« Sans le FMI, le taux de change à plus de 110 000 LL à fin 2026 »

“Without the IMF, the exchange rate at more than LL 110,000 at the end of 2026”

From the very first lines, the tone is set: “The Lebanese authorities have once again placed their personal interest before the needs of the country. »

The Institute of International Finance (IFI), which brings together several hundred major banks in the world and which has sometimes sinned by excess of optimism in its analyzes of the Lebanese situation, no longer minces its words in its most recent report on the country of Cedar published last week and written under the direction of its chief economist for the MENA zone and former executive (from 1991 to 2008) of the IMF Garbis Iradian.

Apart from the sobriety of its title (“Lebanon: accumulating challenges”), the critical tone of the study betrays the exasperation of its authors in the face of the attitude of the leaders who have missed many opportunities for reform the country in nearly three years of crisis, leaving the situation to worsen. The IFI also fears in the statement of its traditional “pessimistic scenario” that the maintenance of the political deadlock will lead to the “disintegration” of the country, pushing in particular the exchange rate to more than 110,000 pounds for one dollar ( i.e. almost 4 times the current one) by the end of 2026.

A bad omen against which the institute presents its “optimistic” counterpart and for which the economic recovery of Lebanon could materialize in a few years, provided that the authorities carry out the mission which is theirs: to put in place economic reforms. to finalize the agreement with the International Monetary Fund by the end of the year. An agreement that the two parties have already signed in the form of a preliminary version on April 7, preamble to a possible definitive subscription to an IMF financial assistance program of up to 3 billion dollars over four years. However, this check is far from blank, given the list of reforms to be undertaken to finalize this agreement.

The terms of the agreement

Among these preconditions, only one was adopted by Parliament on Tuesday: the adoption of a law adjusting banking secrecy in force since 1956. If the deputies approved this text giving the right to lift banking secrecy to three new entities , in addition to the Special Commission of Investigation (CSI, independent but chaired by the Governor of the Banque du Liban Riad Salamé), they at the same time neutralized this lever by not amending in return Law No. 32 which grants the exclusivity of this prerogative to the ITUC in a concurrent provision.

This missed act should however be corrected “in early August”, according to the chairman of the Finance and Budget Committee, Ibrahim Kanaan, who had recently described this law as “a pledge of transparency necessary to revive confidence”. In the business climate of the country and its institutions, this confidence constitutes the basis of any recovery of the economy, as also underlined by the IFI in its report, and for which Lebanon still has all the assets, such as ” its human capital, its entrepreneurial spirit, its diaspora and its strategic location”.

But all this will remain relegated to the rank of wishful thinking which will only materialize “if there is a political will” to undertake the required reforms, insists the institute. And this is where the shoe pinches, because none of the other conditions given by the IMF have yet succeeded. For the IFI, some must thus be “implemented without further delay and independently of the formation of a new government”, and Prime Minister Nagib Mikati, who has resigned since the legislative elections in mid-May last, could theoretically sign the final agreement with the IMF.

Among these reforms, the institute cites and comments on those that seem essential to it and which had already been listed in previous reports, among the essential projects that the country had to launch anyway:

• Budget 2022: Lebanon must get out of the straitjacket of the few countries that have the habit of “delaying or not approving their annual budgets” and strive to bring into play the budgetary responsibility of public decision-makers.

• Capital control: this law should make it possible to “reconstitute official reserves and the stability of external finances”, according to the IFI.

• Audit of the BDL: without this audit, including “government arrears via the Ministry of Finance”, there will not be sufficiently solid data “to build a macroeconomic roadmap in the medium term”, insists the institute.

• Bank restructuring law: a restructuring of the banking sector is necessary to create “a smaller and healthier system”. All establishments must be “audited to determine which are still solvent” and deposits must be kept to “restore confidence” in the sector.

• Exchange rate unification: adopting a floating exchange rate “will balance supply and demand, restore market stability, support investment and growth”. The IFI considers that this will also, among other things, “minimize the risks of corruption and strengthen competitiveness”.

