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Lebanon officially asks IMF for financial support

Finance Minister Ghazi Wazni signs a request of financial assistance from the International Finance Fund in Beirut, May 1, 2020. (The Daily Star/Dalati Nohra, HO)

BEIRUT: Prime Minister Hassan Diab and Finance Minister Ghazi Wazni Friday signed a request for financial assistance from the International Finance Fund, a first by a Lebanese government.

The request came just one day after the Cabinet amended and approved a comprehensive economic plan that outlined the measures the government will take to cut the budget deficit and stimulate the economy.

Previous governments have been reluctant to officially seek the financial support of the IMF, fearing a negative backlash from many political parties, trade unions and activists who fear that the fund may demand higher taxes and the removal of subsidies as a prerequisite for any large soft loans.

Wazni told The Daily Star that the Cabinet would present this plan to the IMF and other donor countries in a bid to lure financial assistance.

The minister stressed that no one was willing to help Lebanon unless there was a viable plan to implement reforms.

And for the first time, the government said it planned to gradually unpeg the Lebanese pound from the dollar.

Wazni explained that floating the pound would be taken in stages and until the end of 2020, adding that the government was aware of the magnitude of this step.

The IMF has repeatedly called on the successive governments to unpeg the pound as this was bleeding the resources of the Central Bank.

Some bankers admitted secretly that the national currency should eventually be devalued.

But some experts and economists expressed doubt whether the IMF was willing to unlock $10 billion in assistance for Lebanon over the next five years, arguing that the fund had many other countries that were seeking its help.

They also doubt whether the government would be able to receive a cash injection before the end of 2020.

The Association of Banks in Lebanon said it also planned to submit a new economic recovery plan to the government within 15 days.

The association made it very clear that it opposed any haircut on customer deposits or any attempt by the government to take control of the commercial banks under the pretext the these lenders had lost most of their private equities.

According to the paper, the government said the IMF programs were also numerous.

“Though the IMF would most probably not be able to provide by itself sufficient resources to cover all of Lebanon's external financing needs over the next five years, even under a so-called exceptional access, it will unlock other sizeable pockets of available funds from multilateral or bilateral partners that would be conditioned to the successful implementation of the IMF program,” the paper said.

It added that debt discussions with bondholders would be facilitated in the context of an IMF program - some of them insist they will simply not negotiate absent such a program - as it would provide an anchor for negotiations, with clear sustainability targets and a methodological framework to rely on.

“Investors will be far more willing to accept a facial reduction of their debt if they see credible recovery value in what they are left with. A Lebanese recovery plan outside of an IMF program that would not tackle fully all the imbalances inherited from the past would fall short of the main objective of giving a fresh start to the Lebanese economy while putting it on a viable long-term trajectory,” the paper explained.

It noted that this is mainly due to the unwillingness of the international community to commit the extensive support needed, while at the same time the very large accumulated losses in the Lebanese financial system would not be restructured and while no international framework would be put in place to monitor reform implementation over the medium term (foreign donors are well aware that previous experiences have shown a lack of capacity from Lebanese governments to conduct reforms as planned in the context of international support packages).

“In the here-after described macroeconomic scenario, external support from various sources are projected to total c. $10 billion over five years (in addition to CEDRE funds) and will be complemented as needed with contributions from bondholders in the context of the debt restructuring and a strategy of returning to the international capital markets in the medium run,” the paper said.

The government indicated that total contractual debt payments to Eurobond holders were projected at c. $19 billion to $20 billion over the next five years before the default.

“Regardless of the nominal discount, the negotiation of a five-year grace period on principal and the reduction of coupon to a minimum level during that same period would fill an additional $15-18 billion of the projected $28 billion BoP financing requirements. The rest of the gap – besides external support – will be covered by a strategy of gradual re-access to the market as the Lebanese economy recovers and the credit rating improves, as well as the rise in FDI that should be fueled by the emergence of a new Lebanese economy,” the paper said.

It added that the overall amount of external support could be higher in case of stricter benchmarks in terms of net foreign assets accumulation by the Central Bank (reconstitution of higher international reserves).

“Following a preliminary projection of real output contractions of -13.8 percent in 2020 and -4.4 percent in 2021, the economy will then gradually recover and reach 3.1 percent real growth by 2024 before stabilizing at an estimated 3 percent growth potential in the longer run,” it added.

