Top Lebanese officials conceded they’ve made little headway in meeting the conditions set as part of a preliminary agreement with the International Monetary Fund, as they made a rare outreach to bondholders more than two years after the government’s debt default.
The deal reached last month requires Lebanon to agree with its creditors, which include major international hedge funds, on a plan to restructure its external debt and restore credibility. But the IMF board won’t consider it for final approval until authorities implement a series of much-delayed reforms, such as overhauling the electricity sector and introducing capital controls.
Three draft bills have been submitted to parliament but none have yet won approval from lawmakers, Deputy Prime Minister Saade Chami told bondholders during a webcast on Wednesday. Counting the $9 billion of debt in arrears, Chami said a total of $37 billion worth of Eurobonds is included in the scope of the restructuring.
“We are facing an unprecedented crisis,” said Chami, who headed the Lebanese side in the negotiations with the fund. “We need the help of all, including our creditors, in order to ensure debt sustainability within the context that was envisaged by the IMF.”
With parliamentary elections days away, the government has a narrow window to push through measures that have been repeatedly blocked by legislators over the past two years. In March 2020, the government announced it would default on foreign debt to conserve what remained of the central bank’s reserves for imports of food, fuel and medicine.
Chami, who appeared alongside Finance Minister Youssef El-Khalil, laid out the dire state of Lebanon’s economy as part of their appeal to creditors.
Public debt was around 360% of gross domestic product at the end of last year, while the country’s foreign-exchange reserves reached about $12 billion and have since declined further, Chami said. Under the assumptions made by Lebanese authorities and the IMF, debt should fall to 101.5% of GDP in 2026.
Inflation is raging and jobs are disappearing while key legislation makes its way through parliament. The looming elections and the end of President Michel Aoun’s term in October risk causing further delays.
International investors — including BlackRock Inc. and Ashmore Group Plc — hold a substantial chunk of Lebanon’s Eurobonds. Reaching a deal with them is also essential if the government plans to eventually return to the debt market.
Lebanese dollar debt due in 2022, one of the nation’s most liquid bonds, fell half a cent to 10.9 cents Wednesday. Meantime, debt due in 2021 edged higher to 11.09 cents on the dollar.
Lebanon’s deal with the IMF for a $3 billion loan would help it overcome one of the world’s worst financial crises in over a century.
But for the agreement to move forward, the IMF additionally wants Lebanon to take several steps, ranging from an externally-assisted evaluation of each of the largest banks to an audit of the central bank and the passage of a banking secrecy law. Lebanon also needs to unify the myriad exchange rates that have been used since the crisis.
The government let its decades-long currency peg unravel after dollar inflows dwindled in 2019. The banking system has been crippled ever since, with de-facto capital controls in place to this day but without any official backing.
The country won’t return to a fixed exchange rate, and temporary capital controls are among the changes it plans to implement, Chami said.
Lebanon began bailout talks with the IMF after the default and drafted a plan to restructure its entire debt stock, which would have largely wiped out the capital of the country’s banks. The talks stalled after local lenders and the central bank, the country’s largest debt holders, campaigned for a different approach to assess and distribute the losses.
An economic recovery program is now in the works that would help address financial sector losses, which Chami said are estimated at around $72 billion. To plug the hole, authorities have proposed measures such as bail-ins and a haircut on dollar bank deposits.
Chami said Lebanon wants to protect savers with deposits of up to $100,000. Lenders need capital injections, he said, adding it was impossible to say how many Lebanese banks will survive, merge or disappear.
The central bank’s full audit will be completed by June, he said.