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Lebanon's government resigns amid public backlash

  • Lebanon’s government resigns amid public protests, leaving the country rudderless in the middle of a crisis

  • Donors pledge US$298m of support to deal with damages totalling US$10-15bn, but further support hinges on reforms

  • Reforms/IMF talks cannot commence until a new government is formed, but sectarian divisions will likely cause delays

Lebanon's government resigns amid public backlash
Tellimer Research
10 August 2020
Published byTellimer Research

Prime Minister Hassan Diab has announced his government’s resignation after a weekend of public protests, including clashes with security forces, triggered by an explosion at the Beirut Port last week. In a speech from Beirut, he blamed Lebanon’s political class for sabotaging his government’s attempts to save the country.

According to procedure, he will now hand over the resignation to President Michel Aoun on behalf of all his ministers and the government will continue to function in a caretaker capacity until a new one can be formed, but will be largely stripped of any decision-making capacity.

The humanitarian cost of last week’s explosion at the Beirut Port has continued to mount, and it is now estimated that at least 150 have been killed and 6,000 wounded. The economic cost is estimated at US$10-15bn, with 300,000 made homeless.

The explosion has greatly exacerbated the ongoing economic crisis, with shortages of food and basic goods giving way to hyperinflation (estimated by Professor Steve H. Hanke of the Johns Hopkins University at 462% y/y in July).

Lebanon imports c85% of its food consumption, with the Beirut Port responsible for handling the vast majority. After its total destruction, goods will have to be routed via Tripoli (c85km from Beirut), but capacity constraints will exacerbate shortages of goods and make it difficult to import much needed aid and supplies. Further, Lebanon now has only six weeks’ worth of grain after the explosion destroyed much of the country’s reserves.

In a virtual donor’s conference yesterday organised by France and the UN, world leaders pledged US$298m of emergency aid to help deal with the impact of the explosion, adding that it will be disbursed directly to aid organisations rather than the government. However, donors emphasised that further support would only be forthcoming if the government committed to credible reforms.

This point was driven home in an IMF statement (see here), which frankly stated that programme discussions "have yet to yield results". It added that the crisis has been exacerbated by a "shortage of political will to adopt and implement meaningful reforms that the people of Lebanon have been calling for", and said that the IMF stood ready to help once the government has shown evidence of reform.

This quashes the hopes of some that the explosion would take the sand out of the gears of IMF negotiations and unlock at least some of the US$10bn of multilateral and bilateral support needed to fund the government’s reform programme.

It is now abundantly clear that the IMF will not simply lend money to governments that have not engaged in good faith efforts only because of a "moral imperative" to help countries in crisis. We think this has important implications for other countries, like Zambia, who may be hoping to play the crisis card to unlock IMF support without the requisite commitment to reforms.

The IMF statement clearly outlines four reforms that Lebanon must implement before it can count on the IMF and donor support:  

  • Restore debt sustainability and recapitalise the financial system;

  • Temporary capital controls and elimination of the multiple exchange rate system;

  • Steps to reduce SOE losses, including at the central bank; and

  • Expand the social safety net to protect the most vulnerable.

However, it is unclear how Lebanon can continue to engage in IMF discussions and implement necessary reforms without a government in place. While the election of a new, credible and technocratic government could finally unleash reform momentum, it could take months to organise new elections as sectarian political infighting delays negotiations.