Emerging Markets

Lebanon's government needs to show a 'resolve for the state to function': IMF Middle East director

Key Points
  • Lebanon's leaders need to win back the confidence of its citizenry not by announcing reforms, but through their implementation, the IMF's Middle East and Central Asia director told CNBC.
  • Lebanon's banks remain closed eleven days into nationwide protests, sparking fears of a rush on the banks and a depletion of the country's dollar reserves once they reopen.
  • Unemployment in Lebanon currently hovers between 35 and 40%, its debt-to-GDP is more than 150% and its current account deficit stands at an eye-popping 25%.
Lebanese demonstrators raise a large clenched fist with "revolution" written on it at the Martyrs' Square in the centre of the capital Beirut on October 27, 2019, during ongoing anti-government protests.
ANWAR AMRO | AFP via Getty Images

Lebanon's leaders need to win back the confidence of its citizenry not by announcing reforms, but by actually implementing them properly, the International Monetary Fund's director for the Middle East and Central Asia said.

"People are suffering because of the low level of growth, the fact that there is low employment," Jihad Azour told CNBC's Hadley Gamble in Dubai ahead of the Fund's release of its quarterly regional outlook.

The economist's advice comes amid the country's largest protests in 14 years. Azour, who previously served as Lebanon's minister of finance from 2005 to 2008, said that if the government dedicates itself to executing functional governance, that translates into better services and job creation. Unemployment in Lebanon currently hovers between 35% and 40%.

"Therefore, I think it's very important now to stabilize the financial situation by addressing the fiscal imbalances, by providing clear direction of reforms that addresses some of the long lasting issues, the structural problems, and also to show that there is a resolve to have the state function to service the needs and aspirations of the people in the street."

Lebanon's banks remain closed eleven days into the mostly peaceful protests, sparking fears of a rush on the banks and a depletion of the country's dollar reserves once they do finally reopen.

To address this fear, Lebanon has put a temporary ban on taking large amounts of dollar cash out of the country. Many blame Lebanon's dangerously low foreign currency levels on the policies of its central bank governor Riad Salameh.

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Lebanese banks must appease protesters, analyst says

Lebanon's central bank, the Banque du Liban, has been intervening for years to prop up the Lebanese pound by selling dollars and buying pounds.

But in order to sell dollars, it has to buy the dollars in the first place — meaning that as economic problems have worsened, the dollar reserves have been worn down. Lebanon's commercial banks have to buy dollars from the central bank, and those dollars are locked in the central bank's reserves or in Treasury bills.

Asked if popular anger at the central bank is warranted, Azour replied, "It's not for me to answer this question." But he stressed the urgency of the Mediterranean country's financial situation, something he said the IMF is "observing closely."

"Lebanon has been suffering for a long period of twin deficits, budget deficit and current account deficit, with the backdrop of a very low level of growth that was not able to create enough jobs," Azour said. "Therefore, what is needed today is a very strong and convincing reform package that restores confidence most of its citizens, investors and international community."

Lebanon's current account deficit stands at an eye-popping 25%, meaning it imports far more than it exports, spends more than it saves, and relies heavily on foreign remittances to stay afloat.

Lebanese protesters hold hands to form a human chain along the coast from north to south as a symbol of unity during ongoing anti-government demonstrations on Zalka highway north of Lebanon's capital Beirut on October 27, 2019.
PATRICK BAZ | AFP via Getty Images

The protests are a manifestation of widespread anger at decades of corruption, dysfunctional government and the deterioration of basic public services. A reform package promised by Lebanese Prime Minister Saad Hariri last week failed to satisfy the demonstrators, who want a full resignation of the cabinet and an overhaul of the country's sectarian political system.

The reform plan aims to reduce the deficit in 2020 to 0.6% of GDP, but people are concerned that the measures have come too late and many are reliant on one-offs, like a one-off bank tax, that protesters say are unlikely to be implemented. An Arabic hashtag that says "no trust" is trending in Lebanon.

A white paper published by an international organization of Lebanese finance executives last week wrote that "in the absence of immediate and radical austerity measures and structural reforms, Lebanon appears to be heading towards an economic meltdown."

While Azour's words were not quite as strong, the former minister put heavy emphasis on the need for action over words from Lebanese leaders.

"I think what is important is not only to have the package, but also to show the timeline and bring credibility not only to the reforms themselves, but also to their implementation," Azour said. "I think this is where the key issue is truly is how to bring confidence back."