“The recovery will be driven by external support to limit the contraction in imports and domestic consumption, a public investment push in the context of the unlocking of the CEDRE committed financing and the implementation of a well prioritized investment plan that would back private sector development and focus on key areas, the implementation of a comprehensive pro-growth reform agenda, and competitive gains achieved through the devaluation of the currency,” the paper said.

The government expected the private sector to gradually adjust to the new environment by reducing costs and reorienting production toward the external sector and import substitution.

“The average inflation is expected to spike at 53 percent in 2020 due to the pass-through effects of the exchange rate depreciation. Inflationary pressures will gradually decline to 6.2 percent by 2024,” the paper said.

It said that fiscal policy would be driven by an ambitious, albeit necessary, fiscal consolidation plan spread out over five years. Primary budget balance will be improved from -0.9 percent in 2019 to 1.6 percent in 2024, reflecting a “domestic primary surplus” of 3.8 percent excluding the portion of capital expenditures that will be self-financed externally with the unlocking of the CEDRE external financing commitments, therefore reflecting a much tighter primary surplus objective.

“These ambitious fiscal consolidation efforts, together with the sharp reduction of the public debt interest bill that will be achieved through debt restructuring, will aim at putting the debt-to-GDP ratio on a clear downward trajectory with a minimal harm on the most fragile,” the paper said.

The Finance Ministry projected the government deficit to narrow from 11.3 percent of GDP in 2019 to 5.3 percent in 2020 and further to 0.7 percent by 2024, under a set of illustrative debt restructuring assumptions.

“Neutralizing the effect of the disbursement of CEDRE financing would reflect a balanced overall budget as early as 2024. Under this set of assumptions, the debt-to-GDP will decline steadily from an estimated 176 percent in 2019 to 99.2 percent by 2024 and further to 83.2 percent by 2027. Fiscal consolidation measures will be underpinned by core structural reforms – fiscal responsibility legislation, central treasury management, and public bodies and employment reforms – that entrench fiscal discipline,” it noted.

The Finance Ministry expressed hope that the fiscal component of the reform package should aim at reaching a primary budget surplus of c. 1.6 percent 2024, equivalent to c. 3.8 percent surplus without taking into consideration the impact of externally financed capital expenditure achieved through CEDRE.

“This requires, in addition to reducing the electricity transfers, rationalizing the wage bill and cutting all inefficient current spending, increasing budgetary revenues by curbing tax fraud and evasion, fighting smuggling across all points of entry, increasing the compliance rate, and revamping the entire tax system to make it fairer and heavier for rent income.”

“In order to preserve the most vulnerable segments of the population, a comprehensive safety net package will be implemented, with cash transfers to the poorest, and education and health adequate measures.”

This medium-term fiscal strategy (MTFS) will be adopted by the government and approved by Parliament by end-June 2020. It will include the following revenue and expenditure measures with a view to distributing fairly the burden of adjustment and to avoiding to the extent possible any additional impact on wage earners and the poor.

The paper assured that the fiscal reform package would be accompanied by social safety net (SSN) measures to protect the most vulnerable groups. The poverty rate is already high, estimated at about 48 percent of the population and is susceptible to an increase as the country adopts measures to come out of the crisis.

Financing an SSN program could be taken up by donors including the World Bank in the context of a full-fledged adjustment program. The Bank and other donors have already provided support to build a poverty targeting system in Lebanon that could be immediately deployed to fund the SSN program.

Monthly cash transfers will be considered for approximately 200,000 poor households to cover basic needs and offset the impact of the increase in some prices including fuel.

The government said it will discuss with international partners additional social policy measures in response to the deteriorating social conditions in the country.

The objective is to enhance and implement additional social safety nets to protect marginalized families, fight poverty in poor areas, and propose community plans to improve their conditions and provide the basic services to them from education, health, and social services with a special focus for areas that witnessed conflicts.

The budget is “expected to amount to $1 billion in 2020, $1.5 billion in 2021, $1.3 billion in 2022, $1 billion in 2023 and $0.75 billion in 2024. The government will also invest in the recent programs, IMPACT and the new SSNP PMT data collection in order to build a reliable database and continuously update it and verify it as a key element to develop focused and effective programs with a better understanding of the needs and more focused targets to act upon (2020+),” the paper said.

 

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