Lebanon defaulted on its Eurobond payments in March. It should be considered a disgrace that we are unable to keep our promises to our creditors. I am proud of my heritage and now determined to work on a plan for the economic revival of Lebanon so that we never default on our commitments. (Watch my views on the Eurobonds default on Loubnan Al Yawm). This article is about Lebanon and IMF and What Can We Learn from Previous Experiences in other countries?
Today all our options have run out and only an IMF loan can help us reduce the economic distress caused to Lebanese citizens. The IMF loan and the reforms which have to follow will also unlock other loan packages.
So far IMF has shown positive interest. Lebanon is hoping for a $10 billion loan. This would help absorb the shock of the triple economic crisis that has befallen us. However, the IMF loan is not a panacea for all our woes. It is our responsibility to help our brothers and stave off the hunger among the most vulnerable populations.
What Should We Expect Once the IMF Loan Comes through?
I decided to look at certain other countries where the IMF has been running their programmes. Before we go on to the successful IMF programmes, I would like to highlight the disastrous ones. Maybe there is something we can learn from the countries where IMF financial technicians have failed.
An Economic Review of International Experiences with IMF Programmes
Let's start with Argentina where Hating on the IMF is a national pastime.
Recently, Argentina was in the news for defaulting on its $500 million interest payments to its creditors on May 23rd. It was compared to Lebanon which defaulted on Eurobonds payment in March.
Note – Argentina, unlike Lebanon, has a lot of natural resources which gives the creditors confidence to keep on giving loans. So Lebanon cannot be compared vis à vis Argentina but we can only learn some lessons from the way in which they are restructuring their debt and negotiating with their creditors.
Argentina & the IMF: A Long Troubled Relationship.
IMF and Argentina have a long relationship. It has borrowed $87 billion since the 1950s which amounts to hundreds of billions when accounting for inflation. IMF is a historic villain in Argentina, so much so that the current President Mr Fernandez seems to owe his election victory to the rhetoric of IMF mistrust. IMF is also a subject of a popular board game called "Foreign Debt, The Country in Play". There are dark comic books on the same topics and even a documentary called "Fondo, The Same Recipe Again" – Fondo in Spanish means hitting rock bottom.
Juan Zysman, a photographer who drives a taxi to make ends meet, says, "Asking IMF for a loan is like asking Dracula for a blood transfusion".
Why is IMF so detested in Argentina?
The Argentinian government usually overspends which typically leads to an economic boom and eventually becomes unsustainable as the underlying structural issues are not treated. Once again, the desperate government turns to the IMF. IMF then provides loans and asks for reforms which lead to a drop in the economic activity. Hence, IMF gets the blame rather than the government’s excessive spending.
Comparing Greece – IMF Debacle to the Iceland – IMF Programme Success
Greece could have learnt a lot from Argentina, but unfortunately, that did not happen. If the Argentines themselves haven't learnt any lessons, what could the Greeks have learnt from them? What can Lebanon learn from all of these case studies?
Why was the IMF programme in Greece not as successful as Iceland? While Iceland Programme is a symbol of success, the Greek Programme seems to symbolise failure.
The key difference is that Greece was part of the EU and Iceland wasn't. This means Iceland had its own currency. The reversal of capital flows created a current account surplus through a lower exchange rate. Also, the cause of the crisis in the case of Iceland was the creation of an international banking centre while Greece had persistent budget deficits and high levels of corruption. Finally, the Government of Iceland took full ownership of the IMF programme which wasn't the case in Greece.
The Key Takeaway –
The absence of ownership will lead governments to failure. If the governments need the help of the IMF, they need to demonstrate reform capabilities.
More IMF Programmes: Iceland vs. Ireland
The key difference here is that Iceland was not part of the EU like Ireland.
Iceland’s three biggest banks grew to 10 times the size of its economy. It was too big to bail out and so, Iceland let its banks collapse. Most of the bank's deposits were by foreigners, letting the banks fail meant letting the foreigners lose the money. Iceland's banks were paying high prices for assets and also promising to pay their depositors high-interest rates.
Also, Iceland let its currency collapse while Ireland didn't have its own currency to devalue. So instead of cutting wages by devaluing its currency, it had to cut wages by directly reducing wages, which turned out to be very unpopular and resisted by many.
The Key Takeaway –
Being part of the EU might be advantageous to get easy credit, but manoeuvring monetary policies proves more difficult when the country has no control over its currency.
