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1- The Institute of International Finance estimates the average exchange rate, which will probably be used to convert the value of the projected nominal GDP in Lebanese pounds to US dollars, at an exchange rate lower than that weighted by the International Monetary Fund.
2- The IIF’s fiscal deficit projection is consistent with the real figures for the first eight months of this year, which show a lower deficit than in the same period last year. The projected sharp drop in the public spending-to-GDP ratio is expected to offset the collapse in public revenues. Consequently, the Institute of International Finance estimates a fiscal deficit of 9 percent of GDP and a primary deficit of around 4 percent of GDP by 2020.
The current account deficit will decrease from $ 11 billion in 2019 to $ 3 billion in 2020 due to a 50 percent drop in imports, but the decrease in capital flows will negatively offset the improvement in the account item current, which will lead to a depletion of foreign exchange reserves.
Repairs required
Regarding the main reforms expected by the International Monetary Fund, Iradian indicated, in his report, that the International Monetary Fund, the World Bank and other official donors have suspended financial support to Lebanon mainly due to the repeated failure of the political class to implement the main reforms expected by the IMF and society. International, namely:
Conducting a full audit of the Central Bank accounts (forensic audit) to activate transparency and accountability.
Approval of the law that establishes capital controls (Capital Control).
Guarantee the independence of the judiciary to reduce corruption and activate accountability.
– Unification of multiple exchange rates with the arrival of the first batch of external financial support.
Rehabilitation of the Lebanon Electricity Corporation and end of resulting losses.
Achieve a large primary fiscal surplus, starting in 2022, to guide public debt towards a sustainable downward trajectory.
Restructuring of the financial system, which will include recapitalizations and bank mergers.
– Establish an expanded social safety net to provide maximum protection to those most in need.
The elimination of subsidies
Regarding the lifting of subsidies, Iradian pointed out that the available reserves of the Banque du Liban are being depleted and the Central Bank will no longer be able to continue bearing the cost of importing basic products, including fuel, medicine and wheat. Noting that at the end of last November, foreign exchange reserves reached $ 17.8 billion, which means that there is only $ 800 million that can be used to support the import of commodities, which is enough for only 6 weeks, and noted that the remaining $ 17 billion is the mandatory reserve for banks.
And he considered that imports of subsidized goods do not provide effective support to the poor, and in turn deplete the reserves of the Central Bank, explaining, for example, that fuel subsidies benefit those with high incomes and encourage smuggling into Syria. , where gasoline prices are more than double the price in Lebanon. Therefore, Iradian, who has worked for the International Monetary Fund for 17 years, argued that the total or gradual elimination of subsidies, combined with the provision of a well-designed social safety net (that directly ensures cash transfers to poor) could result in a significant improvement in the well-being of low-income people. On the other hand, he warned that eliminating subsidies in the next period would lead to higher prices and negatively affect real income.
Public debt
The report indicated that the International Monetary Fund program could put Lebanese public debt, which is expected to peak at 221 percent of GDP this year, on a steady downward trajectory by implementing the financial measures mentioned in the government plan. Given that Lebanon is defaulting on its external debt, the process of restructuring its public debt is likely to be carried out in parallel with the IMF program. In the event that certain public debt restructuring scenarios are implemented, in addition to financial reforms, and the possibility of a parallel exchange rate increase to around 5,500 Lebanese pounds against the dollar by the end of 2021, the public debt / GDP could decline from 221 percent in 2020 to 127 percent in 2021.
Two scenarios for 2021
Given the unconfirmed outlook for the year after 2020, Iradian has prepared two possible scenarios:
The optimistic scenario assumes that a new government of independent experts will soon be formed, reforms will begin, an agreement will be reached with the International Monetary Fund, and urgent foreign financial assistance will be triggered. In this case, the economy will begin to recover, while the additional inflationary pressures derived from the lifting of subsidies to basic products will be mitigated by the significant rise in the parallel exchange rate to 5,500 pounds against the dollar.
As for the pessimistic scenario, it assumes the continuation of the status quo, including the ongoing political paralysis, in the absence of real reforms and external financing. In this scenario, the Lebanese economy will contract further, the parallel exchange rate will decline further, the inflation rate will remain above 100 percent, official reserves will be depleted and most of the reserves required by the banks at the Banque du Liban.
The banking sector
And if banks will be able to restore confidence and recovery, Iradian said that confidence in the banking system has been severely affected and it may take time to recover, considering that a comprehensive financial strategy will make the banking sector viable and ensure the integration of the banking sector. Lebanon in the international financial system, emphasizing the need to restructure. The banking system, which includes the recapitalization and consolidation of the banking system.
In the optimistic scenario, it is possible to begin to gradually lift capital controls in 2022, according to what the evolution of the balance of payments allows, and when the situation of the financial sector stabilizes. Iradian pointed out that the central bank could borrow against part of the gold reserves (currently estimated at $ 17 billion) in order to provide adequate liquidity in foreign currency to the banking system.
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