IMF suspends $3 billion loan to Lebanon
(Bloomberg) – Lebanon has reached a preliminary agreement with the International Monetary Fund for a $3 billion loan to help it weather its financial crisis, but the deal will not be considered for final approval until authorities have not implemented a series of deeply conflicting reforms.
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Bankrupt and short of money to pay for fuel and medicine, Lebanon desperately needs outside financing – and the backing of the IMF – to get through its worst financial crisis since the 1975-1990 civil war.
If approved, the four-year loan program would help restore Lebanon’s credibility with international investors and unlock additional foreign aid.
But before it is sent to the IMF board for consideration, Lebanon must float its exchange rate and get bankers and politicians to agree to measures that would see them shoulder billions of dollars in losses.
Time is not on Lebanon’s side. With legislative elections scheduled for mid-May, the government has a narrow window to push through measures that have been repeatedly blocked by lawmakers over the past two years.
“Lebanon is facing an unprecedented crisis, which has led to a dramatic economic contraction and a sharp increase in poverty, unemployment and emigration,” Ernesto Ramirez Rigo, who led the IMF mission to the country, said on Thursday. Lebanon.
“The authorities are aware of the challenges they face in implementing this ambitious program, but stressed that this reform program is essential to end the current crisis and has the support of all political leaders” .
IMF deal breakthrough within reach for crisis-hit Lebanon
Lebanon has been grappling with a full-scale financial meltdown since late 2019, when decades of mismanagement and corruption erupted into a simultaneous banking, debt and currency crisis.
Savers lost access to most of their deposits, remittances that are a mainstay of the economy dried up, the currency crashed and inflation soared into triple digits, tipping over half the population of a middle-income country in poverty.
In March 2020, the government announced that it would default on $30 billion in external debt to keep what remained of central bank reserves for imports of food, fuel, and medicine.
The agreement with the IMF requires Lebanon to agree with its creditors, which include major international hedge funds, on a plan to restructure its external debt and restore credibility with investors.
The news raised hopes among investors that the government would soon start talks on the fate of these Eurobonds.
Lebanese bonds led the gains among their emerging market counterparts on Thursday, with the national 2032 bond priced 1.2 cents higher at 13 cents to the dollar. It’s the biggest daily security advance since the Covid crisis began in March 2020, according to data from Bloomberg.
“This is a good first step on the long road to recovery for Lebanon,” said Guido Chamorro, co-head of emerging hard currency debt at Pictet Asset Management. “Let’s hope that this personnel agreement will inspire the next government formed after the May elections to ‘do the right things’.”
While the agreement gives new impetus to the government’s economic program, the obstacles that remain are numerous and onerous.
For the deal to move forward, the IMF wants Lebanon to take several steps to prepare for a successful overhaul of the moribund banking system. They include an externally assisted assessment of the 14 largest banks, an audit of the central bank’s external asset position, and the adoption of a bank secrecy law.
Previous efforts to secure an IMF bailout have stumbled on these issues.
Lebanon will also have to unify the myriad of exchange rates used since the crisis, with the official rate still at 1,507 to the dollar and the black market rate at closer to 24,000.
This is a step that the central bank has refused to take alone. He wants parliamentary support amid fears that full currency liberalization could trigger a new round of rising prices at a time when food and fuel prices are rising.
The government had sought to win the Washington-based lender’s endorsement in recent weeks by approving long-delayed plans to overhaul the loss-making power sector and introduce capital controls, as demanded by international donors.
If approved, the deal would force Lebanon to make closely watched changes to how it spends public money and force it to clean up public companies and public services that have become conduits for political patronage.
That, in turn, could help unlock some $11 billion in aid pledged for infrastructure and other projects even before the crisis.
However, the legislative elections scheduled for May 15 are likely to cause delays.
In Lebanon’s complex political system, it often takes months for religious sects and political parties to agree on a prime minister, while efforts to form a government often get bogged down in political horse-trading.
While an interim government can still write laws, its powers are limited and it may not be able to sign a deal with the Washington-based lender or push through measures with potentially lasting ramifications.
President Michel Aoun’s term expires in October 2022, adding another potential hurdle. The presidential seat remained vacant for two years before the political parties agreed to appoint Aoun.
“I’m skeptical that it’s possible to achieve any of these goals in five weeks,” said Guillermo Guerrero, strategist at EMFI Group. “We must consider this agreement as provisional and completely dependent on the outcome of the elections. Basically, they prepare a roadmap for the authorities – that’s what you should do if you need help. »
(Recasts with analyst quote, market response)
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