Criticisms about IMF :
It is said that the IMF is more concerned about protecting the interests of foreign capital owners. Also, the austerity and spending cuts in the reforms are quite unpopular with the people.
Even in Iceland where the programme has been so successful, there has been a backlash where the minister-of-welfare has refused to do the cuts. In a recent Gallup poll, 71% of Icelanders say they mistrust IMF.
Success Stories of IMF Programmes.
I have compiled the following from the IMF website on the success stories below and grouped them into:
- Economic Difficulties
- Support Received
- Solutions Implemented
- Results Achieved
It was among the first countries hit by the financial tsunami of the global financial crisis. With assets, 10 times the size of GDP and a government that relied on aggressive foreign borrowing, Iceland's banking system was extraordinarily large relative to the economy.
Foreign exchange market and banks collapsed, the króna threatened to spiral out of control, dealing a blow to firms and households heavily indebted with foreign currency and inflation-indexed loans.
IMF-supported program of $2.1 billion remains among the largest relative to the size of the economy—18% of Iceland's GDP or 1,190 % of Iceland's quota.
It let its banks fail, it let its currency collapse, and it implemented capital controls–limits on people withdrawing money out of the financial system.
After the crisis outbreak, Iceland has already experienced eight years of robust growth averaging close to 4%. The capital controls have largely been lifted, closing an important chapter in the country's financial crisis saga. Iceland's current account and budget have remained in surplus for several years. Its gross public debt has declined from 92% of GDP at its peak to 35% in 2018. Iceland now has more assets abroad than liabilities, a high level of foreign exchange reserves, and banks that are sound and well-capitalized.
2015, Ghana's economy was in trouble, hobbled by widening current account and budget deficits, rampant inflation, and a depreciating currency. Credit dried up as interest rates rose and banks' bad loans piled up. At the root of Ghana's woes was out-of-control government spending, largely to pay salaries of an overgrown civil service. The quality review revealed significant under-capitalization of the banking sector.
2015, Ghana turned to the IMF for a $918 million loan to help stabilize the economy.
Government limited hiring and wage increases and eliminated subsidies for utilities and petroleum products. To raise revenue, it cracked down on tax evasion and rationalized exemptions. New revenue sources included a tax on luxury cars and increased taxes on high earners.
End central bank financing of the budget deficit—a major source of inflation. Some banks were recapitalized, and the Bank of Ghana used its newly enhanced authority to wind down insolvent lenders. The central bank developed regulations to ensure that banks meet sound underwriting and credit evaluation standards.
The programme helped cut the poverty rate from 53% in 1991 to 21% in 2012. The pace of economic growth is poised to rise to 8.8% in 2019 from 2.2% in 2015. The inflation rate is projected to fall to 8% from around 19%. Cuts to wasteful spending made room for much needed social services, such as free secondary education.
Initially, Ireland went from being one of the poorest countries in the European Union to one of the most prosperous. The boom ran out of steam in 2007 just as fragility in the global economy began to emerge.
Liquidity from overseas investors dried up, bank losses on property loans mounted. When the property bubble burst, the building industry collapsed, hitting a significant portion of the economy. The Irish government saw its budget deficit soar as tax revenues plummeted to 20% in just two years.
November 2010, the Irish government sought help from the IMF and the European Union, which together provided loans totalling €67.5 billion—equal to 40% of Ireland's economy.
On IMF's recommendation, banks were merged and staffing was reduced, and over time assets were aligned more closely with deposits.
After the banks, the second task was the country's public finances. The government set out a plan to reduce the budget deficit over three years. This included increases in the value-added tax and carbon and motor vehicle taxes, the introduction of a supplementary personal income tax, cuts in the civil service, and savings in capital spending.
The government set out a plan to reduce the budget deficit over three years. This included increases in the value-added tax and carbon and motor vehicle taxes, the introduction of a supplementary personal income tax, cuts in the civil service, and savings in capital spending.
The two decades ending in 2007, Ireland went from being one of the poorest countries in the European Union to one of the most prosperous.
End of the second year of the program, in 2012, the Irish economy had begun to recover. Firms started investing, and unemployment began to decline. The government returned to the financial markets, banks' arrears halved, and home prices in Dublin started to improve. By 2018, the unemployment rate had fallen back to less than 6%.
Serbia: 2015–18 Stand-By Arrangement
In 2015, Serbia's economy faced large fiscal imbalances and protracted structural challenges.
