A new Lebanese government has taken office after a 13-month political deadlock, but the road to economic recovery is expected be rough with the new cabinet having to prove it can provide the political stability that will allow implementing tough reforms and conditions demanded by international institutional doners, a new report from the Institute of International Finance (IIF) said.
Lebanon has been in a deep political and financial crisis with its central bank having nearly depleted its dollar reserves leading to shortages in the country dependent on imports. Depositors have been frozen out of their accounts, inflation is in triple digits and poverty has deepened, IIF noted.
"It is hoped that the new cabinet, headed by Najib Mikati and apparently supported by more than 70 percent of lawmakers in the parliament, will arrest further deterioration in the economy and lay the foundation for economic recovery," said Garbis Iradian, Chief Economist, MENA at the IIF.
The cabinet is expected to start soon implementing the reforms, including steps to eliminate a wide range of distortions in the economy, while at the same time managing public anger and tensions resulting from the lifting of subsidies by end- September, the report said.
Last week the IMF said Lebanon will receive approximately $1.1 billion in special drawing rights or SDRs, with $860 million marked for 2021 and $275 million for 2019. The money will be deposited into the accounts of Lebanon’s Central Bank (BDL).
Since the new cabinet was announced, the Lebanese pound gained in value by more than 30 percent against the US dollar in the parallel market. "But there is much uncertainty on the possibility of an agreement with the IMF to lift the economy out of its current crisis," said Iradian.
The reforms expected by the IMF include a full audit of the central bank’s accounts and public institutions, legislation to formalize capital controls, independent judiciary to reduce corruption, unify the multiple exchange rates, reform of the electricity company (EdL) and restructuring of the financial system.
"We expect a 50 percent chance to carry out the reforms needed to achieve macroeconomic stability and arrest further deterioration," Iradian said.
The IIF expects the economy to contract by about 8 percent this year on top of the 26 percent contraction of in 2020. "Such contraction, combined with 90 percent depreciation of the exchange rate on the parallel market, has shrunk the nominal GDP by more than half in US dollars based on our weighted average exchange rate."
The new government has begun moves in the right direction by raising gasoline prices on Friday, thus removing a subsidy, and has signed a new contract with restructuring consultancy Alvarez & Marsal (A&M) to carry out a forensic audit of the central bank.
(Reporting by Brinda Darasha; editing by Daniel Luiz)