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Economic Contraction
Home›Economic Contraction›Lebanon faces “difficult task” as IMF negotiations resume, says Capital Economics

Lebanon faces “difficult task” as IMF negotiations resume, says Capital Economics

By Amber C. Lafever
October 25, 2021
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Lebanon faces a “difficult task” of securing funds from the International Monetary Fund after Lebanese authorities entered into technical talks with the multilateral lender last week to lift the country out of its deep financial crisis, according to Capital Economics.

For starters, the indebted country will have to restructure its defaulted Eurobond debt to even get a deal with the IMF, because the fund won’t lend if it considers a country’s debt unsustainable, Capital Economics said. in his Mena Economics Weekly report.

“Given previous attempts to negotiate with foreign creditors, this will prove difficult,” the UK economic research consultancy said. “Haircuts over 90 percent may be necessary and complications with class action clauses will lengthen the process.”

Lebanon is suffering from one of the most severe economic depressions on record and a deal with the IMF is widely seen as the only way for the economically vulnerable country to unlock the aid it desperately needs. Lebanon defaulted on around $ 31 billion in Eurobonds in 2020. Its currency has lost more than 90% of its value against the US dollar, leading to soaring inflation, rising unemployment and poverty.

Lebanon must undertake a “gigantic to-do list” as part of any deal with the IMF, according to Capital Economics.

Topping the list is the overhaul of its banking sector.

“Local banks hold much of the defaulted debt and the required write-downs could wipe out their capital and force the government to recapitalize at a very high cost,” the report said.

The Lebanese pound will also have to be devalued and the exchange system simplified.

With the currency trading at a discount of more than 90 percent from the dollar’s official black market peg, Lebanese officials are likely to weaken the currency to par with that level, according to Capital Economics.

The tasks ahead are now further complicated by the legislative elections to be held in March.

“While this supports efforts to promote democracy and fight corruption, it sets a deadline for the current government to address these enormous challenges or risk lengthening the country’s economic pain,” the report said. .

Lebanon’s economic crisis ranks among the top 10 global crises – perhaps even the first three – since the mid-19th century, the World Bank said in June.

The Lebanese economy fell to around $ 33 billion in 2020, from nearly $ 55 billion in 2018. The economy shrank 20.3% last year, after contracting 6.7% on previous year, according to the World Bank.

The Lebanese private sector continued to contract in September due to lower production and new orders, fuel shortages compounding political instability and weak domestic demand.

The Blom Lebanon PMI, which measures operating conditions in the private sector, rose to 46.9 last month, registering only a marginal increase from 46.6 in August. A reading below the neutral mark 50 indicates contraction.

Update: October 25, 2021, 5:30 a.m.


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