Last minute gov’t decision:
Financial recovery and policy

Measures seen as partial

fulfillment of IMF preconditions

In its last official meeting before the end of its mandate, the outgoing government approved last week a plan intended to fulfill some of the conditions stipulated in the initial staff-level agreement with the IMF.

The Cabinet approved, amidst several dissensions, two documents: ‘Financial Sector Recovery Strategy’ and ‘Note on Economic and Financial Policies’.

The Cabinet is now a caretaker government. Parliament still has to approve the plan, which includes restructuring the banking sector and amending the banking secrecy law.

The IMF and the international community have been demanding that Lebanon implement wide-ranging economic and financial reforms in order to release loans and investments worth billions of dollars.

Excerpts from the Financial Sector Recovery Strategy
The order of priority in absorbing the losses of the financial sector will be respected: First, shareholders’ equity and subordinated debt securities will be written off and then deposits of concerned parties will be dealt with

Small depositors in each viable bank will be protected to the maximum extent possible within a minimum limit …Increases to the deposit account balances after March 31, 2022 will not benefit from this protection

All banks that are not able to survive will be dissolved in accordance with the bank restructuring draft law that will be approved by Parliament. Depositors in such banks are likely to recover less than the minimum limit stated above

The multiple official exchange rates will be abolished and the Sayrafa rate will be adopted as the unique official exchange rate

The accumulated negative capital of the Central Bank (BDL) exceeds $60 billion, according to government estimates but determining the actual value of the capital needs more thorough auditing

The government will carry out an audit of BDL’s balance sheet. On the basis of this audit, a big chunk of BDL’s foreign currency obligations to banks will be cancelled in order to reduce the deficit in the Central Bank’s capital and close BDL’s net open foreign exchange position

This strategy also includes a partial recapitalization of BDL through sovereign bonds worth $2.5 billion that could be increased if the government is able to assume the debt burden

In a second phase, viable banks will be recapitalized in parallel to the liquidation of non-viable banks. The recapitalization will be carried out through major contributions by shareholders and creditors (other than depositors) in addition to large depositors since the losses are huge and there are no other options

Deposits that exceed the protected minimum limit will contribute to the recapitalization of banks through a bail-in (conversion into shares, or cancelling part of the deposits) or through lirafication (conversion of deposits to lira at rates other than that of the exchange rate market).

Deposits remaining in viable banks could be withdrawn in dollars or in lira at the market exchange rate within limits set by a law that will impose exceptional and temporary restrictions on bank transfers and cash withdrawals

Excerpts from the Note on Economic and Financial Policies
The government is committed to reduce the debt-to-GDP ratio to less than 100 percent by 2026

The exchange rate will be allowed to float. Interventions on the foreign exchange market will be confined to sharp fluctuations

The government plans to diversify power generation resources and increase electricity supply to 8-9 hours per day

The average electricity tariff will be first increased to 12 cents per kilowatt-hour (kWh) within two months after receiving the natural gas supply from Egypt or electricity from Jordan. The tariff will be raised further to 18 cents/kWh with additional increases in electricity supply. Those who consume less than 300 kWh per month will be exempt from these tariff increases

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