Why an IMF loan is not the solution to Lebanon’s economic crisis

With 82% of Lebanon’s population living in poverty, the country is in desperate need of political and economic reform

Two children rummaging through rubbish bins in Hamra, west Beirut, September 2021

 | Stephen McCloskey. All rights reserved

Stephen McCloskey-29 September 2021

In one of the lesser-quoted lines from the movie ‘Casablanca’, a young refugee from Bulgaria seeking passage to the US tells the anti-hero, Rick, that back home “the devil has the people by the throat”. That’s a pretty accurate description of the current plight of the majority of people in Lebanon who have been subjected to a catalogue of national catastrophes since 2019. And the answer: an IMF (International Monetary Fund) bailout widely prescribed as the only solution.

The UN reported this year that 82% of Lebanon’s population is suffering from multidimensional poverty meaning that they are subjected to deprivations in one or more of the following indicators: access to health insurance, electricity, public utilities (water, sanitation etc), internet access and employment.

The reason is simple: the World Bank estimates Lebanon’s economy to have experienced one of the ‘most severe global crises episodes’ in the past 150 years. Lebanon’s GDP has shrunk from $55bn in 2018 to an estimated $33bn in 2020 with GDP per capita falling by 40%.

This kind of collapse, argues the bank, is normally associated with ‘conflicts or wars’. In Lebanon’s case, the argument goes, it follows a series of disasters triggered by an October 2019 popular uprising against corruption and austerity, which resulted in the resignation of the government. The initial wave of non-sectarian and peaceful protests against the country’s confessional and corrupt political system was soon met by ‘excessive force’ by the military and some political factions.

Currency crisis

And then, in March 2020, the economy was sent spiralling into freefall when the state defaulted on a $1.2bn Eurobond debt repayment caused by the depletion of currency reserves to ‘a worrying and dangerous level’. In 2020, Lebanon’s national debt stood at $97.92bn or 170% of its GDP as the only political consensus, according to the World Bank, was ‘in defense of a bankrupt economic system, which benefited a few for so long’.

Then just a few months later, on 4 August, Beirut’s port suffered one of the largest non-nuclear blasts in history when 2,750 tonnes of ammonium nitrate, recklessly stored in a hangar since 2014, exploded. Some 217 people were killed, 7,000 injured and 300,000 displaced, with the material damage estimated at $4.6bn.

A memorial at Beirut's port reads 'Act for Justice', September 2021 | Stephen McCloskey. All rights reserved

Leaked documents have shown that successive governments were warned at least ten times of the dangers of stockpiling the chemicals, but either ignored the problem or passed the buck. Public officials and politicians have used the right to immunity over the past year to shield themselves from an investigation into the blast. For the majority of Lebanese, the port explosion was reflective of a state in the grip of cronyism, unaccountability and political negligence, with Amnesty International accusing authorities of “shamelessly obstructing victims’ quest for truth and justice”.

Yet another government collapsed under the weight of public anger at the port explosion, leaving the state rudderless during the emerging COVID-19 crisis that, to date, has seen 8,240 deaths and 618,580 cases in a state of less than seven million people.

On a visit to Lebanon last week, I found the Lebanese pound (LBP) trading at 18,000 to one US dollar on the black market, which is a depreciation of 90% from the rate of LBP 1,506.5/$1 in 2019. Lebanon’s annual rate of inflation rise is the highest in the world, which, for the majority of citizens paid in pounds, means the cost of essential items like food and fuel have rapidly accelerated while wages in real terms sharply depreciated.

This problem was compounded by a 68% drop in tourist spending in 2020 because of the pandemic, which in turn reduced the levels of hard currency circulating in the economy. The effects were very visible on the streets, with adults and young people, sometimes working in teams, rummaging through rubbish tips to look for food or gather plastic bottles to recycle for a pittance.

A new government of the old order

Under intense pressure from the US and EU, President Michel Aoun agreed to form a new government this month with billionaire businessman Najib Mikati as prime minister. Mikati has had two previous terms as prime minister in 2005 and 2011.

Far from representing a new broom sweeping away the old political order, he is the consensus candidate of the establishment parties and their interests. The new prime minister immediately pledged to move forward with IMF talks to receive billions of dollars in aid, just as President Aoun called for the “help of the IMF, the World Bank, regional and international funds”.

Among the ‘reforms’ being considered by Mikati as part of his dialogue with the IMF is the removal of state subsidies on fuel, medicine and wheat that are likely to deepen the economic crisis for the majority of citizens. Lebanon already has one of the most unequal wealth distributions in the world, ranking 20th globally with a Gini coefficient of 81.9%. A report by the UN in 2020 found that Lebanese billionaires jointly owned $13.4bn in 2019 which “is equivalent to the wealth of the bottom 62.4% of all adults in Lebanon”. The removal of state subsidies is likely to accelerate inequality with the UN finding that:

“households at the top of consumption distribution are more likely to be sheltered from domestic developments through their secure contract jobs, or earnings and assets in foreign currencies. Households at the bottom are much more exposed to income and price shocks, as they lack safety nets or promptly fall through them”.

The same report estimated personal wealth in Lebanon at $232.2bn, which suggests that the country could go a long way toward easing the plight of the most vulnerable by mobilising “its own substantial resources” with a “fair and progressive system of shared responsibility”.

The IMF is not the answer

Lebanon is in desperate need of political and economic reform but an IMF ‘bailout’ is likely to only make things worse. A briefing by Bretton Woods, an NGO that challenges the World Bank and the IMF, suggests that political elites and private sector interests are strongly opposed to the root and branch reforms needed to restructure the financial sector including a “forensic audit of the Central Bank, a default and haircut on internal debt owed to private banks”.

The IMF’s neoliberal playbook when lending to heavily indebted countries includes cutting public services, devaluing the local currency and removing subsidies; measures likely to enhance social unrest.

A repayment of any bailout is likely to fall on the shoulders of an already vulnerable population

The lending programmes of the IMF and its sister organisation, the World Bank, have been disastrous for the Global South. Their structural adjustment programmes have dramatically increased the indebtedness of poor countries and their capacity to manage their economies. The Jubilee Debt Campaign estimates that since the start of the pandemic, the IMF has agreed 28 loans to highly indebted countries which are being used to repay private lenders during the COVID-19 crisis rather than meet social needs.

A repayment of any bailout of the financial sector in Lebanon is likely to be socialised and fall on the shoulders of an already vulnerable population without addressing the cronyism, corruption and structural causes of the crisis. A more just and rights-based alternative could include: a more equitable tax system to support wealth redistribution; measures to encourage productive investment; and the UN’s proposal of a solidarity fund to mitigate the rising levels of poverty.

Adding to the debt burden of a highly unstable economy is likely to represent a ‘band-aid’ of short-term proportions that will only add to Lebanon’s long-term economic woes.