The International Monetary Fund (IMF) on Monday placed Lebanon on the threshold of fragile states in the Middle East, stressing that the country should reform its subsidy system to reach vulnerable citizens and make better use of its rapidly declining foreign currency reserves.
Lebanon, saddled with a heavy debt burden, is facing its worst economic crisis since the 1975-1990 civil war. With the unprecedented rise in prices, many Lebanese have fallen into poverty and become increasingly dependent on subsidies, but the state’s liquidity is shrinking at a swift pace.
“We encourage Lebanon to moving into a more targeted subsidy system that will allow them to reach those who are the most affected and also allow them to have a better utilization of their foreign currencies,” Jihad Azour, Director of the Middle East and Central Asia Department at the IMF told Reuters.
Earlier this month, Prime Minister-designate Hassan Diab said that Lebanon had spent USD 4 billion since the beginning of 2020 on subsidizing imports of food, medicine, flour, and wheat, and warned that completely removing the subsidies would lead to a social implosion.
The Banque du Liban (BDL) said it could finance trade indefinitely as reserves dwindle, but has not given a timeframe.
An official source told Reuters on Oct. 9 that Lebanon has about $1.8 billion of its foreign reserves left for subsidizing key imports - wheat, fuel, medicine - and a list of basic foods, which could last about six months if support for some goods was cut.
Azour’s statements came after the failure of bickering Lebanese politicians to agree on a new government. Binding parliamentary consultations to choose a new prime minister were postponed from last week to Thursday.
The IMF is calling on the Lebanese leaders to come up with a reasonable comprehensive reform program. Last week, the Fund predicted Lebanon’s economy would contract 25 percent this year, up 13 percentage points from what it expected in April.
The report said that Lebanon was going through a difficult situation, as the size of the expected contraction is 25 percent during 2020. The country witnessed political turmoil in October 2019, which worsened with the failure to settle the sovereign debt in March, for the first time in Lebanon’s history.