Lebanon faces further economic disaster and is unlikely to secure international help due to the new government’s links with Hezbollah and inability to enact reforms, experts say.
The country, mired in economic crisis, needs $20 – 24 billion in external financing to save the country, according to the Institute of International Finance (IIF) report from January 24. The new government, headed by new Prime Minister Hassan Diab, needs to implement crucial reforms to attract foreign funding that previous governments have failed to make.
But Lebanese analysts see little reason for optimism.
“Help seems unlikely to come,” said Sami Atallah, executive director at the Lebanese Center for Policy Studies. “I don’t see it happening unless we’re forced into an IMF program.”
In December, former Prime Minister Saad Hariri approached the International Monetary Fund (IMF) to discuss receiving technical assistance from the fund, but Lebanon has not yet formally sought a bailout.
Lebanon, which has been mired in corruption for decades, exports few goods and services, and few international corporations have headquarters in the country. While the small country is of geostrategic importance to Western nations that want to curb the influence Iranian-backed Hezbollah in the country, there is little financial incentive for potential Western donors to help bail out Lebanon.
And Hezbollah’s preeminent position in the new government – it has two seats in cabinet and is said to have had a heavy say in the other positions – is deterring potential donors, according to some analysts. In Washington, there is a schism between those in the Trump administration over whether to provide US aid to Lebanon, the Washington Free Beacon reported.
In the absence of international help, Lebanon must help itself, said Dr. Nassib Ghobril, Head of the Economic Research and Analysis Department at Byblos Bank in Lebanon.
“We need to have our own priorities in order, our own reform plan, our own economic recovery plan, and priorities for reforms, and then take [the plan] to the various stakeholders in the international community, whether it’s countries in the region GCC countries or multilateral organizations,” he said.
Lebanon’s fiscal deficit stands at 11.6 percent of GDP and public debt has hit 166 percent of GDP, according to the IIF. As the economic situation worsens, layoffs have increased, wage cuts are becoming more commonplace, and as the lira – which is pegged 1,500 to $1, officially – slips further upwards of 2,000, the cost of living has gone up.
The IIF report points to reforming the ailing electricity sector, continuing to reduce interest rates, recapitalizing banks, and privatization as items that should be part of the new government’s economic plan.
Dr. Louis Hobeika, who holds a PhD in economics, echoed the report’s findings, adding that approving the 2020 budget, now nearly four months late, is key. The budget was passed Monday, despite objections from civil society and protesters.
“The challenge for the new government is to show they’re willing to reform,” said Hobeika. “They need to fight corruption and to reform infrastructure and social services.”
However, past governments, like Hariri’s, have failed to make progress in any of these areas, including electricity, as the country still suffers from daily scheduled power cuts.
To fix these long-term problems requires international aid dependent on reforms, which successive governments have been unable to push through, and an integrated plan with a debt restructuring program, said Atallah.
Many protesters fear this new government will be unable and unwilling to make the painful reforms necessary to turn the economy around and save it from full-on financial meltdown.
One painful decision the government must make is whether to impose capital controls. So far, capital controls have been enforced in an ad hoc manner and often decided at the bank branch level.
The IIF says the country must enforce uniformly capital controls to prevent capital flight, which has already begun, and maintain the peg in the short term.
Beyond capital controls, Dan Azzi, who is an Advanced Leadership Fellow at Harvard, adds that a haircut on deposits is necessary.
“Effectively it’s not really taking the money, because the money’s already gone,” he said. “It’s really just simply informing them the money is gone.”
“There’s a disconnect between the traditional ruling elite and the street,” said Azzi. “They’re still thinking in a traditional way, and some of the decisions that need to be made are going to be so painful, they may not want to do it.”