IMF Issues Warning to Lebanon

Lebanon still facing enormous challenges.

Ruling class unwilling and incompetent to enact reforms.

Can one ask the fox to guard the henhouse?

Four years after Lebanon’s historic meltdown began, the small nation is still facing "enormous economic challenges", with a collapsed banking sector, eroding public services, deteriorating infrastructure and worsening poverty, the International Monetary Fund warned Friday.

In a statement issued at the end of a four-day visit by an IMF delegation to the crisis-hit country, the international agency welcomed recent policy decisions by Lebanon's central bank to stop lending to the state.

The IMF said that despite the move, a permanent solution requires comprehensive policy decisions from the parliament and the government to contain the external and fiscal deficits and start restructuring the banking sector and major state-owned companies.

In late August, the interim central bank governor of Lebanon, Wassim Mansouri, adopted stricter measures than his predecessor, Riad Salameh who retired under a cloud of malfeasance and under investigation by a number of European countries.

Mansouri called on Lebanon's ruling class to implement economic and financial reforms. Unlike Salameh, he has refrained from providing hard currency loans to the state, a policy that has stabilized the exchange rate between the Lebanese Lira and the US dollar. He also said the Central Bank does not plan on printing money to cover the huge budget deficit to avoid worsening inflation.

Lebanon is in the grips of the worst economic and financial crisis in its modern history. Since the financial meltdown began in October 2019, the country’s political class — blamed for decades of corruption and mismanagement — has been resisting economic and financial reforms requested by the international community, particularly the International Monetary Fund. 

The ruling class has on occasion said it will turn for help from China, Russia, Iran and other non-Western sources, but that has not materialized. It also hurried earlier this year to strike a deal with its arch-enemy Israel - which it does not even recognize - over maritime borders, with a view to extract gas and/or oil from offshore fields shared by both countries, and thus find a source of funding that would bypass the need for help from the IMF. But the country is in collapse, its institutions are all paralyzed, it has no president and only a caretaker government, and achieving a reliable source of money from gas and oil is ten years away at the very least.

Lebanon started talks with the IMF in 2020 to try to secure a bailout, but since reaching a preliminary agreement with the IMF last year, the country's leaders have been reluctant to implement needed reforms. "Lebanon has not undertaken the urgently needed reforms, and this will weigh on the economy for years to come", the IMF statement said. The lack of political will to "make difficult, yet critical, decisions" to launch reforms leaves Lebanon with an impaired banking sector, inadequate public services, deteriorating infrastructure and worsening poverty and unemployment.

Although a seasonal uptick in tourism has increased foreign currency inflows over the summer months, it said, receipts from tourism and remittances fall far short of what is needed to offset a large trade deficit and a lack of external financing. The IMF also urged that all official exchange rates be unified at the market exchange rate.

The structural deficiencies of the Lebanese political system - sectarian, tribal, feudal - are serious obstacles facing the needed reforms. A boss-client system of governance, and a grip on power by the religious institutions, maintains corrupt sectarian leaders in power against the wishes of the population. The private system by far overrides the public sector in the economy, education, and other sectors. When the public sector manages to steer itself away from the greedy and equally corrupt private sector, it often falls short of providing adequate modern services and is beset with politically-appointed incompetent civil servants who perpetuate the endemic corruption.

Unlike Greece, Sri Lanka and other countries that have benefited from IMF aid in recent years, reforms in Lebanon are unlikely to happen because the international community is asking the corrupt barbarians in power to reform themselves. Like asking the fox to guard the henhouse. It is rumored that Riad Salameh, the previous governor of the central bank, detains secrets of mismanagment, corruption and pilfering of public funds by the ruling political class. The question is: Will he open Pandora's box and reveal these secrets, at least to save his own legacy? Or does he fear retribution (in Lebanon this often takes the form of a car bomb or of assassination at close range by the thugs in power)?