BEIRUT: Central Bank’s plan to totally lift the subsidies on gasoline may encourage the new Lebanese Cabinet to proceed successfully in talks with the International Monetary Fund.
But this measure, despite its importance, is only one mile in a long and painful journey toward full compliance with IMF program.
New Finance Minister Youssef Khalil and Central Bank Governor Riad Salameh have already started meeting in a bid to hammer out a new rescue economic plan or maybe an update to the current program which was presented by former Prime Minister Hassan Diab.
Khalil has so far declined to make any public comment or statement about his preparations for the talks with the IMF.
The IMF conditions to provide urgent financial assistance to Lebanon are well-known and the fund does not seem to drop any of them.
These conditions are: Parliament’s final approval for the capital control law, unifying the currency exchange, restructuring of the public debt, restructuring of the Central Bank, restructuring of the banking sector, reforming the electricity sector as well as other conditions.
Prime Minister Najib Mikati is expected to visit Paris Thursday to discuss with French President Emmanuel Macron the government’s plan to push for reforms.
Mikati realizes that French support for the government’s new economic plan is crucial to encourage the IMF and other international donors to provide financial assistance to the country which is now on the brink of total economic collapse.
But some experts warn against any hasty decision to lift the subsidies on gasoline and peg the price to the dollar rate in the black market without introducing the ration card for Lebanon’s most needy families.
However, BDL seems determined to stick to its promise to lift the subsidies on gasoline at the end of September.
On Wednesday, the Energy Ministry raised the prices of gasoline by 15 percent in an apparent bid to prepare the public for the total lifting of the subsidies on this commodity.
The prices of 95-octane gasoline and 98-octane gasoline were raised by around 15 percent and the new rates are LL202,000 and LL209,000 for 20 liters respectively Wednesday.
This step may allow the oil importing companies to release the remaining reserves at their reservoirs and will induce BDL to open new lines of credit to buy this commodity at the new prices.
However, the president of an oil importing company told The Daily Star the price sold for the consumer is based on a dollar rate of LL14,000 while the actual rate at the parallel market is higher than that.
“The subsidies on diesel have been totally lifted and are now sold in fresh US dollars. But the ministry set a price at the pump in Lebanese pounds and is based on LL14,000 and this does not work for us. How does the Energy Ministry expect us to sell gasoline to the consumer based on LL14,000 to the dollar while the actual rate at the market is now over LL16,000,” he asked.
The president of the company explained that the Central Bank is paying the difference of the dollar rate in the parallel market up till now.
At present, the oil importing companies are buying diesel which is used to run private generators from the international market in fresh dollars and are selling it to their customers in fresh dollars as well.
Lebanese oil importing companies import 2 million tons of gasoline and 2 million tons of diesels each year.
“There are several ways to reduce the import of diesel in Lebanon such as resorting to solar power or increase the electricity supply to all households,” the head of the company said.
George Brax, a member of the gas stations owners, said that now there is no excuse for the oil importing companies not to provide the market with all its gasoline needs.
“Basically, the market should now be flooded with gasoline for the coming days and even weeks and hopefully this will decrease the pressure on gas stations,” Brax told The Daily Star.
On Wednesday, the Energy and Water Minister Walid Fayyad expressed his rejection and condemnation of the practices carried out by some stations after receiving quantities of fuel, as well as the new tariffs, adding that they were still refraining from providing citizens with this vital material, and the abnormal practices of selling on the black market and filling gallons are still ongoing by some.
Fayyad warned the gas stations against continuing with similar actions that harm the interests of citizens, and the national interest at the risk of taking legal measures leading to the withdrawal of their licenses.
Marwan Barakat, Group Chief Economist and Head of Research of Bank Audi, told The Daily Star that the lifting of subsidies has become a necessary evil, after the BDL reserves reached a low level equivalent to required FX reserves of banks at the Central Bank.
“The removal of subsidies is necessary to maintain a minimum level of reserves that would be required to support any hope for recovery of the country. It is within this perspective that the IMF requires full removal of subsidies as a requirement for a full-fledged program between Lebanon and the fund. I don’t believe that the subsidy removal itself should lead to currency depreciation on the black market looking forward,” Barakat said.
He added that the increase in the price of hydrocarbons as a result of the subsidy removal would lead to additional overall inflation that would lead to a significant contraction in aggregate demand and accordingly reduce import needs, thus alleviating potential pressures on the FX market.
“Also, the rising domestic inflation is likely to push increasingly Lebanese to resort to their cash dollars in their homes (that are estimated at $10 billion) or support from family members abroad in their spending behavior which would help generate dollar supply in the parallel FX market. Notwithstanding that subsidy lifting is occurring in a period where confidence factor has improved following the Cabinet formation, with the psychological political factor behind currency fluctuation on an improving track.”
Barakat added that the Lebanese pound exchange rate could depreciate only in an event of intense political bickering, lack of reforms, and failure of negotiations with the IMF agreement which would increase again the overall risk factor in the country.