IMF may call on Lebanon to cut public wages, alter peg: Experts

The IMF is likely to ask Lebanon to make painful reforms, including cutting public wages and fixing the exchange rate, but the new government is unlikely to be able to implement them to fix the economy, according to experts, including a former IMF economist.

Lebanon asked the International Monetary Fund for technical assistance Wednesday as the deadline looms for the heavily indebted country to decide whether to pay back its $1.2 billion Eurobond, a bond issued in a non-native currency, maturing March 9. The IMF said it “stands ready to assist the authorities,” spokesman Gerry Rice said in a statement Thursday.

The Lebanese government appointed a committee to study the Eurobond situation, local Lebanese media reported Thursday.

The technical assistance will “provide a policy adjustment scenario that helps Lebanon overcome the crisis, primarily the shortage of foreign exchange, and the balance of payment crisis, and the dual exchange rate that exists in the market,” said former IMF economist and president of the Lebanese Economic Association Dr. Mounir Rached.

According to Rached, the IMF might ask Lebanon to implement measures including:

• Unifying the current parallel exchange rate. Lebanon officially pegs its currency to the dollar, but the country’s peg has slipped from the standard 1,500 lira to $1 to over 2,000 to $1 due to a shortage of dollars,
• Reviewing, recalling, and submitting a new state budget that may include cutting public wages nearly across the board, except at the entry level, and
• Fixing the country’s ailing electricity sector.

However, the country has a poor track record of implementing the necessary reforms to receive foreign loans, including those in the electricity sector. For nearly two years, Lebanon has failed to implement any reforms needed to unlock over $11 billion pledged in soft loans at the 2018 CEDRE conference.

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Rached also expressed his doubts over the government’s willingness to fix the exchange rate problem.

“We can’t go on with two exchange rates. To what extent the government and the central bank are ready to do that, I’m not so sure,” Rached said.

For months, a series of irregular capital controls has governed the country’s banking system, with decisions on withdrawal amounts applied arbitrarily at the bank-branch level, causing a parallel exchange rate to occur in the exchange shops.

Rached said that these restrictions on cash withdrawals and transfers abroad must be eased to tackle the exchange rate problem.

Restructuring debt

The Lebanese government will discuss how to restructure the country’s huge debt with the IMF, according to a government source.

The country is facing an ongoing economic and financial crisis and has one of the highest debt burdens in the world. Gross public debt reached $91.6 billion at the close of 2019, according to research from Lebanon’s Bank Audi.

The heavily criticized state budget passed in January, with experts saying the budget’s projected deficits were not credible.

The budget “relies on a significant and artificial reduction of the cost of servicing the local debt, without dealing with the stock of debt,” according to Kulluna Irada, a Lebanese NGO that pushes for political reforms.

But whether to restructure the debt is debated by economists. Marwan Barakat, group chief economist and head of research at Bank Audi, said that debt restructuring should include a plan for debt management and macro soft landing that includes reducing gradually public debt and deficits.

“The latter two should entail utmost spending austerity, reinforcement of resource mobilization, improvement of tax collection, cut in debt servicing and privatization of some government assets, all apt to put the debt to GDP ratio on a decreasing trajectory,” Barakat told Al Arabiya English.

However, Rached said the country’s current foreign currency reserves were sufficient to avoid restructuring.

“Right now, there’s no need for debt restructuring. The amounts due in 2021 with an adjustment program can be handled,” he said.

In January, the Lebanese banking association said the country’s sovereign debt would most likely be restructured in a way that hurts neither the economy nor depositors, and foreign holders will be repaid, Reuters reported.

Experts urge Eurobond repayment

Restructuring its debt is just one of the economic problems Lebanon faces as the deadline to pay a Eurobond approaches. It is unclear if Lebanon will repay the bond. On Thursday, Finance Minister Ghazi Wazni said Lebanon will continue to discuss options regarding the Eurobond.

Banks and other economists say Lebanon has no choice but to pay, citing that the majority of the bond is held by domestic players – foreigners hold 30 percent of the Eurobond, according to Reuters.

The banking association in Lebanon on Wednesday released a statement saying it should pay its dues to “protect depositors, preserve Lebanon’s position in international financial markets, and preserve its relations with correspondent banks.”

“I think that while awaiting such a comprehensive plan [from the IMF] …, Lebanon should not default on its engagements and Eurobond maturities, bearing in mind that Lebanon has a clean track record of respecting its engagements and [has] never defaulted so far,” said Marwan Barakat, group chief economist and head of research at Bank Audi.

In May 2019, Lebanon repaid a $650 million Eurobond, and in November 2019, shortly after nationwide protests kicked off, the country paid in full a $1.5 billion Eurobond. However, at the end of January, Lebanon began looking to secure $4-5 billion in loans for wheat, fuel, and medicine.

At the end of January 2020, Lebanon’s central bank’s foreign assets totaled $36.7 billion, following a drop of $613 million in January 2020.