LEBANON (OBSERVATORY NEWS) — Lebanon is closer than ever to the financial crisis, at least since the 1980s, which has seen horrific destruction in the civil war as government allies, investors and protesters taking to the streets across the country have demanded it tackle corruption and carry out long-promised reforms.
Prime Minister Saad al-Hariri’s government swiftly scrapped a plan on Thursday hours after announcing charges for voice calls over applications such as WhatsApp in the face of the biggest public protests in years in which protesters blocked roads and burned tires.
Lebanon, one of the world’s most indebted nations with rapidly declining dollar reserves, urgently needs to convince its regional allies and Western donors that it will finally take serious action to tackle deep-seated problems such as the unreliable electricity sector.
Reuters, interviewed by nearly 20 government officials, politicians, bankers and investors, said that if it did not receive financial support from abroad, Lebanon faced the possibility of devaluation or even default on its debt within months.
In a televised speech on Friday, Foreign Minister Gebran Bassil said he presented a paper at a meeting to discuss the economic crisis in September in which he said Lebanon needed an “electric shock”.
“I also said that the rest of the balance may not be enough for us longer than the end of the year if we do not adopt the required policies,” he said, without specifying what he meant by the balance.
Beirut has repeatedly pledged to maintain the value of the Lebanese pound against the dollar and to pay its debts.
However, the sources told Reuters that countries that used to intervene financially to save Lebanon from crises reliably were impatient by mismanagement and corruption and used the growing economic and social crisis to press for change.
Among them are Gulf Arab states that have cooled their enthusiasm for helping Lebanon because of Tehran’s growing influence, backed by Tehran, and what it sees as a need to curb Iran’s growing influence across the Middle East.
Western countries have already provided financial aid that has allowed Lebanon to challenge conditions for years. But for the first time, it said it would not provide new money until the government took clear steps toward long-promised reforms.
They hope that the government will move to reform a system that sectarian politicians have exploited to distribute state resources to their advantage rather than build a well-functioning state.
The crisis could fuel further unrest in a country hosting about 1 million refugees from Syria, where a Turkish military incursion in the northeast this month opened a new front in the eight-year war.
“If the situation remains as it is without any radical reforms, the devaluation is inevitable,” said Tawfiq Gaspar, a former adviser to Lebanon’s finance ministry and former economist at the Central Bank of Lebanon and the International Monetary Fund.
“Since September, a new era has begun. The warning signs are big and everywhere, especially since the central bank pays up to 13 percent to borrow in dollars.”
At the top of the list of reforms in Beirut is one of the most complex problems: repairing the chronic power cuts that have made resorting to private generators expensive. Many see this problem as the main symbol of corruption that has led to the deterioration of services and infrastructure.
In a televised address to the people, Hariri said he had been struggling to reform the electricity sector since he took office. “Laura meeting, meeting and committee Laura committee and subtract Laura subtraction, I finally arrived on the finish line Egee who says what walks?”.
Reviewing the difficulties of implementing the reform more broadly, he added that each committee needed the participation of at least nine ministers to satisfy all parties.
“A government of national unity? Understand. And violin committees, committees of unity? The result is nothing.
Underlining external pressures, French Ambassador Pierre Ducan, who is in charge of monitoring the implementation of the Cedar donors’ conference to support Lebanon, will head to Lebanon next week to pressure the government on the use of floating power plants, a banker familiar with the plan said.
The banker, who asked to remain anonymous, said Dokan wanted to include these floating stations in the electricity sector reform plan.
Dukan could not be reached for comment.
The content of the 2020 budget will be a key element in helping to release about $ 11 billion in which conditional pledges from international donors were issued under the Cedar Conference last year. But the cabinet meeting scheduled for Friday’s budget was canceled amid popular protests.
– “Tax Uprising” –
The Hariri government, which includes almost all of Lebanon’s parties, has proposed a tax of 20 cents a day on voice calls through applications such as WhatsApp, Facebook and FaceTime.
In a country based on sectarianism, the unusually widespread protests may be a sign of growing anger from politicians involved in pushing Lebanon into the crisis.
Smoke rose from fires in downtown Beirut and broken glass was spreading in the streets as the windows of several shops were shattered. Security forces fired tear gas to disperse some gatherings.
An-Nahar newspaper described what was going on as a “tax uprising”. Al-Akhbar daily said it was a “Whatsapp revolution”.
Fadi Issa, 51, took part in the protests. Our children do not have a future … We do not want to resign only we wanted accountability and they return the masters Lilly stole it and become necessary change and the people can change. ”
A number of bankers, investors and officials interviewed by Reuters said new cracks had emerged between the Lebanese government and its private lenders, with confidence dispelling and scarce dollars.
After years, banks have financed the government, expecting revenues to continue to rise, and they are demanding that the country come close to collapse to implement reforms to win donor support.
A majority of those interviewed by Reuters said Lebanon was likely to feel greater economic and financial pressure in the coming months but would avoid setting a ceiling to recover deposits or the state’s inability to meet its sovereign obligations.
However, officials, bankers and investors are divided over whether the Lebanese pound will be devalued because of years of failure to implement reforms and in light of the new determination among traditional donors to demand it.
“You need a positive shock,” said Nassib Gabriel, head of economic research and analysis at Byblos Bank. Unfortunately, the Government believes that reforms can take place without prejudice to the structure that benefits them.”
