Lebanese PM signals difficulty in agreeing financial recovery plan

Prime Minister Najib Mikati indicated on Thursday difficulties in agreeing a financial recovery plan critical to steering Lebanon out of its devastating economic collapse, calling it a “Kamikaze operation”.

A plan for addressing a $70 billion hole in the financial system is seen as the starting point for talks with the International Monetary Fund and vital to reviving the paralysed banking system.

“The economic recovery plan is not easy…We think it is a difficult process, a Kamikaze operation,” Mikati said in a televised news conference after the cabinet approved the 2022 state budget.

Lebanon has been in crisis since late 2019 when the financial system unravelled under the weight of huge public debts, sinking the currency by more than 90% and plunging a majority of the population into poverty.

“The recovery plan is not easy, not easy, not easy and is taking all this time,” Mikati said in a televised news conference after cabinet approved the 2022 state budget.

He said that what had been reported in the media about the plan was untrue. “We have a number of options and we are discussing them with the IMF,” Mikati said.

A draft recovery plan seen by Reuters last month proposed converting the bulk of $104 billion of hard currency deposits in the banking system to Lebanese pounds, with only $25 billion being returned to savers in U.S. dollars.

A previous recovery plan drawn up by a government in 2020 was shot down by commercial banks, the central bank and powerful political parties who disagreed over the size and distribution of losses, torpedoing IMF talks at the time.

The Lebanese pound has slumped by more than 90% since the financial crisis erupted in late 2019.

Though the government has yet to formally cancel the old pegged exchange rate of 1,500 pounds to the dollar, the new budget for the first time applies a rate much closer to the market value for customs transactions of around 20,000.

The budget projects spending at 47 trillion pounds with a deficit of around 7 trillion pounds, Mikati added, equal to around $330 million at the parallel market rate on Thursday.

He did not say what GDP growth forecast had been used in drawing up the budget, or give the deficit as a percentage of GDP.

Mikati said this deficit was set to increase when spending for the crippled state electricity sector was approved.

The budget still requires the approval of parliament.

“This is a stabilisation budget,” Samir Daher, an economic adviser to Mikati, told Reuters.

“It’s like someone is falling from the 7th floor of a building and you want them to land on their feet, not on their head. There’s still a long way to go after its approved.”