Lebanon has restarted discussions with the IMF and is ready to recommence negotiations with its creditors after a more than year-long hiatus caused by Beirut’s political crisis, the new government said on Monday.
The Lebanese finance ministry said in a statement that it had “resumed interactions” with the IMF and expressed “willingness to progress towards reaching an agreement on an appropriate recovery program”.
It added that the government was committed to engaging in “good faith discussions with all its creditors as early as practicable”, and welcomed bondholders to “participate in this process”.
Newly appointed prime minister Najib Mikati has said a programme with the IMF was “not a choice” if the stricken nation is to recover from its economic and financial crisis, which is so severe that the World Bank has said it could be one of the world’s worst in 150 years.
More than half the population in the heavily indebted country is estimated to have fallen under the poverty line, while Lebanon’s chronically weak infrastructure is barely functioning. Import financing problems have created shortages from medicine to fuel. The local currency has shed 90 per cent of its value and inflation has rocketed.
One major factor behind the collapse, which accelerated in late 2019, was Lebanon’s unsustainable public debt burden, which was vastly larger than its economic output and put a huge strain on its foreign currency reserves. The World Bank estimates Lebanon’s debt to gross domestic product ratio hit 174 per cent by the end of 2020.
With dollar reserves running low and a domestic banking crisis raging, Lebanon stopped repayments on its $31bn pile of foreign currency denominated debt more than 18 months ago, the first time Beirut had defaulted on its debt.
But talks with creditors came to a standstill after the devastating port of Beirut explosion triggered the government’s resignation in August 2020. The new government was only appointed in September, after 13 months of political wrangling.
A group of Lebanon’s creditors argued in late September that the debt “requires the new government’s urgent attention”. The bondholders, which include BlackRock and London-based emerging market specialist Ashmore, could see a 75 per cent reduction applied to the value of their bonds, a Goldman Sachs analyst wrote last month.
Lebanese dollar bonds, which have offered investors no interest payments since March last year, are currently trading at about 17 cents on the dollar, having dropped below 12 cents earlier in the year.
“One way or another you are talking about brutal haircuts,” said Raza Agha, head of emerging markets credit strategy at Legal & General Investment Management, which holds a “very small” amount of Lebanese debt. “Some movement on the politics is one thing, but a recovery isn’t going to be a one or two year story. It’s going to be a long, drawn-out process.”
Proper debt restructuring is a key demand of potential donor countries, which might be willing to help Lebanon financially if they believe the nation has a credible plan to get back on track.
Lebanon returns to negotiating table with IMF and creditors
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