By Tom Perry and Maha El Dahan

BEIRUT (Reuters) – In its bid for IMF support, Lebanon must address a question it has evaded since the economy imploded two years ago: how should it distribute the huge losses caused by its financial collapse?

To date, it has been quite clear that ordinary Lebanese are paying the price. They have watched their savings vanish, seen their currency fall, and witnessed basic products disappear off the shelves.

A plan that estimated a hole of $90 billion in Lebanon’s financial system was rejected by banks who claimed it charged too much and the ruling class, which had pushed Lebanon into crisis.

After a year of bitter bickering, the government and plan for Lebanon have failed to materialize.

Najib Mikati (the billionaire tycoon) is the new prime minister. He and his government must acknowledge and share these losses in order to fulfill a promise of International Monetary Fund support for economic reforms.

In 2019, the financial system crashed due to decades of corruption, waste and unsustainable financing. Slowing inflows into the banks, which heavily lent to the government, was the trigger.

Mikati may have a better shot in IMF talks than his predecessor partly because there is now broader political recognition – including, it seems, within Iran-backed Shi’ite group Hezbollah – that an IMF deal is the inescapable path to aid.

Numerous people argue that the IMF crisis has brought more suffering than the most difficult IMF adjustment programmes.

According to political sources, the IMF has already begun to implement a variety of reforms such as cutting subsidy and unifying exchange rates in the country’s cash-strapped economy.

‘CRITICAL OBSTACLE’

Yet many analysts are deeply sceptical about whether the government can embark on significant reforms, even if it can start IMF negotiations, or fix problems like the fuel shortage.

It was the same elite that led Lebanon to its ruin and left it to fester. The World Bank condemned Lebanon’s “deliberate” inaction on policy.

The government is only eight months away from elections, which will be a major concern for the main parties.

The World Bank states that the Depression is among the worst since the middle of the 20th century. In 2018, the country’s gross domestic product declined by 40%. This was in contrast to 2020. Even through the 1975-1990 civil war in Lebanon, banks remained functional and solvent.

It will not be easy to overcome the initial hurdle of an IMF agreement – agreeing upon the allocation of losses. The plan was rejected by banks and other stakeholders last year.

According to Goldman Sachs (NYSE :), reaching an agreement over the issue will likely prove difficult and would be a major obstacle to the recovery process.

An IMF source in Lebanon told us that the loss and momentum were both possible, making it more likely to reach an agreement.

Although some banks still hope that their U.S. dollars deposits will be converted into pounds to pay off their debts, the source stated that banks are more open to the idea of a “proper restructuring”.

The source stated that we don’t need to go to Finland or Sweden in order to agree to an IMF program. “We must do as little as possible, which includes acknowledging and distributing losses to the central bank of the country and the banking sector.

The source said that a capital control law and unified exchange rates must be passed.

READY TO ENGAGE

The IMF has said it has had courtesy calls with members of the new government and stands ready to engage.

According to the government’s statement, they will revise and expand last year’s plan. This included IMF-endorsed numbers.

This plan angered banks partly due to the provisions for a shareholders bail-in which would wipe their capital out. Banks reacted with their own suggestions, including the creation of a $40 billion fund for state assets to settle debts.

Riad Salameh (central bank governor since 1993) also reacted last year to the losses. Legislators representing various factions of the ruling elite came up the numbers that represented between 25% and 50% of the total amount included in the plan.

Youssef Khilil, an ex-official at the central bank, is now the finance minister.

Alain Aoun of the Free Patriotic Movement (founded by his uncle, President Michel Aoun) stated that both the finance ministry and the central bank will be working together better to resolve the losses.

“What has changed?” “The team has changed,” he said to Reuters. “Last year, some parties declared ‘never touch subsidiaries’. Look at where we are today. Everybody is giving in gradually to reforms, either voluntarily or as a result of being forced to.

We are desperately trying to obtain dollars. The IMF promises aid but we must agree to a financial plan. “Everybody will (have to) agree” he stated.

However, the government still faces a great deal of doubt.

The government’s policy program did not provide any details on the major reforms that donors wanted, such as fixing the state-run electric sector. This sector has taken a lot of public money but still generates very little power.

Nadimhoury, the executive director at Arab Reform Initiative, expressed doubts that the new government will engage with the IMF.

He called this “the government of restoration” and said it could spend $1 billion on Lebanon in a part of an IMF General Allocation of Special Drawing Rights.

“They will stabilise this country and sell it under the title of reforms.”