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Lebanon crisis

Lebanon recovery hopes hinge on IMF bailout as Ukraine war, inflation bite: Economist

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Hopes for economic recovery in Lebanon hinge on the program laid out by the International Monetary Fund as the war in Ukraine continues to affect the Levantine country’s economy, causing a rise in stagflation and inflation, an economist told Al Arabiya English in an interview on Wednesday.

In April, Lebanon reached a draft agreement with the IMF for a four-year $3 billion bailout, the final approval of which was conditional on the implementation of eight main requirements.

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Chief Economist and Head of research at Lebanon-based Bank Audi Marwan Barakat told Al Arabiya English that the IMF plan was necessary because it was the “only way out for Lebanon to exit its lingering economic and financial crisis.”

“After the government ensured the ratification of a staff-level agreement with the Fund, the real challenge lies in the provision of the required prior actions on behalf of the Lebanese authorities,” he added, proposing nine actions that needed to take place.

At the government level, he said that a “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, was necessary, along with the “approval of a medium-term fiscal and debt restructuring strategy.” Unification of exchange rates for authorized current account transactions by Banque du Liban is needed too.

He said that it was the Parliament’s responsibility to: “approve an appropriate emergency bank resolution in order to implement the bank restructuring strategy and kickstart the process of restoring the financial sector,” to reform bank secrecy law, approve a 2022 budget “to start regaining fiscal accountability,” and implement formal capital controls.

With regards to the Lebanese Central Bank, he suggested the “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,” the completion of the “special purpose audit of the central bank’s foreign asset position,” along with the unification of exchange rates.

“It won’t be easy ratifying all those prior actions in the near future, especially within the context of a fragmented Parliament, possible difficulty in forming a post-election Cabinet and a [potential] vacuum at the Presidential level.”

Ukraine war

Barakat explained that the war in Ukraine has further worsened the economic crisis, “pushing the country further into stagflation, or a combination of growth contraction along with a surge in inflation amid rising cost push supply factors.”

Ukraine, often referred to as the world’s breadbasket, was invaded by Russia on February 24 in what Moscow calls a “special military operation.” Since then, countries across the world, namely European Union member states, have imposed tough sanctions on Russia and the conflict has heavily disrupted Ukraine’s economy.

People walk past a torn campaign banner, ahead of parliamentary election that are scheduled for May 15, in Tripoli, Lebanon April 25, 2022. (File photo: Reuters)
People walk past a torn campaign banner, ahead of parliamentary election that are scheduled for May 15, in Tripoli, Lebanon April 25, 2022. (File photo: Reuters)

This combination caused a ripple effect all over the world, leading to rising inflation rates and an exponential increase in food prices – problems Lebanon faced before the Ukraine war, but that have since intensified, driving the Levantine country into a much bigger recession.

“Food costs were the most significant inflation drivers since the onset of the Russian-Ukrainian War, especially wheat, vegetable oil and grains such as soy and corn. For instance, wheat prices increased by 30 percent so far, with 80 percent of Lebanon’s wheat consumption coming from Ukraine,” the chief economist said.

“Such a situation is exerting significant additional socio-economic pressure on households. Lebanese [people] are trying to cope through a significant deal of austerity and additional dissaving, but the pain is being largely felt, with 78 percent of the population now below the poverty line according to UN figures, and with excessive malnutrition in a country that was few years ago among the middle-income nations of the world.”

With Agencies

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