Lebanese government faced with 'difficult decisions' amid dire economic situation

Weighing the pros and cons of paying maturing bonds, Nader said defaulting or paying will have dire consequences.
Saturday 22/02/2020
Anti-government demonstrators block a road during a protest against parliament giving a confidence vote to the cabinet, in Beirut, February 11. (AFP)
Foggy future. Anti-government demonstrators block a road during a protest against parliament giving a confidence vote to the cabinet, in Beirut, February 11. (AFP)

BEIRUT - The Lebanese government is undecided whether to default on a Eurobond debt payment for the first time to preserve declining foreign currency reserves amid growing popular uproar against uncontrolled increases in prices of basic consumer goods.

Lebanon asked seven firms and the International Monetary Fund for advice on dealing with the country’s worst economic and financial crisis in decades, including options regarding its 2020 Eurobond maturities. The first Eurobond, worth $1.2 billion, matures March 9.

Lebanese protesters demonstrated outside the Ministry of Economy and Trade in Beirut calling for tighter measures to monitor rocketing prices and protect consumers from “greedy” merchants.

The unemployment rate in Lebanon hit dangerous levels, reaching an unprecedented 40% within a period of four months, a study by Infopro Centre for Economic Information stated.

“It is estimated that from October 17, 2019, until the end of January 2020, more than 220,000 jobs have been temporarily or permanently lost, a 38% increase from a survey in November,” Infopro Founder Ramzi el-Hafez said.

The study said that during that period, of 300 surveyed companies, 12% had ceased or suspended operations, a 20% increase since November.

“The fragility of the private sector had started since the beginning of 2019, with companies reducing their overhead and number of employees and lowering salaries,” Hafez said. “By October 17, most companies had already depleted their reserves and many had lost their ability to resist the crisis.”

Tony Ramy, president of the Syndicate of Owners of Restaurants, Cafes, Night-clubs and Pastries in Lebanon, said 785 institutions dealing with food and drink closed from September 2019-February 2020.

Lebanese Former Minister of Social Affairs Richard Kouyoumjian said: “Two million Lebanese will live below the poverty line in 2020 if the new government does not give special attention to this issue. The situation has reached unprecedented dangerous levels.”

Lebanon has been suffering from slow growth, high unemployment rates and decades of widespread corruption and mismanagement that triggered nationwide protests against the political elite since mid-October.

The Lebanese pound has lost nearly 60% of its value on the black market. Lebanon also has a massive debt, standing at $87 billion -- 150% more than the country’s GDP.

The most pressing issue the new Hezbollah-backed government of Prime Minister Hassan Diab faces is the looming Eurobond maturity in March. Parliament Speaker Nabih Berri, an ally of Hezbollah, called for restructuring the debt in a first public comment on the issue by a senior official.

“The core issue is not whether we pay or not,” said Sami Nader, director of the Levant Institute for Strategic Affairs. “More important is to have a serious and feasible government plan for reforms and a timetable for implementation.

“Based on that, you can tell your bond holders, I am very serious about my reforms, look at my road map, I started with the priorities such as electricity and we need to reschedule the debt…

“I think no bond holder will refuse to reschedule in that case because it is in their interest to see the bonds, which have lost 40% of their value, improve. If the government is able to start big significant reforms immediately, that would be a game-changer,” Nader said.

Weighing the pros and cons of paying maturing bonds, Nader said defaulting or paying will have dire consequences.

“Negotiating after defaulting is a problem. Creditors can hold all the assets of the Lebanese republic everywhere in the world. Lebanon won’t be able to borrow from international markets in the future and it would be most damaging for the banking system and people’s deposits,” he said.

“Honouring the debt at the expense of paying for basic food imports is also a big problem but, if the government starts introducing meaningful reforms, then it will convince the bond holders to negotiate the rescheduling of the payment and will show that we are on the right track,” Nader added.

The United States and the European Union have said financial assistance to Lebanon depends on the government’s commitment to implement reforms and to fight endemic corruption.

A senior US State Department official quoted by Al Arabiya on condition of anonymity said: “They (Lebanese officials) know how to introduce genuine reforms which, if implemented, will open the doors wide for international, US and EU investors in Lebanon but first the Lebanese government has to make some difficult decisions.”

3