IMF Reaches Staff-Level Agreement on a Four-Year Extended Fund Facility with Lebanon

In a widely expected move and at long, an International Monetary Fund (IMF) mission led by Mr. Ernesto Ramirez Rigo visited Beirut, Lebanon, from March 28 to April 7, to discuss IMF support for Lebanon and for the authorities’ comprehensive economic reform program. At the end of the mission, Mr Rigo made a statement, announcing that “the Lebanese authorities and the IMF team have reached a staff-level agreement on comprehensive economic policies that could be supported by a 46-month Extended Fund Arrangement (EFF) with requested access of SDR 2,173.9 million (equivalent to about US$3 billion). This agreement is subject to approval by IMF management and the Executive Board, after the timely implementation of all prior actions and confirmation of international partners’ financial support. The EFF aims to support the authorities’ reform strategy to restore growth and financial sustainability, strengthen governance and transparency, and increase social and reconstruction spending. This will need to be complemented by the restructuring of external public debt that will result in sufficient creditor participation to restore debt sustainability and close financing gaps”.

The statement added that the comprehensive policies “are based on five key pillars:

  •  Establishing a credible and transparent monetary and exchange rate system;
  • Restructuring the financial sector to restore banks’ viability and their ability to efficiently allocate resources to support the recovery;
  • Implementing fiscal reforms that coupled with the proposed restructuring of external public debt will ensure debt sustainability and create space to invest in social spending, reconstruction and infrastructure;
  • Reforming state-owned enterprises, particularly in the energy sector, to provide quality services without draining public resources;
  • Strengthening governance, anti-corruption, and anti-money laundering/combating the financing of terrorism (AML/CFT) frameworks to enhance transparency and accountability, including by modernizing the central bank legal framework and governance and accountability arrangements”.

More specifically, “decisive policies and reforms in these areas, together with significant external financing, are necessary to achieve the authorities’ objectives during the coming years”. These mostly include: (1) “Improving public finances and reducing public debt through revenue-generating and administrative reform measures to ensure a more equal and transparent distribution of the tax burden. The 2022 budget is a first critical step in this direction. It aims to achieve a primary deficit of 4 percent of GDP supported by a change in imports valuation for custom and tax purposes to be done at a unified exchange rate. This would allow for an increase in allowances to public sector employees to re-start the functioning of the public administration and for an increase in social spending, with the goal of protecting the most vulnerable. The budget deficit will be externally financed, and the practice of the central bank financing will be abolished”; (2) “Creating the conditions for disinflation including by moving to a new monetary regime. It will focus on rebuilding its foreign currency reserves and maintaining a single market-determined exchange rate, which will help the functioning of the financial sector”; (3)  Restoring “health and viability of the financial sector for the country to be able to lift the existing uncertainty and provide conditions for strong economic growth. Total recapitalization needs in the banking system are very large, and losses will need to be recognized upfront and allocated, while protecting small depositors”; (4) Implementing other reform measures, such as “tax policy and revenue administration reforms will broaden the tax base and strengthen revenue intake. Comprehensive plans for cost-recovery in the energy sector and the introduction of a new state-owned enterprises framework to improve their governance and oversight will help reduce hemorrhage of scarce government resources. The modernization of the public finance management framework, implementation of the recently approved procurement law, the passage of the competition law, a reform of the civil service and pension and retirement schemes will increase transparency and spending efficiency. Fiscal space created by these efforts will be used to improve social protection and equity among the Lebanese population as well as for infrastructure and human capital development. Frameworks for banking supervision, resolution AML/CFT, as well as deposit insurance and asset declaration regimes will be strengthened, and the National Anti-Corruption Commission will be fully operationalized”.

As important, the statement observed that “the authorities are cognizant of the challenges they face in implementing this ambitious agenda but have stressed that this reform program is critical to end the current crisis and enjoys the support of the broad political leadership. They expressed their strong commitment to carry out this reform program and sustain decisive implementation during the upcoming parliamentary and Presidential elections. The authorities are also committed to stepping up their efforts to communicate and explain their reform plans to the public”. Perhaps more importantly, “the authorities understand the need to initiate the reforms as soon as possible, and have agreed to complete the following measures prior the IMF Board’s consideration:

  • Cabinet approval of a bank restructuring strategy that recognizes and addresses upfront the large losses in the sector, while protecting small depositors and limiting recourse to public resources.
  • Parliament approval of an appropriate emergency bank resolution legislation which is needed to implement the bank restructuring strategy and kick-start the process of restoring the financial sector to health, which is fundamental to support growth.
  • Initiation of an externally assisted bank-by-bank evaluation for the 14 largest banks by signing the terms of references with a reputable international firm.
  • Parliament approval of a reformed bank secrecy law to bring it in line with international standards to fight corruption and remove impediments to effective banking sector restructuring and supervision, tax administration, as well as detection and investigation of financial crimes, and asset recovery.
  • Completion of the special purpose audit of the BdL’s foreign asset position, to start improving the transparency of this key institution.
  • Cabinet approval of a medium-term fiscal and debt restructuring strategy, which is needed to restore debt sustainability, instill credibility in economic policies and create fiscal space for additional social and reconstruction spending.
  • Parliament approval of the 2022 budget, to start regaining fiscal accountability.
  • Unification by BdL of the exchange rates for authorized current account transactions, which is critical for boosting economic activity, restoring credibility and external viability, and will be supported by the implementation of formal capital controls”.

Lastly, the moral is in the implementation of these pre-conditions prior to Board consideration and approval, especially during an election year and especially by a political class that is known for prioritizing popular but irrational policies and for guarding its private interests “religiously” even if they contradict with public interests. But the reaching of the agreement – at long last – is no small achievement and we hope it is the harbinger for better things to come!

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