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Lebanon

Lebanon: Government formation is first step on long road

  • New government formed after 13 months without one, marking essential first step towards resolving economic crisis

  • Dwindling reserves and FX depreciation have caused shortages of food, fuel and electricity, pushing economy to brink

  • Reform and restructuring process will be long & difficult; outlook has greatly improved, but too early to turn positive

Lebanon: Government formation is first step on long road
Tellimer Research
10 September 2021
Published byTellimer Research

Prime Minister-designate Najib Mikati has unveiled his new government. This ends a 13-month period in which Lebanon has not had a government, following the Beirut Port explosion and subsequent resignation of former Prime Minister Diab’s administration (followed by the resignations of two more prime minister-designates last September and this July).

Mikati has named Youssef El-Khalil, director of financial operations at Banque Du Liban, as finance minister, part of a 24-member cabinet that has been approved by President Aoun and is expected to shortly be approved by parliament. El-Khalil joined the central bank as an economist in 1982 and has been a key figure in the government’s contribution to the reform proposals overseen by France.

Mikati, a Sunni billionaire from the northern city of Tripoli who served as prime minister in 2005 and from 2011-13, was tapped to form a government after prime minister-designate Hariri’s resignation in mid-July. He says that his cabinet will reach out to international institutions to secure the basic needs of the Lebanese, adding that he hoped to bring the country together to “return Lebanon to its glory.”

The government formation is a welcome step after over a year of political paralysis during which Lebanon’s economic crisis has continued to spiral out of control, prompting the World Bank to call it one of the three worst crises of the past 150 years and a “deliberate depression”. However, the difficult work of reforms must now begin, and the road will be long and difficult.

Plummeting reserves (which are negative once US$16.7bn of banks’ FX deposits are factored out) have led to crippling shortages of fuel, electricity, food and medicine (with the World Food Programme – WFP – estimating that one in five families are struggling to put food on the table), while FX shortages and parallel market depreciation have pushed food prices up over 10x since the crisis began in October 2019 (see here for a more detailed overview of Lebanon’s economic crisis).

Reserves

LBP

Inflation

Mikati says that the treasury no longer has the cash to support fuel and food subsidies, but the backlash against the central bank's decision to lift fuel subsidies last month underscores the difficulty of removing what is, for many Lebanese, the last lifeline before destitution. However, the subsidies are regressive and wasteful and their removal is necessary, with a more efficient US$556m programme that hands cash cards to over 500,000 needy families launched this month to fill the gap.

The economic crisis has converged with Covid to push Lebanon’s medical system to the brink, with the prestigious American University of Beirut Medical Center saying that electricity shortages may force it to shut off ventilators and other lifesaving equipment. Reports suggest that at least 2,500 doctors and nurses have left Lebanon this year alone, an acceleration of an ongoing brain drain that could threaten the future of the economy.

An international aid conference led by France recently raised U$370m in aid for Lebanon to address urgent needs such as food security, water and sanitation, and health and education, and Lebanon has received another US$860m of funds from the IMF’s recent SDR allocation, but both parties have made it very clear that further support is contingent on the formation of a new government and implementation of meaningful reforms (see here and here for an outline of reform recommendations).

So, now, the difficult reform process must begin. The formation of a government is an essential first step, and Lebanon’s 10-year eurobond has jumped by c11.5% today on the news to a price of US$14.60. We think the reaction is warranted and, for the first time in a long time, we see a potential path out of the crisis. However, this is just the first step in what is sure to be a lengthy process, fraught with difficulties and hampered by Lebanon’s sectarian political system.

We retain our Hold recommendation on Lebanese eurobonds, and will watch keenly for signs of progress on economic reforms, the restructuring of public debt and the banking sector, and IMF negotiations.

Eurobonds

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Hariri resigns as Lebanon descends further into crisis, July 2021

A new civil war in Lebanon: time to consider the consequences, April 2021 (Hasnain Malik)

Cabinet formation process collapses; no hope in sight, March 2021

Lebanese pound sinks alongside hopes for reform, March 2021

Lebanon comes full circle as Hariri returns, October 2020

Back to square one as prime minister resigns, September 2020

New premier faces uphill battle, August 2020

Lebanon restructuring on pause as we await a new government, August 2020

Lebanon’s government resigns amid public backlash, August 2020

Beirut explosion another tragic blow to a country in crisis, August 2020

At the precipice as leaders pass the buck, July 2020