IMF Bailout May Be Half What Lebanon Sought When Talks Began

Lebanon may only count on the International Monetary Fund for as little as half the bailout it had originally sought to help unlock other assistance the country critically needs to bridge the crisis, according to a top official.

With talks over a $10 billion loan program stalling for much of this month, the IMF could provide an amount in a range of $5 billion to $9 billion, Economy Minister Raoul Nehme said in an interview with Bloomberg Television. Although Lebanon’s economic collapse is accelerating, Nehme gave no time frame for when a deal might be reached.

Should negotiations succeed, Lebanon will look to cover the rest of its $30 billion in total needs by seeking help from allies and capitalizing on pledges of about $11 billion made by international donors in 2018 in exchange for a promise of reforms, according to Nehme, a 64-year-old former banking executive.

“All of them are waiting for the IMF, in my opinion,” he said. Without an IMF bailout, Lebanon is looking at a “real black scenario,” and officials are working hard to secure a package as quickly as possible, Nehme said.

Over four months after defaulting on Eurobonds for the first time, Lebanon has succumbed to its worst economic crisis as decades of corruption and mismanagement shattered its finances and spilled into nationwide protests just when the global pandemic crippled trade and tourism.

The government and local lenders are still hashing out a compromise over calculating losses in the financial sector after their differences set back progress with the IMF. Lazard Ltd., the government’s financial adviser, and those counseling the central bank are in discussion to try to move quickly, Nehme said.

The economy has increasingly come apart as Lebanon’s fixed exchange rate crumbled in the face of a dollar shortage, touching off food inflation that approached an annual 250% last month. Nehme said poverty has already spread to half the population and will worsen further by the end of the year.

Read more: Lebanon Fences Off More of Its Economy Against Currency Crisis

On Monday, Moody’s Investors Service downgraded Lebanon to C, the lowest rating in its scale and the same level as crisis-ravaged Venezuela. It warned that losses by bondholders through the country’s current default could exceed 65% and questioned the likelihood of outside assistance any time soon.

“In the absence of key steps toward plausible economic and fiscal policy reform, official external funding support to accompany a government debt restructuring is not forthcoming,” Moody’s said.

Peg Unravels
The central bank is burning through reserves to subsidize wheat, fuel and medicine at the official peg of 1,507.5 pounds per dollar as the black market rate hovers around 8,000. It’s now supporting essential items and food at the rate of 3,900, the same level used by local lenders to allow dollar withdrawals.

Nehme has launched a campaign to target what he’d called “greedy” traders to stem the sharp rise in food prices, saying businesses have taken advantage of the currency crisis to make profits that exceed the margin set out by the ministry. He has closed down businesses and fined others for breaching the limit.

The minister has also worked with the central bank on rolling out hundreds of subsidized food and other essential items last month. In the interview, Nehme said the government can’t remove subsidies altogether but it’s possible to reduce them after getting IMF aid.

Authorities also aren’t planning to introduce a new change to Lebanon’s foreign-exchange policy without a bailout.

“Until we have an IMF program, we will stay with two official rates,” Nehme said. “A crawling peg is the ideal solution but it has to accompanied by social measures.”