In the large hospital named after Rafik Hariri in Beirut there was no need to wait for the coronavirus epidemic to see the extent of the crisis in medical services. Long before the outbreak of the plague that has so far only hit Lebanon in a limited fashion, patients faced a severe shortage of medicine and medical supplies.
In the orthopedic wards, elective surgeries have been put on hold and those scheduled for urgent operations have discovered that the staff is unable to provide basics such as bags for blood transfusions, artificial knee parts and even needles for anesthesia drips.
The medical staff and hospital managers have joined thousands of protesters in squaring off with security forces and Hezbollah activists in recent months. Neither the transition government nor the government formed a month and a half ago by Prime Minister Hassan Diab could help very much. They may have agreed to sell dollars to this hospital and the rest of the country’s health centers at an official exchange rate of 1,500 Lebanese pounds, compared to the black-market price of about 1,800 pounds to the dollar at the time, but the decision was never completely implemented. The health services were forced to pay for medicine and equipment with dollars bought on the black market.
The Lebanese government’s enormous public debt has forced it to take drastic steps, including severe limitations on spending foreign currency. The situation has gotten so dire that individuals and businesspeople who deposited dollars in their bank accounts have discovered that they are not allowed to withdraw their money.
The threatening shadow looming over the government was the impending due date for Eurobond government bonds, whose maturity date for the first series, worth $1.2 billion, was on March 9. Though the central bank may have the money in its vaults, paying out that amount would place the country on the brink of a red line for its depleted foreign currency reserves. This would endanger its ability to fund day-to-day expenses, imports and social security payments for the needy.
At the same time, nonpayment of this debt – the portion of the total national debt that is over $90 billion, about 160 percent of GDP – harms Lebanon’s ability to receive further loans in the international market and endanger the stability of its banks.
The political pressure has been enormous. The governor of the central bank, Riad Salame, demanded that the government meet its obligations and try to find additional sources of financing for its activities. The public stood against the central bank, demanding that the payment be postponed so the government could meet its budgetary commitments and use funds for economic development.
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Last Saturday, a historic decision was reached. For the first time, Lebanon will not pay its debts and not redeem its bonds. The country that once enjoyed the title “banker of the Middle East” is now facing a three-sided crisis. It must conduct negotiations with bondholders over how to pay them what they are owed, it must find sources for financing the next two rounds of bond payments – about $700 million in April and another $600 million in June – and it must assemble enough foreign currency to pay for government operations.
Even before they decided to postpone the Eurobond redemption payment, the government unsuccessfully tried to reach an understanding with bondholders – mostly Lebanese banks and foreign investors – who refused to hear of a delay in payment. The government now has two unpalatable options: Give the bondholders a “haircut” pay them less than they are owed, or ask the International Monetary Fund for a loan.
Diab said this week that negotiations with the bondholders could very well last for nine months if “everyone demonstrates understanding and good will.” The question is, who will agree to conduct negotiations with a government that does not keep its commitments, and where will the money come from for payment even if an agreement is reached. The most reasonable path is to turn to the IMF, but Lebanon’s political leaders know that receiving such a loan means a commitment to carry out deep reforms, without which the IMF will not approve the aid.
Reforms have long ago become a false hope in Lebanon, after every government in the last few decades has promised to carry out some reform and ended its term with an even larger debt than when it began. The latest budget approved for 2019 was also phrased in a way that promised reforms, but so far nothing has been implemented.
It is clear to every political and ideological movement in Lebanon that any reforms would require a systematic and effective battle against corruption, greater transparency in government activities, structural changes, including in the central bank, and building a list of budgetary priorities that would meet the needs of the economy, instead of the political elites.
This would mean a loss of control over the sources of funding enjoyed by interested parties, and placing the economy – at least for a few years – under the oversight of the International Monetary Fund. It is hard to imagine the heads of Lebanon’s political movements reaching such an understanding on the nature of the reforms before the government goes completely bankrupt. This is evidenced by the lack of an economic plan attached to the decision to delay the bond payment.
Lebanon has not yet decided whether it wants to restructure its debt by building a new payment schedule over a longer period of time, or to refinance the debt – a step that would mean asking the bondholders to forgo part of what they are owed, in return for a large-scale reform plan.
For now, the government may be enjoying the lull in the ongoing social protests due to public fears of coronavirus, but it will soon need to reach some conclusions regarding its ability to continue running the country.