Shake On It: A Fair IMF Package For Lebanon
Lebanon desperately needs cash injections – but it is fast running out of willing international donors. Soon enough, it will be left with the world’s lender of last resort instead: the International Monetary Fund (IMF). How might an IMF package uphold the best interests of the Lebanese, whilst avoiding potentially devastating IMF conditions: austerity, privatisation and regessive tax hikes?
Defaulting on Lebanon’s foreign-held debt may patched up the country’s financial wounds, but it has not stopped the internal bleeding. To achieve that, Lebanon will need a comprehensive reform package and a shot of fresh US dollars to recapitalise local banks and keep the economy moving. But, who will administer the shot? For a host of reasons, Lebanon is fast running out of willing international donors. Soon enough, Lebanon will be left with the world’s lender of last resort instead: the International Monetary Fund (IMF).
But there is a snag. The IMF is likely to demand economicmeasures similar to those which sparked a national uprising in October last year. A punitive package of reforms aimed purely at repayment of IMF loans and austerity would exacerbate inequality, push Lebanon deeper into recession, increase the debt-to-GDP ratio, and, in all probability, make repayment to the IMF almost impossible to achieve.
Instead, the IMF and policy makers should strike a deal which balances much-needed financial, economic, and institutional reform with the social realities of a country in the midst of an anti-establishment uprising. First and foremost, any IMF package will need to address how the burden of state financing is unfairly levied on the poorer segments of society.
Progressive tax reform and collection will need to be at the heart of this process, with a focus on increasing collection rates and closing loopholes for income tax avoidance and evasion. The ludicrously low top tax rate of 25% should be the first to go—top taxpayers in OECD countries typically pay between 40% and 60%.
Privatisation, another typical IMF demand, should not be considered in the short term. Lebanon’s underperforming state assets have relatively low value, especially given the dire economic situation. This would mean that privatisation would amount to a wasteful fire sale; instead, privatisation should only be considered in the medium-to-long term, when a future government can negotiate any sale from a position of strength. To get there, the government must implement long-awaited institutional reforms in the electricity sector, the telecommunications sector, and other key industries. Above all, Lebanon must establish and empower independent regulators, capable of defending public good over private interests.
Otherwise, Lebanon will fall prey to the same fate as other countries who implemented hastily thought up IMF-led privatization. Egypt and Tunisia, for example, did not have strong regulatory institutions to prevent regime elites from carving private monopolies out of former state assets. In Lebanon, that will mean that ministers kiss goodbye to their lucrative portfolios, which have long been cash-cows for their respective parties.
The IMF will be open to serious discussion with the Lebanese government. But in return, Lebanese negotiators must be ready to bring meaningful policy suggestions to the table. Arriving empty handed would simply allow the IMF to impose its own agenda on a country which cannot afford austerity and regressive taxation. This time, the bill must be split equitably, with the richest shouldering their fair share of the burden.