On paper, the 46-month, USD 3bn Extended Fund Facility staff-level agreement reached with the IMF in early April 2022 marks the first step on the road to recovery for Lebanon’s devastated economy. To unlock the first tranche of funding the government is required to pass a range of reforms, broadly centred on restructuring the deeply dysfunctional financial sector, standardising the Lebanese pound’s complex web of exchange rates, and reforming bloated and inefficient state-owned enterprises. As an added bonus, meeting the criteria would prompt the release of USD 11bn pledged by international donors at the 2018 CEDRE conference.

Yet, the entrenched political instability and policy gridlock that has blocked that round of funding for over four years continues to loom large. Like the CEDRE framework, the IMF agreement has been reached roughly one month before a parliamentary election, allowing little time for reforms to pass before becoming entangled in Lebanon’s protracted government formation process, which typically takes months. Thereafter, it faces the historically insurmountable obstacle of vested interests, leading establishment parties to reject painful austerity and restructuring measures that may draw the ire of their confessional support bases.

Complicating the situation further is the legacy of successive crises that have further destabilised the country since 2018. The socioeconomic fallout of the COVID-19 pandemic and Russia’s invasion of Ukraine, on top of heightened political polarisation following the 2019 protest movement and the Beirut port explosion, have fostered a climate in which the trifecta of systemic Shia, Sunni and Christian parties opt to close ranks, prioritising self-preservation over the uncertainty of change.

The Future Movement’s boycott of the elections presents a potential wildcard, perhaps allowing for the emergence of a reform-minded faction to inherit the Hariri-dominated party’s position as the Sunni representative in government. Such blue-sky thinking has little precedent to draw from in Lebanon while the fundamental obstacles that have blocked previous rounds of multilateral assistance remain. The fate of the IMF agreement, and Lebanon’s ailing economy, look likely to join the CEDRE funding in purgatory.

This article first appeared in the Axco Flashpoints newsletter, which provides monthly analysis on country risk and geopolitics from our Global Risk team. You can sign up at https://www.axcoinfo.com/axco-flashpoints-signup.aspx 

Photo Credit: craigfinlay