Concerns arose from (1) declining revenues, despite tax rate hikes; (2) rising mandatory spending, especially public wage and pension bills; (3) expanding state aid to ailing state-owned enterprises, usually in the form of direct subsidies and guarantees for borrowing; and (4) the cost of resolving ailing public banks.
Constrain current primary expenditure. The program aimed to strengthen the public wage system, reduce budget subsidies and state guarantees, improve public financial management and tax administration, strengthen bank resolution frameworks, and reduce nonperforming loans.
Efforts to improve tax collection efficiency and broadening the tax base.
Expenditures (particularly wage and pension expenses and state transfers) were contained, and capital spending was broadly protected relative to programmed projections.
The program aimed to strengthen the public wage system, reduce budget subsidies and state guarantees, improve public financial management and tax administration, strengthen bank resolution frameworks, and reduce nonperforming loans.
The program was successfully completed. Serbia succeeded in addressing macroeconomic imbalances and restoring confidence and growth. Fiscal sustainability was restored, and the external position was realigned with fundamentals.
Jamaica's public debt had reached a historic high of about 147% of GDP
After a debt exchange in 2010 and yet another IMF-supported program that went off track, in 2011, the country was on the verge of an economic meltdown, with no access to international capital markets. Jamaica once again turned to the IMF in spring 2013 for financial support.
Support from all walks of society—political, public, and private sector, as well as strong support from international and bilateral partners—has provided Jamaica with a historic opportunity to reverse its course from unsustainable policymaking to setting an example for other small countries on how to take on a crisis and convert it to an opportunity.
The Economic Program Oversight Committee was formed so that stakeholders from the private sector, unions, government, academia, and the media could come together to hold the government accountable for its reform commitments and fiscal discipline under the reform program. With that, as described by Finance Minister Nigel Clarke, "What began as an 'IMF program' became 'Jamaica's program' with IMF support." reforms supported by technical assistance from both the IMF and the Inter-American Development Bank—which helped with administration and the switch from direct to indirect taxes—generated significant dividends during the period.
Debt is down to below 100% of GDP for the first time since
The unemployment rate has reached 8%—an all-time low—and poverty is slowly declining (although still high). The economy has grown for 16 consecutive quarters, and the pace is accelerating as dormant sectors are now producing (for example, mining).
The rise in debt proved unsustainable, and by 2011, Portugal tipped into a full-blown economic crisis. Public and private indebtedness surged without necessary structural reforms. Fiscal deficit in 2010 ballooned to about 11% of GDP; at its worst, unemployment climbed to 16% in 2013.
International partners extended financial assistance worth €78 billion ($116 billion; £70 billion)—of which one-third was committed by the IMF.
The country committed to progressively cutting its deficit, facilitating bank capitalizations, and implementing structural reforms. In particular, the government agreed to lower the public sector wage bill and reduce the most generous state pensions. Other measures included the privatization of stakes in national energy companies and the sale of the national airline.
Portugal managed to keep its fiscal deficit of about 11% of GDP and the government is targeting a small deficit this year. Portugal's bonds were once in double-digit territory, the yield on a 10-year bond is currently about 1.1%. joblessness stands below 7%—its lowest level since 2004. Improved business environment—which included labour reforms—facilitated a recovery that boasts a boom in tourism and exports.
In the aftermath of the global financial crisis, Cyprus began to suffer a confidence crisis, linked to weakness in its very large banking sector and sizable external and internal imbalances.
Cypress approached the IMF for a three-year lending arrangement of about €1 billion with two goals: putting the banking sector on a sound footing and returning public finances to a sustainable path.
The Authorities undertook a strong fiscal adjustment under difficult economic circumstances. Cyprus also introduced legislation to modernize the budget process, strengthen accountability for public spending, and establish medium-term fiscal planning. Tax collection was made more efficient and equitable.
Cyprus regained access to international financial markets barely 16 months after the crisis and has successfully issued debt on favourable terms multiple times since then. The economy got back on a growth track and the banking system on more solid footing. Growth returned earlier than expected, and unemployment began to fall. Authorities completed a challenging bank recapitalization process and restored liquidity. In parallel, decisive steps were taken to restructure weak banks.
Our Political Elites haven't been able to get reforms in place and thus IMF would require considerable proof of leadership from Prime Minister Hassan Diab's ability to make all the different sectarian political parties get to a consensus.
In case our Prime Minister Hassan Diab is not able to get a consensus on reforms, It will mean more pain for Lebanese and we would need to undergo political reform's before we could expect any economic reforms and revival.