It added that there are two options, the first, which needs to be avoided, rests on a status-quo scenario of doing nothing that would ultimately lead to total chaos, while the second option rests on an orderly restructuring on the basis of an IMF program that would be crucial for much needed financial adjustment.
It stressed that an orderly restructuring option should be indeed implemented in conjunction with an IMF program with structural and fiscal reforms undertaken by a credible upcoming Cabinet, which would serve to restore confidence and unlock CEDRE funds and other investments in the local economy.
“It ought to be based on the restructuring of the public sector to reduce its borrowing needs, the creation of a sovereign fund with state assets for circa $30 billion which will serve directly or indirectly to bridge the prevailing FX gap, the injection of liquidity into the local banking sector via a loan linked to gold reserves, floating the local currency which reduces the local debt stock and negotiating a discount on Eurobonds investors,” Audi said.
It added that such an orderly restructuring option would ultimately lead to a distribution of the current national losses in a fair and equitable way, a reduction in the public debt to a sustainable level below 100 percent of GDP, freeing up part of the depositors funds without applying haircuts, and finally restoring confidence in the economy and banking sector for them to be able to attract new funds into the domestic economy at large.
Audi indicated that a significant number of theories emerged recently on the roots and causes of the current intense financial crisis, some blaming the state for its long years of mismanagement, others blaming the Central Bank for its unconventional monetary policies and others blaming banks for excessive exposure on the ailing state.
“While there is no doubt that there is a shared responsibility across the different economic agents for the current conundrum, we should not neglect the fact that the real imbalances were driven by the excessive spending of an economy that has been living for decades at above its means amid unconventional domestic policies and acute state mismanagement,” the report said.
“A glance over the past few years prior to the eruption of the recent macro/financial crisis suggests that the inflection point was the year 2014 and exacerbated further since 2016 with the drying up of inflows and the emergence of a foreign currency gap in the balance sheet of the Central Bank.”
The report stressed that BDL FCY Net Reserves started to turn negative in 2014, and reached an estimated -$55 billion today, deteriorating by $56 billion since the end of 2013.
“This is due to an estimated $30 billion of net domestic Lebanese pound to FX conversions over the period, $14 billion interest loss (difference between average yield on BDL FX assets and average cost of FX liabilities) and $12 billion transfers to support government foreign currency payments [Fuel oil for EDL and foreign currency debt service in particular].”
Audi said the policy of the currency peg has been the main driver for the increasing banks’ placements at BDL as it had to guarantee the convertibility of the currency amid significant excessive demand for FX.
“As such, the current real imbalances were driven by maintaining currency stability for long, keeping inflation at negligible levels and assuming a large deal of imports of goods and services in an economy with excessive foreign dependence and lacking domestic productivity amid an excessive spending of an economy that has been living for long at above its means.”
Since 2014, $151 billion were spent on imports and travel expenses abroad ($118 billion and $33 billion respectively), while $93 billion were received from incoming flows (net financial transfers and proceeds of exports, FDI and tourism), leaving a gap of $58 billion, indirectly financed from the financial system’s net foreign assets (BDL and banks).
“In addition, BDL’s FX reserves were used to fund the government unproductive spending [directly and indirectly], in particular foreign currency budgetary spending, while state policy failed to invest in productive sectors or infrastructure, which exacerbated the situation even further within the context of growing infrastructural bottlenecks. Paradoxically, the state ratified a costly public sector wage scale that inflated real wages and fueled adverse currency conversions and outflows.”
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