Lebanon
and the IMF: A Crisis of Will - Dr.
Khalil Gebara
Since October 2019, Lebanon has been engulfed in one of the most severe and protracted economic and financial crises documented globally since the mid-nineteenth century. Triggered in 2019 by the reversal of capital inflows that had long sustained an unsustainable economic model, the crisis has manifested as a devastating combination of sovereign debt default, a banking sector collapse rendering deposits inaccessible, a currency that has lost over 98 percent of its value, persistent inflation decimating incomes, and a catastrophic surge in poverty and unemployment. State institutions crumbled in the initial years of the crisis, becoming unable to provide essential services.
Throughout Lebanon’s recent history, the International Monetary Fund (IMF) has maintained a consistent presence, initially offering technical assistance and conducting regular economic assessments through Article IV consultations. However, the IMF’s role has shifted dramatically since the 2019 meltdown and Lebanon’s first-ever sovereign default in March 2020. It is now viewed as the indispensable anchor for any potential financial rescue package, holding the key to its own resources and to unlocking billions in aid pledged by other international donors. This evolution from diagnostician to gatekeeper has significantly raised the stakes of Lebanon’s engagement with the IMF.
This
article reflects on the contentious relationship between the IMF and Lebanon
from the post-civil war reconstruction era to the present. It argues that while
the IMF consistently diagnosed Lebanon’s core structural economic weaknesses
and prescribed necessary reforms, the powerful vested political and financial
interests have prevented meaningful economic and financial change. The
cumulative failure to address fundamental imbalances over decades ultimately
precipitated the current catastrophic crisis, leaving Lebanon trapped between
the imperative of IMF intervention and a domestic political structure incapable
of fulfilling the required conditions.
Lebanon’s Unsustainable Postwar Political Economy
Following
the end of the civil war, Lebanon embarked on a reconstruction path that
prioritized rebuilding infrastructure, often financed through substantial
borrowing, and aimed to attract foreign capital inflows. Key strategies
included maintaining high interest rates, leveraging banking secrecy laws, and
pegging the Lebanese Lira (LBP) to the US dollar.
The focus was overwhelmingly on developing the service economy, particularly real estate and banking, often at the expense of investment in productive sectors like industry and agriculture. While this approach facilitated an initial period of recovery, reconstruction, and upward trending capital-output ratios, it simultaneously embedded deep structural vulnerabilities. Large fiscal deficits became chronic, fueled by reconstruction spending, subsidies, and the high cost of servicing a rapidly growing public debt. Concurrently, a persistent and large trade deficit emerged, reflecting a reliance on imports financed by capital inflows rather than domestic production. By the late 2010s, public debt averaged at least 150 percent of GDP.
Throughout this period, the IMF engaged with Lebanon primarily through technical assistance and its regular Article IV consultations, acting as a critical watchdog. Its reports consistently flagged the mounting risks long before the 2019 collapse. Pre-crisis IMF recommendations repeatedly stressed the urgent need for sustainable fiscal adjustment to curb the high public debt. Specific measures advised included broadening the tax base, controlling expenditures by eliminating costly electricity subsidies, restraining the public sector wage bill, and strengthening tax administration. The IMF also pointed to the LBP’s overvaluation under the peg, which hampered export competitiveness, and consistently highlighted the critical need for deep structural reforms, especially in the electricity sector.
Broader concerns about weak governance and corruption were also recurrent themes.
This era effectively normalized a fundamentally unsustainable economic model. The reliance on large twin deficits, soaring public debt, and volatile capital inflows became accepted features of the Lebanese economy. This precarious situation was often masked by superficial stability indicators, such as the fixed exchange rate and seemingly comfortable foreign exchange reserves held by the Central Bank, bolstered by a pervasive narrative of unique Lebanese “resilience.”
The political economy system, which benefited key stakeholders such as commercial banks and politically connected elites, created strong incentives for these groups to maintain the status quo. Consequently, despite clear warnings from the IMF, World Bank, and other institutions, the perceived short-term benefits of stability and the high political costs of challenging these powerful vested interests led to continued inaction on fundamental reforms.
International donor conferences, notably Paris II (2002) and Paris III (2007), were convened to mobilize support and, more concretely, extend the maturity of the unsustainable economic model. Lebanese governments pledged significant reforms at these conferences, including privatization of state assets, fiscal consolidation measures (VAT increases, subsidy cuts), and governance improvements, in exchange for billions in grants and soft loans. Donor assistance secured at Paris II and Paris III provided temporary fiscal relief but failed to force a change in the underlying economic trajectory.
Based on confessional power-sharing and elite cooperation, the post-war political model created a system where reforms threatening established patronage networks or the distribution of economic rents were fiercely resisted. At the same time, Hezbollah gradually integrated into this system, becoming an active participant in the political economy and resisting reforms as a result. This model began to crumble definitively in 2019 as the capital inflows essential for financing the twin deficits and servicing the debt slowed and reversed.
