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Written after the May 2022 parliamentary elections and the cabinet's approval of a revised recovery plan, this issue asked how a defaulted and disabled economy could be restructured. It placed Lebanon, rated Selective Default since its Eurobond default of 7 March 2020, at the bottom of the third category of speculative-grade sovereigns, and argued that outside support from the IMF, donors and development institutions depended on the country first putting its own house in order.
The authors held that the government plan neglected four immediate priorities: electricity, food security, medication and hospitalisation, and depositors' money. They then set out a medium- to long-term agenda covering the quality of government, economic diversification, revenue and expenditure reform, management of public borrowing requirements and primary balances, central bank governance, exchange rate unification and a bank recapitalisation of around US$30 billion over five to ten years.
The issue's main contribution was a proposal to divide the roughly US$100 billion of remaining deposits into three tiers, with the government's share delivered as a tradable, low-yielding perpetual bond issued directly to depositors and guaranteed by an independently managed Financial Stability Fund.
Key findings
- At the time of writing the parallel rate had surged to LBP38,000 per dollar, against an official rate of LBP1,507.5 and a bank withdrawal rate of LBP8,000.
- Deposits had fallen from US$187 billion in 2019 to about US$100 billion, largely through withdrawals at punitive conversion rates.
- Tier 1 (30%) would be deducted as excessive past interest, Tier 2 (30%) returned by banks over up to ten years, and Tier 3 (40%) paid via the perpetual bond.
- The Financial Stability Fund would receive recovered assets, privatisation proceeds and part of oil and gas revenues, and would be barred from financing the government.
- The issue estimated that bank sector equity had eroded from US$22 billion before the crisis to roughly US$12–14 billion.
Archive: written in May 2022; figures and assessments reflect conditions at the time of writing.Summary of the paper; the full analysis is in the PDF.