Lebanon needs a financial lifeline to pull it out of its deep economic crisis.
But this week, the prospects for a bailout from the International Monetary Fund appeared to dim, after one of the country’s key interlocutors with the lender resigned, saying the Lebanese government had “no genuine will” to undertake painful reforms necessary for unlocking aid.
The acrimonious departure stems from a key element of a financial rescue plan Lebanon’s government approved on April 30.
The blueprint, which aims to secure some $20bn in foreign aid, offered a candid appraisal of how deep a hole the country’s financial sector had fallen into propping up an insolvent, corrupt state that for decades spent beyond its means.
The plan estimated financial sector losses at 241 trillion Lebanese pounds, roughly $62bn at the current parallel market exchange rate.
But in recent weeks, behind closed doors, Lebanon’s parliamentary finance and budget committee has been re-crunching the numbers and has slashed the loss estimate to 70 trillion pounds, ($18bn) Member of Parliament Nicolas Nahhas, the committee’s deputy head, told Al Jazeera.
That is 70 percent lower than the previous figure. The committee chair, Ibrahim Kanaan, a prominent member of a large political bloc founded by President Michel Aoun, declared: “The financial truth won.”
But others see a profound defeat for Lebanon’s economy.
Henri Chaoul, a respected adviser working with Lebanon’s government in the IMF negotiations, resigned on Thursday, saying that the country’s politicians and its financial establishment “opted to dismiss the magnitude of these losses that impose themselves as an uncontestable reality”.
Economists also fear that the dramatically lowered estimate of financial-sector losses could scupper a bailout deal.
“These numbers are not going to be acceptable to the IMF, who have said publicly that their numbers are closer to the government’s,” Mike Azar, a financial adviser and former lecturer at Johns Hopkins University told Al Jazeera.
“These new numbers the political class are rallying around are effectively an end to IMF discussions. It’s sabotage of the IMF talks, there’s no two ways about that.”
Financial engineering or Ponzi scheme?
For decades, Lebanon depended heavily on cash flowing in from abroad from its vast and successful diaspora.
But in recent years, as remittances dried up, Lebanon’s central bank sought to bolster its foreign exchange reserves by indirectly offering what many saw as exorbitantly high interest rates on US dollar deposits by commercial banks.
This enabled the central bank to keep paying for imports, service state debt and defend an increasingly unrealistic official exchange rate for the Lebanese pound, while commercial banks saw their balance sheets swell, making them look very profitable.
The central bank has defended these practices as “financial engineering”. Critics have called it “a Ponzi scheme”.
Either way, it is commercial bank depositors who have been left picking up the tab. The dollars that depositors now see on their bank statements are largely tied up in the Central Bank, as well as in loans to the government and private sector that have little hope of being repaid on time or in full.
Commercial banks are so starved of US dollars that they have imposed informal capital controls severely limiting the number of dollars depositors can withdraw.
To shore up the country’s finances and put the economy on the path to recovery, Lebanon began talks with the IMF in mid-May for a bailout package worth approximately $10bn to finance its direct needs over the next few years. Beirut is also looking to secure $11bn in grants and favourable loans pledged by donor nations to finance infrastructure projects and boost the economy.
But a month on, talks with the IMF appear to be stalling.