IMF assistance is a must says government reform plan

A draft of a government reform program being circulated for discussion has placed the emphasis of obtaining external financial assistance to the tune of $10 billion to $15 billion.

According to the draft plan, without such multilateral institution support, the economy would fall short of the main objective of getting a fresh start.

“No reform agenda, as ambitious as it could be, can be implemented when the economy is in free fall. Stabilizing the economy is an immediate priority that requires substantial foreign financial assistance,” the government stated in the draft plan. “External support in the form of a program supported by international multilateral institutions is expected in such situation and constitutes a realistic and efficient way of restoring confidence,” it said.

The plan said that the gross cumulative external funding gap is projected at $27 billion. It assumed that a successful public debt restructuring will enable considerable savings in the external debt service and a gradual return to international capital markets in three years. It also assumes that inflows of private dollar will gradually resume after the full clean-up of the banking sector, including the Central Bank (BDL).

The plan is explicit on the need for an IMF program: “The positive spillover effects of an IMF program are numerous. Though the IMF would most probably not be able to provide sufficient resources to cover all external financing needs of Lebanon for the next five years, even under an exceptional access, it will unlock other sizeable pockets of available funds from multilateral or bilateral partners, and conditioned to the successful implementation of the IMF program. In addition, debt discussions with bondholders will be facilitated in the context of an IMF program, as it would provide an anchor for negotiations, with clear sustainability targets and a methodological framework to rely on. Investors will be far more willing to accept a facial reduction of their debt if they see credible recovery value in what they are left with,” it said.

The plan also calls for a haircut to affect ten percent of depositors. It has estimated a $63 billion gap in the aggregate balance sheet of the Lebanese financial sector – commercial banks and BDL combined.

Other measures include a reduction of the public payroll and benefits, especially to the military, several tax increase measures, and a myriad of loosely described reform measures.

The government said that cash usable reserves at BDL have reached a worrying level and all indicators show that the depletion is not likely to reverse naturally. “External support, in the form of financial commitments but also in support of the Government reform program, is urgently needed to limit the size of the economic contraction, secure basic imported goods, and restore confidence in Lebanon,” it said.

The program rests on eight central and interrelated pillars:

1. A comprehensive debt restructuring strategy that decisively addresses the debt overhang
2. A comprehensive restructuring of the financial system to decisively address accumulated foreign exchange mismatches at the Central Bank and in the banking sector, reveal the embedded losses and re-focus a resized banking system on the distribution of credit to the private sector
3. A strong phased fiscal adjustment, focused on improving tax compliance, streamlining expenditure and reforming the public sector, including reforming Electricite du Liban (EDL)
4. Moving to a more flexible exchange rate policy beyond the near term to lessen the strains on the balance of payments and improve competitiveness
5. Growth-enhancing reforms that include measures and laws that would increase productivity and reduce costs, which would enhance the competitiveness of the economy
6. A social sector reform agenda to improve social indicators and strengthen or develop social safety nets to protect the most vulnerable segments of the population
7. An ambitious national anti-corruption strategy, addressing the roots of a major impediment to growth and social justice
8. International financial assistance at favorable terms to close the large external financing gap and finance the development of new infrastructures

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