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On April 7, Lebanon reached a long awaited 3-billion-dollar staff-level agreement with the International Monetary Fund (IMF). The agreement was set as a milestone by Prime Minister Najib Mikati upon the formation of his cabinet in September 2021, given the failure of the previous cabinet, led by Hassan Diab, to achieve this goal. The Diab cabinet had adopted a reform program in early 2020. However, this program did not gain approval from the Parliamentary Finance and Budget Committee before the cabinet resigned on the back of the Beirut port explosion of August 2020.
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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.
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LIMS Media Interviews:
- Unifying The Exchange Rate Is A Fireball In The Path Of IMF Agreement... How Is It Implemented? April 11, 2022: Annahar, Article AR
- Does An Agreement of Intentions Exist With The IMF And What Does This agreement Mean? April 11, 2022: VDL, Radio Interview AR
- What Comes After Signing The Initial Agreement With The IMF? April 11, 2022: Annahar, Article AR
- “Stamps” A Renewed Crisis! April 13, 2022: Grand LB, Article AR
- Banking Secrecy: When Lebanon Was Switzerland Of The East And Later Turned Into Hotbed Of Corruption And Corrupt Individuals, April 18, 2022: Al Jadeed, TV Interview AR
- "Capital Controls" Ignite Downtown Beirut...Elections Is The Password? April 21, 2022: Jusur, Article AR
- Economic Recovery Plan, Blessing Or Curse? April 21, 2022: VDL, Radio Interview AR
- Capital Controls: Doors To Nepotism And An Unknown Fate For The Depositor Whose Bank Goes Bankrupt, April 21, 2022: MTV, TV Interview AR
- Post-Capital Control Plan: Risk Of Privatization Without Competition, Transferring Government Monopoly To Some Beneficiaries, April 21, 2022: Al Jadeed, TV Interview AR
- Behind The Scenes Of The “Capital Controls” Inflames The Street: “Zeroing” Of Deposits And Additional Withdrawal Restriction, April 21, 2022: Huna Lubnan, Article AR
- What Is The Impact Of The Exceptions On Preventing The Conversion Of The Lira Into The Dollar On Citizens And Economic Sectors? April 22, 2022: NBN, TV Interview AR
- Special: Clear Confusion…What If Lebanon Does Not Comply With IMF Terms? April 26, 2022: Leb Economy, Article AR
- With Start Of Tourist Season, Rise In Dollar Exchange Rate, And Diesel Crisis...How Much Did Prices Of Hotel Rooms Cost And Are They Fair? April 26, 2022: Addiyar, Article AR
- What Measures Are Most Effective, As An Alternative To The Recovery Plan And Its Loopholes? April 26, 2022: RLL, Radio Interview AR
- Capital Control moved until after the elections, and depositors are heading towards escalation April 27, 2022: Sawt Beirut International, TV Interview AR
- Mardini: Without Serious Reforms, The IMF Will Not Agree To Any Bailout Program, April 29, 2022: VDL News, Article AR
- First “Recovery Plan” Is Rise In Dollar Exchange Rate, April 29, 2022: VDL News, Radio Interview AR
- Can The Budget Get Approved Before Elections? April 30, 2022: VDL, Radio Interview AR
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Public Sector Shifts Losses to Depositors
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On April 3, Lebanon’s deputy prime minister declared that Lebanon as a state has gone bankrupt as did the central bank, and that the loss has occurred. The use of the term “bankrupt” to describe the financial situation of the Lebanese government and central bank, caused many circles to be on alert. The next day, the central bank governor denied that the institution he heads was bankrupt.
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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.
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LIMS Media Interviews:
- Lebanon Declares Bankruptcy…How Did The Country Get To That Point? Experts Answer, April 5, 2022: Al Tareeq, Article AR
- What Is The Truth About “Lebanon’s Bankruptcy”? An Economist Answers, April 7, 2022: Hafryat, Article AR
- Useless To Talk About Selling Public Assets At This Stage, April 7, 2022: RLL, Radio Interview TV
- Lebanon Suffers From A Liquidity And Solvency Problem, And We Must Aim Towards Economic Re-Growth, Instead Of Liquidation, April 7, 2022: VDL News, Radio Interview AR
- Is Lebanon Really Bankrupt? What Are The Necessary Steps For This Stage? April 7, 2022: Al Mamlaka, TV Interview AR
- Between Declaration Of “Bankruptcy” And “Wave” Of Reassurances...A Reading Of Words From Lebanon’s Deputy Prime Minister, April 11, 2022: Al Majalla, Article AR
- Truth About Bankruptcy Of Lebanon And Its Central Bank, April 11, 2022: Yemen Today, TV Interview AR
- The End Of Banks...Your Deposits Are Guaranteed To A Ceiling Of 75 Million Lebanese Pounds, April 22, 2022: Lebanese Forces, Article AR
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Currency Board Would Stop Ongoing Currency Devaluation
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On April 22, the Lebanese pound (LBP) went up to around 28,000 LBP to the dollar despite the announcement of an agreement with the IMF a couple of weeks earlier. At the start of April, it was traded at 24,000 LBP to the dollar. Previously, before the financial crisis engulfed the country, the currency was pegged at 1,500 LBP to the dollar. Nowadays, multiple exchange rates are still applied in various transactions with the government and banking sector.