The Policy of Not Having an IMF Program
One episode that illustrates Lebanon’s relationship with the IMF was during the preparation for the Paris II conference. The IMF did not endorse Lebanon’s plan and, on the contrary, signaled its disapproval. This stance was reflected in its October 2001 report on Lebanon, which emphasized the urgent need for comprehensive fiscal reforms to reduce deficits and public debt levels. Strengthening the financial sector’s resilience, enhancing transparency, and restoring confidence in monetary policy were identified as essential steps to stabilize the economy and safeguard the banking system. The report also warned about the high exposure of commercial banks to government debt and the Central Bank’s practice of financing government deficits within a fixed exchange rate regime. Despite these warnings, Lebanon secured funding from Paris II, primarily due to the late Prime Minister Rafik Hariri’s regional influence and the broader geopolitical context.
The
continuous policy of deferring necessary reforms has led the international
community to align firmly on the necessity of an IMF program as a precondition
for supporting Lebanon’s economic recovery and postwar reconstruction. After
the decision by Hassan Diab’s government to default on its sovereign Eurobond
debt for the first time in its history in March 2020, Lebanon formally
requested assistance from the IMF in May 2020. It prepared a financial recovery
plan in April of the same year. Negotiations with the IMF did not progress
further due to internal disagreement in Lebanon regarding assessing and
distributing the enormous financial sector losses.
The
subsequent government, headed by PM Najib Mikati, reached a Staff-Level
Agreement (SLA) with the IMF in April 2022. This agreement outlined a potential
46-month Extended Fund Facility (EFF) worth approximately $3 billion in Special
Drawing Rights (SDRs). Crucially, however, the SLA was explicitly conditional:
final approval by the IMF Executive Board and the disbursement of funds were
contingent upon Lebanon implementing a series of specific, critical reforms
known as "prior actions." These prior actions included a bank
restructuring strategy, a bank resolution law, a bank secrecy law reform, a
Banque du Liban (BDL) audit, bank-by-bank evaluations, a fiscal and debt
strategy, approval of the 2022 budget, exchange rate unification, capital
controls legislation, and electricity sector reform.
Despite
the urgency underscored by the IMF and the dire economic situation, progress on
implementing these prior actions has been exceptionally slow and largely
inadequate since April 2022. Exchange rate unification was achieved through the
central bank reducing money supply liquidity in the market and working through
a group of currency exchange dealers to manage the supply and collection of US
dollars and Lebanese Lira. The 2022 budget was approved without a robust
macroeconomic framework and inadequate financial data. The Mikati government
failed in multiple attempts to discuss and adopt a draft bank resolution law or
a draft bank restructuring law. Entrenched interest groups once again succeeded
in blocking any significant discussion related to these topics.
Current
PM Nawaf Salam’s ministerial statement explicitly stated its commitment to
reaching a program with the IMF. During the IMF/World Bank Spring 2025
meetings, the Lebanese delegation made it evident that the political and
monetary authorities are unified on the importance of reaching an agreement
with the IMF. The Salam government adopted a draft bank restructuring law, and
the Parliament has voted on the amendments to the bank secrecy law. These
measures could be framed as a sign of seriousness towards the international
community. Many additional actions are still required, such as adopting a 2026
budget that goes beyond being a mere accounting exercise and includes a
comprehensive macroeconomic framework with clear measures to stimulate economic
growth without overburdening the formal private sector, which is already
strained by taxes. In contrast, the expanding cash economy and informal sector
are accumulating unprecedented illicit profits.
The Way Forward: Navigating Internal
Resistance
Since
the economic, financial, and fiscal collapse of October 2019, one of the key
unanswered questions has been whether Lebanon can recover without an IMF
program. Is there a way to put the Lebanese economy back on the path of
economic recovery, regenerate economic growth, reintegrate the country back
into global financial markets, earn the trust of international and regional
donors, and negotiate a settlement with Eurobond holders without an IMF
program?
In
the Global South, skepticism towards IMF programs is prevalent, particularly
due to their perceived negative impacts. Many Latin American, African, and Asia
countries have had adverse experiences with IMF interventions that have led to
renewed debt crises, prolonged recessions, and widespread social discontent.
The IMF typically promotes an economic model that prioritizes market
liberalization, deregulation, and fiscal austerity, often resulting in
increased dependency on foreign capital and imports. Austerity measures, such
as spending cuts, tax hikes, and subsidy reductions, can reduce social welfare
programs and increase the cost of living. IMF policies often prioritize
macroeconomic stability over social equity, exacerbating income inequality.
In
Lebanon, however, opposition to IMF programs does not primarily stem from
social groups or civil society. There may be various reasons for this, such as
the weakening labor movement, which has been shaped for decades by political
and sectarian interests. What makes the Lebanese case intriguing is that the
primary group explicitly protesting and actively opposing a deal with the IMF
is the banking and financial elite.
Since 2019, Lebanon's central conflict has revolved around distributing the substantial financial sector losses among the state, commercial banks, and depositors. The IMF estimated Lebanon’s debt-to-GDP ratio at 164% in 2024. The key issue is how much of these financial sector losses the government would assume as debt. An IMF program requires that debt remains manageable and sustainable. If the primary objective of commercial banks is to emerge from the crisis unscathed or as “free riders,” then an IMF program is certainly not the appropriate path.
Disclaimer:
This article was published as part of the newsletter “IMF Policies: No Rule Fits All”. The views and opinions expressed are those of the author and do not necessarily reflect the official position of the Arab NGO Network for Development (ANND).
Recent publications
