LIMS explained that this staff-level agreement will be ratified by the IMF board, only if Lebanon executes the following pre-conditions:

• Cabinet’s approval of a bank, fiscal and debt restructuring strategy.
• Parliament’s adoption of a capital controls legislation, an emergency bank resolution legislation, and the 2022 budget, in addition to repealing bank secrecy.
• Initiation of an evaluation for the 14 largest banks, and the completion of an audit on the central bank’s foreign asset position.

Once those pre-conditions are achieved, the IMF will assist Lebanon in five axes of reform which are: (1) resolving the banking crisis, (2) restructuring the public sector, (3) reforming government-owned monopolies, particularly electricity, (4) strengthening governance and anti-corruption and (5) stabilizing the exchange rate.

LIMS added that the recovery plan, proposed by the Lebanese government, provides more details on the specifics of the reforms. On the banking front, a new capital control law will be adopted confirming current banks’ practices. Capital controls will then be followed by a bail-in, leading to a series of bank failures and a hefty haircut on depositors. On the fiscal front, the 2022 budget includes a substantial deficit, despite large increases in tariffs and taxes. The government plan also opens the door to privatization, yet there is no mention of competition. In other words, this creates the risk of moving from public to private monopolies and creating oligarchies, rather than competition.

Therefore, LIMS concluded that members of parliament will not execute the pre-conditions, due to their unpopular nature with voters, as Lebanon is on the verge of parliamentary elections. The Lebanese government has been struggling to pass some of the suggested reforms through a parliament that seeks re-election. Even the budget proposal that was due at the end of January 2022, is still waiting for parliamentary approval and the cabinet is spending based of the previous year’s budget, delaying the discussion until after the elections’ results. 
 

LIMS explained that though the government defaulted on the payments of Eurobonds, and this would have led to a private company going bankrupt, the government is sovereign, so it doesn’t go bankrupt. Therefore, the term was incorrectly used. Furthermore, LIMS expressed concerns about the rationale behind the statement as it signals the government’s unwillingness to pay back public sector debt, notably Lebanese banks’ dollar-denominated deposits at the central bank. Defaulting on the payment of this debt would shift all public sector losses to commercial banks and their clients. The public sector appears to abandon responsibility, regarding the loss of depositors’ savings. This analysis was later confirmed by the cabinet’s recovery plan that served as the basis to the IMF agreement.

LIMS argued that pushing the losses of the public sector onto the private sector (i.e the depositors) will only prolong the crisis. The public sector should cut spending, instead of increasing them as suggested in the 2022 budget proposal, and switch to a fiscal surplus to regain the ability to service debt. Failure to address decisions that increase public spending will spell further catastrophe for Lebanon’s economy.

LIMS Media Interviews:

Following news about freezing the central bank governor’s assets, the exchange rate saw a small hike. LIMS explained that the exchange rate will stay vulnerable to any instability, because the central bank follows a discretionary monetary policy. Such a policy is highly dependent on public trust—a key asset that the currency has lost since the crisis began.  LIMS explained that the Sayrafa exchange rate platform is used by Lebanon’s central bank, Bank du Liban (or BdL for short), to pump US dollars into the market. However, Sayrafa is unable to keep up with the increasing USD demand due to higher prices of international goods related to the global inflation and the war on Ukraine. In the end, Lebanon will reach a stage when the central bank runs out of reserves, which in fact are depositors' dollars, used to stabilize the currency. Then, BdL will forcefully exit the market, leading to an uncontrolled devaluation. Therefore, Lebanon should reform its monetary system and move from the current discretionary policy to a rule-based monetary arrangement by adopting a currency board. Such a reform would allow for a stable exchange rate, regardless of internal and external shocks.

LIMS Media Interviews:

Furthermore, bread and fuel shortages will get more severe as price controls continue. Currently, the Ministry of Economy sets the price of bread way below the actual cost. For fuel, the Ministry of Energy sets the prices lower than the real cost as well. Then the central bank foots the bill, thus draining Lebanon's foreign exchange reserves. LIMS has recommended allowing prices to be set by importers and bakeries, since the central bank cannot finance this program any longer. Alternatively, the country could suffer from running out of bread, if the ministry maintains the price below cost and cannot finance these subsidies.

LIMS Media Interviews:

Policy Papers
Throughout the program, participants worked on developing a policy reform of their choosing that would help Lebanon out of the current crisis. Graduates produced the following policy papers: (1) Reclaim the cannabis industry from militias and political parties, (2) End garbage crisis and give the population incentives to recycle, (3) Federalism in Lebanon: A solid foundation for equitable development, (4) How to stimulate entrepreneurship in Lebanon? (5) The collapse of Lebanon’s healthcare system: Feasible solutions and (6) A viable solution to the electricity crisis in Lebanon and the role of renewables.  Read LLA 401 Policy Papers, Booklet AR

Policy Fair
The graduation ceremony was followed by a policy fair. Each group selected one or two representatives to present their policy proposition in a two-minute pitch to 37 journalists and 20 experts and guests who attended the ceremony. 6 stands were established at the policy fair, one per group, and participants, journalists, and experts interacted and discussed the suggested reforms.

Advancing Liberty Award
During the graduation ceremony, LIMS presented the 2021 Advancing Liberty Award to two female journalists: Ms. Nawal Abboud, from Voice of Lebanon radio station, and Ms. Salwa Baalbaki, from Annahar newspaper, for their work in promoting accountability and transparency. These two women scrutinized the work of ministers and MPs, checked if they acted in a way to benefit the population, and ensured people received the right information. They have stood with the people against corruption, with freedom against oppression, and with the weak against the strong. They have not been intimidated by officials with power and authority, and remained the voice of freedom and justice, despite the continuous pressures.
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In 2012, banks started doubting the government’s ability to service debt, so the central bank stepped in and started financing the government. By doing so, Lebanon broke the concept of the impossible trinity, as the country had simultaneously a fixed exchange rate, free movement of capital, and an active monetary policy. The central bank started losing foreign exchange reserves that were actually dollar-denominated deposits made by financial institutions at the central bank. This system continued until 2019, when the central bank exhausted most reserves and banks were unable to attract new capital inflows to the country. As a result, the system crashed, the Lebanese pound started a sharp devaluation, and the central bank made the problem worst by increasing money in circulation by 9-fold, which led to hyperinflation. Hyperinflation substantially reduced people’s purchasing power and banks were unable to meet withdrawal demands. This is when Lebanon asked for the International Monetary Fund’s support.

Dr. Mardini also addressed the problem facing the energy sector in Lebanon, which is also common with Sri Lanka. He explained that the government’s monopoly over the production, transmission, and distribution of electricity is the real problem. The government should put a legal framework in place that would attract investors to the energy sector. Every investor should be able to open an independent power production company and sell to the public without government intervention. The same principle applies to telecom and the airline industry. Reforms can be achieved through dismantling all government monopolies and allowing competition to enter those industries.
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