Crises

A crisis is defined as a time of intense trouble or danger, a time when a difficult or important decision must be made. Economic crises have occurred frequently in several Arab states, particularly since the onset of the Arab Spring in 2011. Of the Arab countries without meaningful oil revenue, more than half have needed some form of IMF support over the past decade; three - Egypt, Tunisia and Jordan - took loans.

And so another such crisis has emerged, this time in Lebanon. With its economy collapsing, the country’s newly-formed coalition government, put together in January after months of multi-party haggling, appears united solely in its reluctance to ask the International Monetary Fund (IMF) for help. But ask it has. A first round of discussions with an IMF team was held on February 20, ostensibly to obtain the Fund’s advice in addressing immediate economic issues. Foreign currency reserves to pay for essential imports are nearly depleted; the country’s public debt exceeds 150% of GDP. Funds to address a recent outbreak of the COVID-19 virus infection (three confirmed cases at the end of February) are severely limited. As a $1.2 billion Eurobond payment is due March 9, it seems that more than just advice is needed now - without an advance on an eventual IMF line of credit, it is difficult to think how the government will avoid default on its payment obligation.

And yet, if Lebanon is able to strike a deal for an IMF bailout loan, the economic adjustments stipulated under any agreement will prove onerous for especially Lebanon’s poorest . The World Bank warned in November that the poverty level in Lebanon, estimated at 27% in 2018, could rise to as much as 50% on current trends. The state spends billions on electricity subsidies and make-work projects, expenditures that under typical loan agreements with the IMF would be cut back or eliminated in order to achieve some semblance of fiscal stability. As well, to enhance export competitiveness, Lebanon would likely be required to float its currency, pegged since the 1990s to the US dollar at 1500 pounds to a US dollar but trading on the black market at a rate closer to 2000. (Under an IMF Loan Facility signed in 2016, Egypt unpegged its currency, which almost immediately lost half its value.) A falling currency would, with a lag, lead to more exports, but in the short term the cost of imports would increase, affecting the purchasing power of the poor in Lebanon disproportionately.

IMF-induced austerity may be a necessary condition if economic health is to be restored in Lebanon. But without structural reforms, including measures such as investments in education, and freer trade with neighbouring middle-eastern economies through reductions in tariffs and other trade barriers, an impoverished Lebanon, facing continued political instability (and more refugees from the failed state of Syria), could persist.

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