Summary: An IMF bailout may not be enough to save Lebanon from a catastrophic economic collapse.
Last week in Lebanon protesters returned to the streets in numbers not seen for many weeks. In the northern city of Tripoli one protester was killed and dozens more including police and security forces injured. In both Beirut and Tripoli banks were attacked and set ablaze and ATM machines destroyed.While the government and the Central Bank of Lebanon (BdL) traded barbs about who was responsible for the economic mess the country is in, the streets burned with a visceral anger at the failure of institutions and the elite to respond in any effective manner to a crash that Covid-19 has served to accelerate. Ordinary Lebanese are angry that while the government instituted a night time curfew in late March and sought to enforce a lockdown, it did nothing to help them. While the cost of food has soared, the value of the Lebanese pound has collapsed. The currency, long pegged at 1500 to the US dollar, now sits at 4500 on the black market. Exacerbating the situation, the withdrawal of US dollars from the banks is prohibited.
On 1 April the government had announced a plan to distribute LBP 400,000 (US$265) to approximately 200,000 needy families. But by the time the money actually reached them at the end of April the pound had already lost 30% of its value. And in any event the number of those at risk of food insecurity was much higher. Asking its citizens to respect the lockdown while failing to assist them with their basic need to secure food underscores the profound disconnect between the elites and the people, a disconnect that had brought protests to the streets in October last year that were only finally stilled by the coronavirus clampdown in mid-March.
As one protester, a woman, put it “you won’t see (people) sitting at home because hunger does not have mercy on anyone. When you see your child crying from hunger, coronavirus, or the state’s decisions or the country, all in all become irrelevant.” She was masked against Covid-19 as she spoke but many protesters are not. As of 3 May the number of reported cases sat at 737, with 25 deaths. But given the ramshackle nature of the country’s health system and the lack of coordination in gathering figures there is concern that the numbers may well be higher, a fear exacerbated by the sight of hundreds of protesters ignoring the lockdown.
Meanwhile Riad Salamé the long serving head of the BdL, responding to criticisms from the prime minister Hassam Diab that the BdL was responsible for the collapse of the pound, took to the airwaves 30 April to attack the government: “we funded part of the state’s needs, as did the bank sector….We did all of this because there were reform promises. These promises were not translated by the government into reality for political reasons.”
Salamé spoke the same day that the prime minister and his finance minister Ghazi Wazni were unveiling an economic rescue package that Diab claimed was “a historic moment in the history of Lebanon”. It involves a bailout from the IMF in order to avoid even more catastrophic damage to the country’s finances. But the solutions include a drastic devaluation of the pound, cuts in government spending including a hiring freeze, pension reform and an end to subsidies of the state-owed electricity company EdL. At a time when unemployment, already very high, has been further elevated by Covid-19 and when inflation is rampant, the reforms, necessary as they are, will only place a greater burden on an already economically distressed population.
Also included in the package is a plan to cover financial sector losses of roughly $70 billion in part through a bank shareholder bail-in that would wipe out the banks’ capital and cash from large depositors with a promise it would be restored later. That drew the immediate fire of the banking association which said it had not been consulted. A statement from the association said in part: “As laid out in the Plan, the domestic (bank) restructuring will further destroy confidence in Lebanon both domestically and internationally … (and) is likely to deter investment in the economy thereby hindering any recovery prospects.” It also spoke of what it called the “vagueness” of the package and the danger of hyperinflation.
It is unsurprising that the banks, many controlled by the country’s elite families, would cry foul. Lebanon has one of the highest ratios of government debt to GDP in the world, now running at 162%. In order to finance debt it borrows heavily both internationally and from Lebanese financial institutions. The Lebanese banks are happy to lend because they receive a good rate of return on their loans. Now the government is calling time, at least for the time being on that cosy arrangement.
While the Lebanese banks and the BdL lambasted Diab and his government, London-based Capital Economics (subscription only) had praise noting “the plan set out by the Lebanese government is comprehensive and outlines many of the criteria that the IMF is likely to insist on in return for financing. Securing a bailout from the Fund, and the technical assistance that will come alongside it, would go a long way to preventing a more disorderly outcome from the country’s current economic turmoil.”
That said, Capital Economics continues to believe that “currency devaluation and fiscal consolidation mean the economy will continue to suffer enormous pain.” The pain will be felt by a population already deeply impoverished and bitterly angry. To convince them, in the midst of Covid-19, to accept a plan that promises them more pain will only be accomplished if the government can at the very minimum ensure that food supplies are available and affordable. What is driving the protests now, more than corruption, incompetence, and the selfishness of the elite, is a simple, elemental fear, caught in a single word uttered by a protester. When asked who was organizing the protests his reply was “hunger.”
(For more on the crisis in Lebanon members are directed to Haley Bobseine’s article for the Middle East Institute “Waiting for the bad to get worse: Lebanon in the time of corona”)