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The IMF: No Silver Bullet for Lebanon

Facing political, social, and economic collapse and the unexpected results of last weekend's parliamentary elections, Lebanon has arrived at a crossroads, and its inhabitants are locked in a debtor’s prison. Current discourse frames the IMF process as the country's only and last option to try to recover from this collapse. However, Lebanon’s only choice is to no longer limit itself to this path.


Facing political, social, and economic collapse and the unexpected results of last weekend’s parliamentary elections, Lebanon has arrived at a crossroads, and its inhabitants are locked in a debtor’s prison. In 2021, inflation was estimated at 145%, ranking third in the world after Venezuela and Sudan. According to the World Bank, government revenues were cut in half in 2021 to 6.6% of GDP, the third lowest ratio after Somalia and Yemen. Debt skyrocketed to 183% of GDP in 2021, the fourth highest in the world after Japan, Sudan, and Greece. The Lebanese state is complicit in various crimes and irresponsible polices that have pushed the economy to this precipice.

Following the neo-liberal restructuring of the country and economy in the post-civil war period of the 1990s, the parasitic relationship between the financial sector and the state led to large fiscal deficits driven by high-borrowing interest rates, overspending, an expensive and ineffective electricity sector, corruption in public works projects and capital investments, and inefficient tax collection. This destructive operation of extraction began to show cracks in the summer of 2019 with a liquidity crisis, compounded by the effects the October 17 revolution, the pandemic, and the August 2020 Beirut port explosion. As a result, the poverty rate in Lebanon doubled from 42% in 2019 to 82% of the total population in 2021. Inequality has skyrocketed with the middle class, which now accounts for less than 40% of the population, while the percentage of wealthy people has decreased from 15% to 5% in 2020. From the advent of the crisis in 2019, the Lebanese pound has devalued by about 95% against the US dollar. Sitting at one of the highest in the world, Lebanon’s food prices have risen by 1,000% from October 2019 to January 2022. It is estimated that Lebanese banks have faced losses of up to $69 billion since the beginning of the crisis. In the face of what the World Bank calls one of the worst economic crises on record in modern history, Lebanon is hedging its bets on the “tried and true” option and is currently negotiating an IMF bailout in an attempt to pull itself out of this quagmire.

The IMF and modern crises

The IMF today is an essential part of the American post-war toolkit that states turn to in the event of financial crisis. Since the 1970s, the IMF has provided loans to member states in order to “tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth” in crisis. With the advent of an increasingly globalized neo-liberal turn in the international system in the 1980s, key markers of IMF borrowing were crystallized in the “Washington Consensus. In this era, the financial system and its purveyors have become paramount, yielding more power than ever before in an increasingly inter-connected global economy. Despite some success stories, the impact of this ideological shift has proven calamitous for other societies.

The case of Greece in the aftermath of its own debt forces us to question austerity measures as an effective policy for recovery—an approach pursued in the Lebanese case. Today in the aftermath of the rescue plan spearheaded by the EU and the IMF, Greek youth continue to face high unemployment, low wages, or have emigrated for more economic opportunity elsewhere in the EU, leaving behind a gutted welfare system. Greece is but one of many warnings of how this approach can leave such societies in perpetual economic purgatory without accountability for those responsible.

Perhaps a greater omen of what an IMF bailout could mean for Lebanon is the Zambian story. In 2005, Zambia, along with 29 other African countries, were part of IMF’s “heavily indebted poor countries” scheme in which some of the countries’ debts were forgiven. The policy did pump funds into vital institutions like schools and medical clinics. However, within 10 years, Zambia had accrued debt that was 59% of its own GDP due to the siphoning of state resources through widespread corruption, compounded by the increasingly authoritarian nature of the system. Much like the Lebanese case, various public works projects, such as contracts for the construction of new roads or new airport terminal, were grossly inflated allowing implicated officials to profit. This scheme also encouraged irresponsible borrowing from states like China, which holds about one third of Zambia’s external debt, giving less importance or impetus for the country to move toward good governance practices. In 2020, Zambia defaulted on its debt. Lebanon, like Zambia, underscores the perils of steps that would reward a system designed for theft and concealment of such crimes.

Today’s economic system functions to generate systematic inequality by an elite set of states that prevent the periphery from weathering storms like the pandemic with the same capacities. This has even given the IMF reasons for pause, as it has reflected that austerity measures can wreak havoc on already weak economies and do not necessarily lead to economic growth.

The IMF and Lebanon

In March 2020, Lebanon defaulted on its loans for the first time in its history, and stopped paying all maturing Eurobonds in foreign currencies estimated to be worth $30 billion. In March 2022, in the latest installment of a two-year saga with the IMF to address the crisis, a staff-level agreement was reached between the IMF and Lebanon, for a loan package of about $3 billion over the next 46 months, which would be the first step for a larger bailout. This package would be conditional on lower state spending, increased taxation privatization, debt reduction, and devaluation of the currency. The IMF is set to monitor the disbursement with ongoing staff reviews, and further disbursement would be contingent on it.

To inch Lebanon closer to this deal, the Lebanese government had proposed in February an economic recovery plan in which depositors are expected to bear the greatest burden. In order to cover the $69 billion in losses in the financial sector, a portion would be covered by converting dollar deposits to Lebanese pounds, which would see them lose most of their value. The state, the central bank, and commercial banks would cover $31 billion, which is tantamount to a “nationalization of deposits,” and would constitute one of the largest “bail-ins of depositors in modern economic history.” The plan could also lead to wealthy depositors owning 72% of the capital in Lebanese banks. Moreover, in the budget proposed by the state for this year to meet the requirements of an IMF loan, the revenue the government collects from value-added taxes (VATs) would triple; VATs have disproportionally burdened and harmed the working poor. As the injection of liquidity will initially be gradual and minimal, absorbing the losses of the financial sector will make recovery that much more painful as capital controls will likely remain in place to stabilize interest rates and the currency’s exchange rate, as was the case in Cyprus, Iceland and Greece. Therefore, financial reforms required for an agreement with the IMF will lead to a re-distribution of assets upward, far out of reach for those desperately in need.

