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Today, April 7, marks the second anniversary of the agreement signed between the Lebanese government and the International Monetary Fund (IMF) delegation at the Presidential Palace in the presence of former President Michel Aoun. The signing took place under his auspices, as he exercised his constitutional prerogative. As president, he is responsible for negotiating and concluding international treaties in conjunction with the Prime Minister. However, these agreements do not become concluded until they are approved by the Cabinet.

Prime Minister Najib Mikati left Baabda Palace that day and announced the government’s realization of an agreement with the IMF on employee-level economic policies. This agreement aimed to facilitate funding from the Fund for four years, potentially granting Lebanon $3 billion. Crafted by Lebanese authorities with the support of IMF experts, the agreement outlined a comprehensive economic reform program. It aimed to rebuild the economy, restore financial sustainability, enhance governance and transparency, remove barriers to job creation, and increase social spending and reconstruction efforts.

The most significant aspect highlighted by the agreement was that accessing exceptionally favorable financing terms from Lebanon’s international partners hinged on implementing necessary reforms. These reforms are pivotal for restoring growth and financial sustainability, enhancing governance and transparency, and boosting social spending and investment in reconstruction efforts.

In addition to restructuring external public debt, this will entail sufficient participation from creditors to restore debt sustainability and bridge financing gaps.

On that day, Deputy Prime Minister Saadeh Al-Shami came out and heralded significant progress in negotiations with the IMF, following the successful agreement reached at the employee level, and the file being transitioned to the stage of formulating a final agreement. Often, the period between employee consent and higher-authorities approval should not exceed four months at most, but it could potentially be completed within one month.

As Lebanon commemorates the second anniversary of the agreement signed, there remains no final agreement in sight, largely due to the failure of Lebanese authorities, especially the lack of upholding the commitments made by Prime Minister Najib Mikati on the day of signing the agreement. Mikati had then considered the reforms outlined in the preliminary agreement with the IMF as a “visa” for donor countries to collaborate with his country, mired in economic collapse.

He stressed the need for effective policies and reforms to revive the economy, pledging to address the crisis and guide Lebanon toward sustainable, balanced and inclusive growth. This involves implementing structural reforms that strengthen the institutional framework, tackle principal economic and financial imbalances, expand the social safety net to alleviate the impact of the crisis on Lebanese citizens, especially the neediest, and stimulate investment in infrastructure and reconstruction.

During Prime Minister Mikati’s tenure, and with the IMF’s blessing, a reform plan emerged. It focused on writing off BDL’s obligations towards banks, specifically about depositors’ funds initially placed in banks and later transferred to the Central Bank of Lebanon.

Thereafter, problems surrounding depositors’ rights, which have been delaying the finalization of the final agreement with the IMF, have taken precedence. The IMF has consistently insisted on this approach as the solution, a stance that Deputy Prime Minister Saadeh Al-Shami, leading the negotiating committee with the IMF, has repeatedly emphasized.

There was a notable disparity in the government’s crisis resolution plan, especially regarding deposit handling. This underscored the clear convergence between the stances of the Lebanese negotiating delegation and those of the IMF concerning the approval of depositors’ funds write-off.

The fatal blow to Deputy Prime Minister Saadeh Al-Shami’s plan came from the State Council, which nullified the Cabinet’s decision issued in May 2022 approving the strategy for financial sector rehabilitation, particularly in terms of canceling a significant portion of the Central Bank of Lebanon’s foreign currency obligations to the banks, to mitigate the BDL’s capital deficit.

It is important to recall that Deputy Prime Minister Saadeh Al-Shami’s plan involved the substantial write-off of around $60 billion of the Central Bank of Lebanon’s foreign currency obligations to commercial banks. This was aimed at resolving the bank’s net exposure to open foreign currencies. Furthermore, the strategy also included partial recapitalization of the BDL through bonds valued at $2.5 billion. As for the remaining negative losses, they will be gradually canceled over 5 years.

Let’s review the recommendations of the IMF’s administration which underscore the necessity of restoring a healthy financial sector and the required components for its long-term sustainability. This is crucial for Lebanon to dispel current uncertainties and create conducive conditions for robust economic growth. The IMF underscores the substantial need for comprehensive recapitalization within the banking system and stresses the importance of recognizing initial losses and strategizing their distribution while ensuring the protection of small depositors.

Moreover, as per the accounting adaptation in the “governmental” response, it is imperative to free the Central Bank of Lebanon’s budget from the weighty deficit burden evident in its balance sheets, which results in a significant deficit compared to available assets.

Returning to the agreement with the IMF, it has been two years since the signing, yet no implementation of crucial conditions has been made. For instance, the Lebanese government has not yet dared to negotiate with bondholders, a step that should have been initiated in March 2020 when Hassan Diab’s government made the “catastrophic” decision to cease Eurobonds’ payments, declaring Lebanon’s failure to meet its obligations.

Certainly, there has been some progress in terms of certain conditions, such as conducting an audit of the external assets of the Central Bank of Lebanon. Additionally, the government proposed a plan to address the banking sector’s situation, though it poses an additional catastrophe in itself.

The proposed bill for deposit handling entails disposing of 80% of deposits by converting a portion from dollars to Lebanese pounds, another portion into bank stocks, or a fraction into a bond with 0% interest over 30 years. From the total of $91 billion in foreign currency deposits, around $16 to $20 billion, approximately 20%, will be recovered over 15 years. When converting a portion of the deposits from dollars to LBP, the corresponding amount is written off from the IMF budget. Similarly, each time a fraction of these dollar deposits are transformed into bank stocks, this value is deducted from the Central Bank of Lebanon’s budget, which means that the mindset regarding the necessity of deposit disposal persists. According to sources closely following negotiations with the IMF, experts opted to change their stance and retract this approach, after being persuaded that disposing of deposits is impossible and would only further harm the remaining banking sector.

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