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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.
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LIMS Media Interviews:
- Each Side in Lebanon Blames The Other. Government Blames The Central Bank, And The Central Government Blames The Government, April 5, 2022: Al Yaum, TV Interview AR
- Currency Board: A Remedy For Lebanon? April 6, 2022: ICI Beyrouth, Article FR
- Patrick Mardini To Tayyar.Org: “In This Case, The Dollar Will Rise To An Unimaginable Extent,” April 11, 2022: Tayyar.org, Article AR
- Exchange Rate Unification...When and how? April 18, 2022: Leb Economy, Article AR
- Capital Controls: A Desperate Attempt To Curb The Dollar At The Depositors’ Expense, April 26, 2022: Al Jadeed, TV Interview AR
- The Dollar Is On The Rise Again, But Why? April 26, 2022: VDL, Radio Interview AR
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War on Ukraine Raises Questions about Lebanon’s Food Security
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Increasing pressure is mounting, as the risk of a humanitarian crisis in Lebanon becomes possible, due to grain supply issues—a consequence of the war on Ukraine. Bread and fuel shortages have become more frequent. Additionally, questions and concerns are arising about the food supply in Lebanon.
LIMS explained that food security should be seen as citizens having the means to acquire food and not the country being self-sufficient. Lebanon has a geographic advantage when it comes to the ability to import essentials. However, government policies like restrictions on imports and high import taxes are affecting the citizens’ ability to buy such goods. Also, the Lebanese pound’s devaluation has been negatively affecting consumer purchasing power.
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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.
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LIMS Media Interviews:
- Lebanon: Ukraine War Pushes Country Deeper Into Crisis As Global Wheat and Fuel Prices Soar, April 5, 2022: Middle East Eye, Article EN
- Food Security In Lebanon In Danger...Are We On The Verge Of A Social Explosion? April 5, 2022: OTV, TV Interview AR
- Expert Reveals…That Is Why Dollar Price Rose Strongly Today, April 13, 2022: Lebanon 24: Article AR
- Ruling Majority Wastes One Billion and 140 Million Dollars On The Altar Of Elections, April 14, 2022: Lebanese Forces, Article AR
- Lebanon Facing Real Catastrophe…Has Hunger Become Destiny? Does Bread Become A Dream? April 16, 2022: Beirut Daily News, TV Interview AR
- Government Borrowing From Central Bank Under Pretext Of Securing Bread, Medicine, And Electricity: An Excuse Worse Than A Sin, April 18, 2022, Radio Interview AR
- Bicycling Movement Sweeps Lebanon, April 20, 2022: Al Monitor, Article EN
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LIMS Leaders’ Academy: Policy Fair and Graduation Ceremony
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On April 28, 2022, 34 leading activists belonging to 19 prominent grassroots organizations working for change in Lebanon, graduated from the 5th edition of LIMS Leaders’ Academy (LLA) at the Lancaster Plaza Hotel in Beirut. This year’s edition comes at a special time since 8 graduates from the academy are running for the 2022 parliamentary elections.
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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
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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.
View Event’s Full Album On Facebook
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The event was mentioned in 15 news-websites and newspapers and in 2 radio station: VDL, El nashra, Lebanon 24, News112112, Arab Youm, NNA, Mllm news, Beirut news, Al intishar, Bilmokhtasar, Trend Arabi, Hadramout, Nabad 1, Annahar, Nabad 2, VDL24 1, and VDL24 2.
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Avoiding Beirut: Lessons from Lebanon’s Economic Crisis
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On April 15, 2022, LIMS CEO, Dr. Patrick Mardini joined the Advocata Institute-Sri Lanka for a 90-minute online podcast session. Sri Lanka seems to be heading toward an economic meltdown similar to the one observed in Lebanon. Therefore, the purpose of the podcast was to learn from the lessons of Lebanon’s economic crisis.
During the session, Dr. Mardini explained that like in Sri Lanka, Lebanon has been piling up imbalances because the government has been spending beyond their means for many years. This situation has led to a very large public debt (170% of the GDP) financed by the Lebanese banking system. Banks managed to continuously attract foreign dollar-denominated deposits mainly from the Lebanese diaspora and from wealthy people from neighboring Arab countries.
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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.
Watch Podcast Session Online, Event EN
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