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No monetary solution for Lebanon’s economic problem
The International Monetary Fund offers Lebanon a roadmap to more misery
The International Monetary Fund (IMF) concluded last week a Staff-Level Agreement (SLA) with the Lebanese government for a “comprehensive economic reform program aiming to rebuild the economy.” The IMF plan rehashes older proposals that Lebanon’s late Prime Minister Rafic Hariri once turned down. The IMF plan also avoids dealing with the main drag on Lebanon’s economic growth: The existence of the Hezbollah militia that undermines the country’s sovereignty, stability and – most importantly for foreign investments – predictability.
An SLA is concluded at the bureaucratic level and remains subject to the approval of the IMF management and Executive Board, “pending several critical reforms” that the Lebanese government promised to undertake “ahead of the IMF meeting.”
Anyone who knows Lebanon understands that Beirut – with its sovereignty undermined by Hezbollah that uses the bureaucracy to reward its enablers – is unlikely to implement meaningful reform. Lebanon’s SLA agreement with the IMF was most likely inked as an election publicity stunt by incumbent rulers who are competing in the coming parliamentary elections, scheduled for mid-May.
But even if the IMF plan is ever implemented, it is near impossible to arrest the free fall of Lebanon’s economy. The plan is premised on Lebanon’s establishment of a “credible and transparent monetary and exchange rate system,” economic lingo for unpegging the country’s national currency, the Lira, from the USD.
Between 1993 and 2019, the Lebanese Central Bank pegged the dollar at 1500 Lebanese Liras. The architect of this policy was Prime Minister Rafic Hariri, who was assassinated in 2005. A UN tribunal convicted at least three top Hezbollah officials in the assassination.
Hariri was the most visionary leader that Lebanon ever saw since independence in 1943. He believed he could turn Lebanon into a leading services economy, exporting engineering, banking, education and healthcare while attracting Foreign Direct Investments (FDI) and millions of tourists.
Hariri’s vision was incumbent on regional peace, including with Lebanon’s neighbor to the south, Israel. But if peace was unattainable, the late prime minister believed he could work with a long-term truce that guaranteed Lebanon’s security and stability, and therefore economic growth.
Hariri was forced out of government in 1998 and retook the premiership in 2000 on the back of a sweeping electoral victory. Lebanon at the time was facing economic trouble and the IMF recommended that the country unpeg the lira from the dollar.
Before parliament in 2001, Hariri stood defiant. He insisted that pegging the lira was essential for the trust of foreign investors, for a stable business environment and for national social safety since depreciation would make those salaried in lira poorer. The Ministry of Finance, under then Finance Minister Fouad Siniora, released the “the philosophy of the 2001 budget,” in 100 pages, which stipulated that the cornerstone of Hariri’s economic policy was “maintaining the stability of the exchange rate.”
Hariri argued that the IMF’s recommendation to unpeg national exchange rate did not help Argentina and Turkey, and that if unpegging the currency was wise, Lebanon’s opposition led by then Prime Minister Salim Hoss and Finance Minister George Qorm should have done so during their two years in power.
But Hariri’s plan was not to peg the currency in the absence of growth, which grinds to a halt during war or instability. In April 1996, war broke out between Hezbollah and Israel, instead of rallying behind Hezbollah, a brave Hariri dissented and said that the only solution was for Israel to withdraw from south Lebanon. The would end the vicious cycle of war, Hariri said. “If Israel withdraws, Hezbollah has no legitimate reason to exist and fight,” he told CNN, adding that “it was time to rein in Hezbollah for the good of Lebanon.”
Israel took Hariri’s advice and withdrew from Lebanon in 2000, but Hezbollah did not disarm, forcing Hariri to start rounds of dialogue with the party’s leader Hassan Nasrallah to chart a course of action for the disbanding of the pro-Iran militia. Instead of heeding Hariri’s advice, Hezbollah killed Hariri in 2005.
Hezbollah’s takeover of Lebanon, its participation in wars in Syria, Iraq and Yemen and its daily threats of war with Israel, repulsed FDIs and tourism, depressed the country’s services and caused brain drain.
After 2005, the Lebanese Central Bank maintained the peg, but in the absence of growth, it was forced to hike interest rates to unsustainable levels to replenish its Foreign Currency (FX) reserves. Those who bought the central bank’s bonds were local banks, often using money of their depositors. After this Ponzi Scheme emptied all pockets, everything came crashing down. The banks became insolvent and unable to pay back deposits. Most Lebanese families lost their life savings.
Without foreign currency, the country lost its ability to import its basic needs, including wheat and energy, causing shortages, long lines at gas stations, empty drugstores, and severe electricity cuts.
If that’s not enough, the IMF wants the Lebanese government to unpeg the “tariff dollar.” Beirut still calculates its import tariffs on the old 1500 exchange rate, not the market rate which hovers around 25,000. If the government does so, prices in a country that heavily relies on imports will shoot high, making them even more unaffordable to the general population.
The IMF also recommends that Lebanon restructures its debt, that is to say “giving Lebanese depositors a haircut” wherein they lose all or most of their live savings. The government then opens a new page and resumes vacuuming whatever wealth is left in the hands of the hapless Lebanese.
If Lebanon implements these “reforms,” it will receive $3 billion. Before the government defaulted on its bonds in March 2020, Lebanon’s national debt stood at around $100 billion.
Rafic Hariri was right. The problem was not the exchange rate. The problem was not “reining in Hezbollah for good.” Hariri lost his life when he tried to do so.
The IMF does seem to have listened to what Hariri once said. Lebanon’s problem is not monetary. It is economic. The country’s economy needs to grow, and that’s impossible with the continued existence odf the Hezbollah militia. Monetary fixes will not change much, but will only make the Lebanese poorer and give a false illusion of working toward a solution.