IMF deal breakthrough is within reach for crisis-ravaged Lebanon

Lebanon's economy is in the grip of hyperinflation after the government defaulted on its international debt. PHOTO: REUTERS

ABU DHABI/BEIRUT (BLOOMBERG) - Lebanon may be closer than ever to breaking a two-year deadlock in talks with the International Monetary Fund, a senior official said, a step that could help draw a line under one of the world's worst financial crises in over a century.

The economy is in the grip of hyperinflation with the currency in free fall after the government defaulted on over US$30 billion (S$40 billion) in international debt. But as key legislation makes its way through parliament, Lebanese authorities are turning more optimistic they can reach a staff-level agreement with the Washington-based lender before elections in May, Deputy Prime Minister Saade Chami said in an interview.

An IMF delegation is in Beirut this week on a mission that authorities are hopeful will conclude by signing a so-called Memorandum of Economic and Financial Policies, a list of measures the country needs to implement to pave the way for disbursement of up to US$5 billion in aid. It may unlock US$11 billion in other financial commitments made to Lebanon in the past few years.

"We are working toward reaching an agreement with the IMF as soon as possible and exerting every effort to reach a staff-level agreement before the elections," Chami, who heads the Lebanese side in the negotiations, said by phone.

Lebanon's success in finally securing a lifeline still hinges on passage of key reforms in the face of a dire crisis that's left its financial system with an estimated US$69 billion in losses. The talks are taking on new urgency, with the country's international reserves collapsing by more than a third in a year to below US$12 billion as it faces another inflation shock from the run-up in food and energy prices.

The IMF declined to comment on the progress of talks with Lebanon or the likely time line for reaching an agreement. The fund remains "closely engaged" with Lebanese authorities and "the discussions are progressing well", IMF spokesperson Gerry Rice said March 18.

In the case of Lebanon, a deal would provide a critical backstop to a government that's let its decades-long currency peg unravel after dollar inflows dwindled in 2019. The banking system has been in crisis ever since, with de facto capital controls in place to this day but without any official backing.

Lebanon began bailout talks with the IMF after the default and drafted a plan to restructure its entire debt stock of more than US$90 billion, which would have largely wiped out the capital of the country's banks. The talks stalled after local lenders and the central bank, the country's largest debt holders, campaigned for a different approach to assess and distribute the losses.

Led by billionaire Prime Minister Najib Mikati, the government finds itself in a race against time to clinch a bailout because it wants to have draft laws and reforms ready for the newly elected parliament to pass. If it falters again, the elections would yield a new cabinet and risk further delays.

Capital controls

One of the IMF's crucial demands is a capital controls law that regulates withdrawals, payments and transfers abroad - alongside a reform plan for the power sector and the 2022 state budget. The government has already passed a plan to overhaul its unprofitable electricity company, and on Wednesday (March 30) it's set to refer a draft bill on setting up formal capital controls to parliament for approval.

An economic recovery programme is also in the works that would help address financial sector losses of about US$69 billion. To plug the hole, it proposes bail-ins, a haircut on US$100 billion in dollar bank deposits to lower their value to a little less than half, and issuing perpetual bonds in an asset management company.

Banks previously rejected the possibility of a haircut on deposits and demanded that the sovereign pay its debt to the central bank, which in return would reimburse a part of the US$80 billion owed to commercial lenders.

The Association of Banks in Lebanon, a industry lobbying group, is now more likely to take another tack as the economy continues to deteriorate. Lenders are struggling to comply with central bank instructions to pay depositors while also coming under increasing pressure from the local and international judiciary to meet liabilities to customers from their limited stock of foreign currency.

"I understand where everybody stands on what should be done to get out of the crisis, but there is a realisation that things can't continue like this and we should come together for the sake of the country," Chami said.

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