He added that Lebanon should implement reforms in order to increase capital flows.
“We cannot continue to turn to Emiratis and Saudis. We need to help ourselves to help others.”
– Time is going on –
This month, Moody’s decided to put Lebanon’s CAE-1 rating under review for downgrade and estimated that the central bank, which intervened to cover government debt payments, still had usable reserves of only $ 6 billion to $ 10 billion to maintain stability.
Debt maturity at the end of next year is about $ 6.5 billion.
The central bank said the October 15 cash reserve stood at $ 38.1 billion.
Lebanon has real reserves of only $ 10 billion, an official told Reuters. “The situation is very bad and (Lebanon) has five months to correct the situation or there will be a collapse around February,” he said.
The Hariri government may have only a few months to implement financial reforms to persuade France, the World Bank and other parties to the Cedar Agreement to release $ 11 billion in conditional funding.
The head of regional investments at a major US asset management company said Lebanese officials had said in informal meetings that a plan would be announced before the end of the year to tackle short-term and long-term power outages, after which the government would raise prices.
But critics say no concrete steps have been taken despite statements by the Energy Department that the plan is on track.
Last month, Hariri left Paris without pledging immediate cash after visiting French President Emmanuel Macron. Similarly, he returned this month from Abu Dhabi empty-handed after he met with Crown Prince Sheikh Mohammed bin Zayed Al Nahyan.
MPs in Beirut struggled to explain what happened in Abu Dhabi after Hariri claimed the UAE had promised investments following “positive” talks.
– Eyes on Hezbollah –
Investors, bankers and economists say at least $ 10 billion is needed to renew confidence among Lebanese abroad who have supported the economy for decades by keeping bank accounts at home.
However, deposits have contracted by about 0.4 percent since the start of the year.
The government has sought smaller support from its Sunni allies to buy time. But several sources said Beirut must meet conditions aimed at weakening the influence of Shi’ite Hezbollah in the Lebanese government to secure funding from the UAE or Saudi Arabia.
Many see Hezbollah, which is under US sanctions, gaining more control over state resources by naming the health minister in January after last year’s election led to an increase in its allies in parliament.
Some say Saudi Arabia, the United Arab Emirates and the United States are being pushed to refrain from supporting Beirut as part of its broader policy of weakening Iran and its allies, who are fighting proxy wars with Gulf states on several fronts.
“Their patience with Iran and Hezbollah has diminished a lot,” said Sami Nader, director of the Beirut-based Mashreq Center for Strategic Studies. The ‘Lebanese exception’ disappeared.”
“The balance has tended and we are now at odds with our former friends because Hezbollah now has the upper hand politically.”
“People are impatient with corruption, in which there is simply a frozen parliament with no power to divide the cake among politicians,” said the former regional head of a major Western bank.
“But at the end of the day, the Lebanese political class usually succeeds in convincing the allies that they should not allow the collapse of the regime and the restoration of civil war.”
Lebanon has been known as a banking hub in the region where deposits are flowing, especially since 1997 when the currency was pegged to the price of 1507.5 lira against the dollar.
But things have changed after the cost of insuring Lebanese sovereign debt rose to a record high in August and September.
Depositors, including immigrants attracted by far higher returns than in Europe and the United States, have begun withdrawing funds in the face of Lebanon’s growing double deficits, inability to obtain funding from abroad and the central bank’s extraordinary efforts to attract dollar flows.
Confidence among Lebanon’s 6 million people has waned.
Depositors can no longer withdraw funds in dollars easily and most ATMs no longer allow dollars to be withdrawn, forcing people to resort to parallel foreign exchange markets where the dollar rate is higher than the official rate.
“I am with the protesters,” said Walid al-Badawi, 43. I have three children and I am a taxi driver working all day to bring food to my children and I can’t get it.”
Gaspar, a former head of research at the central bank, said access to foreign currency was easy even during the 15-year civil war. There was always a balance of payments surplus until 2011, when the deficit began to grow to $ 12 billion last year.
– The collapse of the resolve of banks –
Three events precipitated a crisis of confidence that seemed inevitable to come years ago. The first of these events is a series of efforts by the Central Bank since 2016 to continue the growth of deposits at interest rates exceeding 11 percent on large deposits. Oil prices have fallen in recent years, weakening Gulf allies.
In a report on Thursday, the International Monetary Fund (IMF) called Lebanon’s position “very difficult” and added that “new substantive measures” were needed to protect it and reduce its huge deficit.
As the dollar depleted, banks had virtually stopped lending and could no longer carry out simple foreign exchange transactions for their customers, a banker said.
“The whole role of banks is to pump money to the central bank to finance the government and protect the currency. Nothing happens in the fiscal deficit because doing anything will disrupt corruption systems.”
Banks’ resistance was frank but expressive given their key role in financing the government.
When Beirut proposed cutting debt service costs by $ 660 million in the 2019 budget, banks never agreed. Banks have also cooled their enthusiasm to subscribe to international bonds, including a planned $ 2 billion issue later this month, officials said.
If reforms do not materialize, “banks agree that we can no longer support the public sector,” Byblos said.
This article is written and prepared by our foreign editors writing for OBSERVATORY NEWS from different countries around the world – material edited and published by OBSERVATORY staff in our newsroom.
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