A Lebanese consensus on debt can’t wait any longer

By : Hussein Ibish

While Lebanon’s ruling elites continue to wrangle with the International Monetary Fund over a $10 billion bailout, the country’s economic crisis is spiraling out of control. Economy Minister Raoul Nehme, who admits Lebanon has become “a failed state,” remains confident that a deal will come soon. But even after six weeks of talks, there’s evidently been little apparent progress. Key Lebanese negotiators have resigned in protest over how politicians are handling the crisis.

Meanwhile, much of the Lebanese middle class is sinking into poverty, and the poor are plummeting into utter destitution; the combination of a sinking currency and soaring inflation is leaving millions hungry. The government has been forced to raise the price of bread, for the first time in eight years. And the lights are literally going out: large parts of the country now endure blackouts of up to 22 hours a day, because the state cannot pay for imported fuel to run generators.

Hezbollah, which dominates the government of Prime Minister Hassan Diab, is clinging to the hope that the money can be found elsewhere—China, for example. Diab has approached other Arab states, including Kuwait and Qatar. But it is unlikely anyone will invest in Lebanon without an IMF scaffolding in place.

That won’t happen until the Lebanese leadership agrees to necessary—and necessarily painful—reforms to its grossly mismanaged economy. But the political elite can’t even agree on the disease, much less the cure. Banks and the government are bickering over the size of the country’s debts, and who should pay the bills. The bankers and the politicians are blaming each other, but both are complicit.

This augurs badly for what will come after a bailout has been agreed: in addition to scrutiny and accountability—the banks and politicians have long grown used to operating without either—the IMF will demand painful structural reforms. These are hard to pull off even in countries where there is a national consensus on how to deal with an economic crisis. In Lebanon, they will rock a political stability that has long been based on an uneasy equilibrium of unstable elements.

The IMF is still largely guided by the “Washington Consensus” model developed for Latin America in the 1980s and 90s, which emphasizes reducing a swollen and corrupt public sector—in Lebanon as in most Arab countries, the government is the main employer and provides most services—and strengthening the private sector and market forces. The IMF will demand a reduction in government borrowing and spending, cuts in public employment, possibly even further devaluation of the Lebanese pound (which has lost 80% of its value since October) and privatization of public assets.

Even though the Lebanese can legitimately fear the social and economic pain all this would entail, it would be less damaging than the ongoing freefalling collapse. Rather than squabble over whom to blame, their leaders should be preparing them for the tough times ahead. The experience of other debt crises in their neighborhood, including in countries like Turkey and Greece, suggests any Lebanese recovery will be a long time coming.

The Greek example is especially germane. After the global recession in 2009, the Greek government began borrowing heavily to finance its public sector and services. It also underreported its debts and deficits. A collapse of confidence lead to a major crisis and widespread unrest. There are clear parallels to Lebanon, where banks for decades financed the state through what was effectively a Ponzi scheme for depositors. As in the Greek case, the Lebanese debt structure was effectively hollow and creditors simply cannot be paid.

IMF assistance eventually helped Athens reduce its massive debt, but at a cost of scores of billions of losses for private investors. It took major cuts in social services and public spending, painful austerity, and three massive bailouts before the Greek economy resumed growth—close to 2% in 2019. But even so, the IMF warns that Greece is still not out of the woods.

Lebanon’s debt-to-GDP ratio is about as bad as Greece’s ever was. While the big argument in Beirut is over who should pay the debt, history suggests the general public will be saddled with most of the bill.

Preparing the Lebanese for this inevitability would be hard enough without the squabbling among their leaders. Eventually, all the Lebanese political factions, including Hezbollah, will need to cut a deal with the IMF. They seem to think they have several more months to play with. But the intensifying national catastrophe suggests otherwise.

BLOOMBERG

Hussein Ibish is a senior resident scholar at the Arab Gulf States Institute in Washington.