For 22 years, US dollars and Lebanese lira were interchangeable in streets and shops at an unvarying rate. Since the Banque du Liban — Lebanon’s central bank — largely suspended the peg in November, the lira has dropped 33% in quasi-market exchange.
Prices of imports have jumped as businesses and individuals struggled to find dollars after commercial banks imposed capital controls limiting withdrawals to as little as $100 a week.
The currency crisis links to a banking one because the bulk of an $87 billion public debt — 150% of GDP — is financed by Lebanese banks. Both link to a fiscal crisis with a government deficit of half its revenue.
There is also a political crisis. Since October 17, protesters have been opposing tax hikes and proclaiming a revolution to end corruption. Following the resignation of Prime Minister Saad Hariri, his successor, 60-year-old engineering Professor Hassan Diab, is seeking a “technocratic” government but faces opposition from many of the country’s parties.
While the prime minister is constitutionally mandated to be a Sunni Muslim, only five Sunnis were among 69 parliamentarians voting for Diab, against 42 abstentions.
Whoever sits in government, there are no easy solutions for an $87 billion debt. The choices ahead are over who pays and who, as economists say, takes the haircut.
Many Lebanese have decided it won’t be them and are not repaying bank loans and are ignoring bills from the loss-making state electricity utility.
One option for government arises from 61% of the debt being in Lebanese lira. Further devaluation would lessen its burden but would again hit most Lebanese, whose incomes are in lira.
A second option, advocated by Samir al-Daher, adviser to former Prime Minister Najib Mikati and an ex-World Bank official, is a one-off tax on dollar holdings in Lebanese banks. With this revenue, the state would wipe out at least a large part of the $34 billion dollar-denominated debt.
A third option is debt restructuring, presumably under the International Monetary Fund (IMF) with a haircut across the board, including bank shareholders and depositors. Such a default would undermine Lebanon’s diminished creditworthiness and impede future access to borrowing.
To be sustainable, any scenario entails reducing the deficit. Managing likely social unrest requires popular understanding and stronger social safety nets. “With 22% inflation and a GDP contraction of 5%, numbers in extreme poverty would double from 10 to 20%,” Haneen Sayed, human development specialist for Lebanon at the World Bank, said at a seminar in Beirut in December.
Such prospects fuel talk of open default. Some proponents argue central bank foreign-currency reserves — down to $28 billion, Goldman Sachs said — should not go to repay a $1.2 billion Eurobond due in March ($10.9 billion of debt matures in 2020) but be held back to ensure basic services for poorer Lebanese.
Bankers know they are blamed — on a daily basis, tellers face distraught customers refused withdrawals for medical or other bills — but argue default would be disastrous.
“There is misguided talk of the need to choose between using the central bank foreign reserves to pay the Eurobond or to pay for import necessities,” said Nassib Ghobril, chief economist at Byblos Bank. “With default, whatever you build over decades in terms of credibility would just evaporate. How do you get that reputation back?”
Ghobril said the Lebanese-lira debt, held “100% by local institutions, the central bank, commercial banks and the national social security fund” can be “reprofiled” short of default. “In the past we have rescheduled Treasury bills in Lebanese pounds,” he said.
Such measures concentrated on the lira, he argued, would protect Lebanon’s standing. “Rating agencies look primarily at foreign-currency obligations, whether of a government or a bank. Decisions on downgrades have been taken on estimates of the central bank’s foreign-currency reserves and whether they will decline,” Ghobril said.
However, “reprofiling” would need serious public-sector reform and deficit reduction, Ghobril insisted: “The government must urgently address its own inefficiencies, which are the origin of the problem. The public sector is too large, too costly. It should support the private sector, not obstruct growth. Public expenditure reached the equivalent of 32% of GDP in 2018 — higher than the UAE at 30%, Qatar at 29% or Egypt with 30%.
“There are also no credible efforts to fight tax and custom-duty evasion, nor attempts to improve fee collection. There are many things to do before asking the private sector to pay any price for reforms,” Ghobril said.
Such priorities, alongside tackling corruption, are shared abroad. Pledges of $11 billion, mainly loans, at 2018’s Paris conference are unfulfilled by international donors dismayed by empty promises.
The unanswered questions are many. Many Lebanese are bewildered. Are any politicians interested in or capable of building consensus for a “fair” recovery programme? Is the IMF, however unpalatable, the only real route to change? And, always, who will pay the price?
By Gareth Smyth
The views/opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Al Bawaba Business or its affiliates.
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