• Modernization of the medium-term fiscal and budgetary framework: developed over “four years”, this framework would ensure “sustainability of the debt”, would include “the reform of the civil service” and would give priority “to expenditure in favor of infrastructure and social services”, because modernizing tax policy would generate “additional revenue that could be allocated to it”.

In addition to these reforms ordered by the IMF, the authors of the IFI report add the restructuring of public entities such as the electricity supplier, the operators of the telecom networks, the water offices and the port infrastructures. “The authorities should consider privatizing and regulating these establishments”, they advise, based in particular on the law of public-private partnership and with the help of the World Bank, “expert in the matter”. Finally, the IFI also recalls the need to improve the system for collecting national statistics, “one of the weakest in the region”, which is “the key to effective policies” and for “the analysis of developments economic”.

It is therefore from all of these recommendations that the IFI then unveils its double or nothing scenarios for the year 2023 and beyond.

Optimistic scenario: the “recovery” of Lebanon

Assuming that, “following the presidential election” next October, the aforementioned reforms are implemented and the agreement with the IMF is thus finalized, the IFI expects an acceleration in real GDP growth (removing the effect of inflation) of “6% in 2023 and 8%” the following year. A growth which would thus result “from an increase in consumption, public investment and exports”. The institute also predicts that the inflation rate, assessed by the Central Administration of Statistics (CAS) in July at 210%, “would gradually increase to double digits over a period of two years (2023-2024) then to a figure over the same following period (2025-2026)”, thanks in particular to “the unification and appreciation of the exchange rate and the general fall in consumer prices”.

Regarding the budget, this could increase considerably thanks to the increase in state revenues, which the IFI projects to see go “from 9% of GDP in 2022 to 17% of GDP in 2026”, while official reserves could also increase “from less than 9 billion dollars at the end of 2022 to some 30 billion dollars in 2026, by limiting budget deficits and financial flows”. Finally, in this optimistic projection of the institute, “Lebanon will regain its nominal GDP in pre-crisis dollars in 4 years, going from 23 billion dollars in 2022 to 53 billion dollars in 2026”. In 2019, Lebanon’s nominal GDP reached nearly $52 billion.

Pessimistic scenario: the “disintegration” of Lebanon

The second scenario presented by the IFI counts on the blocking of crucial reforms by Parliament and therefore on the failure of the agreement with the IMF which would leave the country without international financial aid. In this case, “Lebanon’s official foreign exchange reserves would decline to the point of reaching less than a billion dollars in 2026”. In other words, the BDL will be forced over the next few years “to draw down on its compulsory reserves, that is to say the reserves of the country’s commercial banks”. As a result, the majority of banked citizens’ deposits will no longer be accessible, while poverty and unemployment will continue to grow until “more than half a million Lebanese people flee the country in the next few years”.

All against a backdrop of public debt that will remain close to 200% of GDP in the absence of debt restructuring or a haircut on foreign currency securities (eurobonds) on which Lebanon defaulted in March 2020. On the side of real GDP, which had contracted by 45% between 2018 and 2021 according to the IFI, it will contract again in 2023 and beyond, but more slowly than since the start of the crisis, account given the weak economy that will prevail in the country. Finally, on the market, the pound will continue to depreciate to reach 40,000 pounds per dollar by the end of the year. But the IFI does not stop there: if nothing is done, this rate will go up to 110,000 pounds per dollar in 2026. A disaster scenario that predicts the “disintegration” of Lebanon, becoming a failed state in the like Venezuela, Somalia and, more recently, Sri Lanka.

From the very first lines, the tone is set: “The Lebanese authorities have once again placed their personal interest before the needs of the country. “The Institute of International Finance (IFI), which brings together several hundred major banks in the world and which has sometimes sinned by excess of optimism in its analyzes of the Lebanese situation, does not chew…

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