Beyond financial reforms, an IMF bailout also obliges parties to pursue institutional accountability, which should in theory generate positive outcomes for democratic governance. In the case of Lebanon this includes forensic audits of the central bank and a capital controls law, a process which is currently stalled. The Lebanese central bank has not disclosed profit and loss statements since 2002, which are estimated at over $50 billion. A bailout would require policy priorities that are likely to cut or reduce public services and lift more subsidies, possibly pension reforms, anti-corruption measures, and reducing the size of the civil service. Structural adjustment policies of this nature would further burden the working class and lead to even higher levels of poverty in Lebanon.

The marginal injection of liquidity into the system with the IMF bailout would give people a moment to breathe, yet, the country’s dependency may be reinforced and it would allow corrupt elites to maintain their parasitic relationship to the banking system and the Lebanese economy. There is also the possibility for inequality to grow, even if the IMF bailout is coupled with World Bank programs and the release of the CEDRE Package to soften the blow. The kleptocratic Lebanese state has proven time and time again it cannot be trusted with the task of serving its constituents. Even the international community acknowledges this reality: According to the UN Special Rapporteur on extreme poverty, the Lebanese state and the central bank are “responsible for human rights violations, including the unnecessary immiseration of the population, that have resulted from this man-made crisis.”

Alternatives for recovery and a lost generation

Resolving the current crisis cannot be a resignation to old tricks and tactics that are doomed to bring Lebanon back to the conditions prior to collapse in 2019. A substantial shift away from the previous functioning of the state implies creativity and a multi-pronged approach. The overhaul of the political system should be paralleled by a novel approach to immediate and long-term recovery. Current discourse frames the IMF process as Lebanon’s only and last option. However, Lebanon’s only choice is to no longer limit itself to this path. This transient solution will not prevent the return of a Lebanese state that is positioned to default on its debt and plunge deeper into poverty. Moreover, a system of extraction, graft, and impunity would likely remain and allow for the same abuses to continue.

Immense pressure needs to be placed on the elite and ruling class in new forms, devoid of myopic or short-sighted intention. Administering aid through the Lebanese state has proven ineffective, has been frequently lost to corruption, and would be a disservice to those who need the assistance. To address the concerns of access to liquidity, a UN Trust Fund should be established where aid packages can be deposited and dispersed outside the apparatus of the Lebanese state on a larger scale through direct cash deposits to Lebanese, as was done in Afghanistan through the UNDP this past year. In the case of UN Trust Funds, states or NGOs can submit requests for assistance. Here is where trusted Lebanese civil society organizations must make their case to be the sole recipient and distributor of this aid. Additionally, other models include UN Office for the Coordination of Humanitarian Affair’s Country Based Pooled Funds and the UN Humanitarian Response Plan, which have been used recently in Ukraine and Afghanistan, to pay health workers and beneficiaries, without going through the authorities. Adopting an alternative approach would not only elevate civil society vis-à-vis the state, but also begin to break the binds of patronage holding Lebanese society hostage.

The importance of accountability

Accountability to hold officials responsible and address the root causes of impunity should also be prioritized. Lessons can be drawn from the comprehensive efforts by the Ukrainian state and civil society to hold Russia to account for its invasion into Ukraine. The example of Ukraine has set forth a series of instructive lessons for international accountability before bodies including the International Criminal Court, the International Court of Justice, and the UN Human Rights Council’s mechanisms. Though the Ukrainian case cannot be characterized in the same way as Lebanon, it offers an example in which these tools are being deployed comprehensively to isolate the aggressor. Whether via civil society pressure on states to bring a case in all these bodies, or though other initiatives emerging from within the newly elected parliament, such actions could serve as yet another conduit toward accountability.

Most recently, Lebanese central bank governor Riad Salameh has been named a suspect in a case brought by the European Union’s criminal justice which froze some $130 million of Lebanese assets. The properties and bank accounts, linked to five people suspected of embezzling some $330 million between 2002 and 2021, were seized in France, Germany, Luxembourg, Monaco, and Belgium. The seizures are linked to a probe launched by French investigators last year into the personal wealth of the central bank governor. Even if no conviction is reached in such cases, the narrative that Lebanon has been held hostage by a criminal state must be amplified to further the isolation of its ruling elite.

However, the ability for such initiatives to gain genuine traction is more probable when society is no longer coerced and shackled by the forces of patronage. The less Lebanese people opt into such a structure either tacitly or for their own survival, once they are no longer indebted to an inherently extractive form of governance, the chances of accountability emerging from a more independent judicial system becomes more conceivable. That is to say, the more economic support and social freedom individuals and functionaries of the state experience, the less indebted they will be to their leaders or the state itself, which will no longer be able to move with such impunity in the long-term.

Lebanese people will very likely continue to suffer economically and in the immediate sense. However, facing impunity and financial accountability will ensure in the long run that the ruling class is squeezed out of its strongholds of power. An IMF loan in its current form only bodes of future catastrophe, in which the ruling oligarchy will reap the spoils of fragile institutions as they did in 1991. With the cautious potential for reform, but also the risk of increased political deadlocks following recent parliamentary elections, this moment presents an opportunity to demonstrate this reality for Lebanon and offer a new vision that does not rest on the traditional tools but demands more. Lebanon simply has no other choice.

Marie-Christine Ghreichi is a Campaign and Research Assistant with Crisis Action, and specialized in international security with a focus on diplomacy and the Middle East.

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