebanese people. But he believes the country will be better off for it.

“Focusing on the pain while forgetting the gain is an issue,” he said.

“If we can set the stage, implement a system overhaul and rebalance the economy to grow to its actual potential, then we have not years, but decades of prosperity in front of us.”

Source : Al Jazeera

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