Beirut, Lebanon – Lebanon will seek $10bn to $15bn in external financing and officially devalue its currency by half by 2024 in an effort to address the deepest financial crisis in its history, according to a leaked government plan.
The government will seek “massive external financial support to backstop the economy, made conditional upon the implementation of a comprehensive recovery plan able to restore confidence and reverse the current trends,” the plan says. “It is difficult to imagine Lebanon coming out of such a deep crisis without the support of the international community at large.”
The draft blueprint necessitates a comprehensive restructuring of the country’s central and private banks and its debt burden – currently the third-highest in the world as a percentage of total economic output.
Lebanon chose to default on its foreign-currency debt last month for the first time ever, and has since said it will postpone payment of all local and foreign debt, totalling some $90bn.
Also included in the plan are structural reforms aimed at fighting corruption, modernising the country’s power grid, which bleeds up to $2bn per year from state coffers – and creating a social safety net to insulate the country’s most vulnerable against negative fallout from those reforms.
Pain across the board
While the government’s draft rescue plan acknowledges the scale of the country’s financial crisis, analysts say implementing the outlined reforms would be difficult given the pain it showers on various stakeholders.
Nasser Saidi, a former Lebanese economy minister and vice governor of the Central Bank, told Al Jazeera the draft takes a holistic approach by addressing the country’s most pressing problems including the need for external financing – preferably from the International Monetary Fund – and its need to restructure public debt, private banks and the central bank.
“It can’t be piecemeal” said Saidi. “These are signs that there is a willingness to go in the right direction, but let’s have no illusions: it will take a lot of political courage.”
Some of the proposals under consideration that have triggered popular protests in the past include hiking fuel prices, restructuring the country’s bloated public sector, revising benefits for tens of thousands of members of Lebanon’s security forces, and imposing salary and hiring freezes.
The plan also takes aim at wealthy elites with measures such as hiking corporate tax rates and income tax rates for high earners, as well as jacking up the value-added tax on luxury goods from 11 percent to 15 percent. Individuals with swollen bank accounts may see their funds greatly diminished or stuck in the banking system for years to come.
‘Impossible to restore’
Lebanon’s economic crisis came to a head last year as the local currency began to devalue on parallel markets and the government sought to implement austerity measures, sparking unprecedented anti-establishment protests that shut down the country for several months.
Decades of unsustainable financial policies, eye-watering levels of corruption and a 10-year economic slump had led to an acute shortage of United States dollars. The Lebanese pound has since devalued by almost 50 percent on parallel markets, sliding to 2,850 Lebanese pounds to $1 from the long-standing official rate of 1,500.
“The peg to the US dollar that has been maintained over decades is now impossible to restore and must be abandoned as part of the Government reform program,” the draft plan proclaims.
The plan advances the idea of a “crawling peg” whereby the Lebanese pound would gradually depreciate over the next four years, reaching 3,000 Lebanese pounds to $1 in 2024.
This economic crisis has tarnished the once-gilded status of Lebanese banks that have imposed informal capital controls to limit US dollar withdrawals and keep foreign exchange from fleeing the country.
The dollars that depositors now see on their bank statements are largely tied up in deposits at the Central Bank and in loans to the government and private sector that have little hope of being repaid on time or in full.
Today, dollar withdrawals have ceased entirely, and a process of voluntarily converting small dollar accounts into local currency is under way.
The plan accounts for the fragility of the country’s banks by forecasting a whopping $83.2bn in total losses for the banking sector – a hit the plan says will be shouldered mainly by shareholders and large depositors.
Nafez Zouk, an economist at Oxford Economics, told Al Jazeera that these measures signal an intention to distribute losses somewhat fairly by protecting small depositors.
Prime Minister Hassan Diab has pledged to protect 90 percent of the country’s depositors, most of whom have relatively small accounts.
To underscore this commitment, the draft plan pledges to spend 1,055 billion Lebanese pounds (about $370m at the parallel market rate) on a safety net to limit negative impacts.
Still, it does little to address “inevitable depositor losses,” said Zouk, who also points out that the plan assumes a fund will be created with money seized from those who engaged in corruption.
“Using that in the assumptions is not being genuine. In the best of cases, it would take years to retrieve those funds,” he said.
Step in the right direction, but ‘too rosy’
The plan “is a good step in the right direction,” Zouk said, but he criticises a number of “rosy” assumptions, such as projected economic growth and inflation, and a lack of clarity around how the country’s debt would be restructured.
The plan also assumes heavy inflows of cash from abroad, whether through an IMF programme or $11bn in soft loans that were pledged to Lebanon by the international community at the CEDRE donor conference two years ago, chiefly for infrastructural projects.
Lebanon was supposed to implement a series of reforms to unlock those funds, but never did.
Additionally, the global economic downturn triggered by the coronavirus pandemic has pushed nations to look at their own needs first, making generous aid pledges to Lebanon less likely to materialise.
“A lot of the fiscal adjustment rests on influx of CEDRE money, which in my view is still a large geopolitical risk,” Zouk said.