Lebanon OKs multi-pronged reform effort, seeks IMF rescue package

By Rebecca Melvin

New York, May 1 – The government of Lebanon has approved a package of reforms and requested assistance from the International Monetary Fund as it attempts to reassert some control over an economy that is in a self-described free fall, according to market sources.

An international financial rescue package is urgently needed to backstop the recession and create the conditions for a rebound, while “quick delivery” on reform measures is critical to help restore confidence, according to the Lebanese government’s financial recovery plan executive summary dated April 30.

Part of the plan is that “foreign holders are expected to face significant losses on their holdings of eurobonds,” the summary stated.

The plan involves restructuring its public debt and recapitalizing the country’s banks and institutions. It also includes de-pegging the Lebanese pound from the dollar, reforming the state-run electricity sector and recovering stolen assets.

Formal talks with bondholders are not yet underway, but the restructuring initiative follows on the government’s decision in March to withhold all payments on its $1.2 billion 6 3/8% bonds due March 9, 2020.

Prime minister Hassan Diab described the plan as a roadmap for managing public finances.

In a speech on Thursday Diab said the government has committed to a program that includes 26 reform projects within 100 day and 14 bills, with three other bills to be finalized within a few days. The remaining eight projects should be completed within the set deadline, he said.

“Today, the Council of Ministers has voted unanimously on the adoption of the economic and financial plan that will put Lebanon on the right path towards financial and economic rescue. This plan is based on six main interrelated components: financial, economic, banking, fiscal, social and development protection.”

The country has a debt to GDP ratio of nearly 170%, and it is proposing to drop that level to 100% within five years. At the same time, it wants to restore safety nets for the most vulnerable citizens and outfit the economy with sustainable jobs.

Meanwhile, the Lebanese pound has lost more than 60% of its value in recent weeks and it stood at 1,505.93 pounds to $1.00 on Friday.

Structural reforms in all areas of the economy are required, according to the summary and to Diab, who noted in his speech that the current crisis was exacerbated by the Covid-19 pandemic and added to its currency and unemployment woes and the country’s default on sovereign debt in March.

“The government was groping its way toward a historical decision to stop paying the debts and relevant interest rates in preparation for addressing the county’s financial situation, when the coronavirus pandemic hit and took priority nationwide, draining a lot of effort and capabilities,” Diab said.

Lebanon is faced with few available options for dealing with these losses, Diab said. Ignoring the losses would prevent Lebanon from benefiting from any meaningful international assistance, and it would prevent it from negotiating a debt restructuring with foreign bondholders.

Diab also referred to corruption as “a state within a state,” calling it rampant and deeply rooted in state institutions.

“We will proceed with requesting a program from the International Monetary Fund, formalizing our negotiations with eurobond creditors and moving forward, thereby reducing the debt burden on our citizens and presenting our vision for an economic recovery scheme to our international friends, partners and investors,” Diab said.

The goals of the reform are to have the current account deficit recede to 5.6% in the next five years; to obtain external financial support of more than $10 billion in addition to Cedre conference funds, to return to positive economic growth as of 2022, to have direct and indirect support to needy categories, and to implement relevant social programs.

The program also aims to restore initial public finance surplus by 2024, structuring sovereign debt portfolio and reducing the ratio of public debt to GDP to less than 100%

The plan also aims to restructure the banking and financial sectors to allow the relaunching of the economy.

As previously reported, Diab said the government was withholding the bond payments in order to safeguard foreign currency reserves. The government is prepared to engage in good faith discussions with its creditors to explore options to make Lebanon’s public debt sustainable.

The sovereign has retained Lazard Freres as financial adviser and Cleary Gottlieb Steen & Hamilton LLP as legal adviser.

© 2015 Prospect News.
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