The Association of Banks in Lebanon (ABL) released on May 20, 2020 its own contribution to the Lebanese Government’s financial recovery plan in which it demonstrated its willingness to aid Lebanon in tackling its current crisis. In details, the ABL intends to engage in the reconstruction of the Lebanese economy and bolster its growth potential. The ABL’s communique attributed the prevailing economic crisis to the recurrent twin (fiscal and current account) deficits which were largely & indirectly financed by bank deposits from Lebanese residents and non-residents, noting that governments’ reluctance to implement necessary reforms has aggravated the crisis and has led to the country’s default on its external debt for the first time in Lebanon’s history.

ABL’s approach is based on five strategic pillars aimed at fostering a prompt and viable economic and financial recovery:

1. A debt restructuring process that minimizes the damaging impact on bank depositors and on the economy by:

• Avoiding internal default: According to the ABL contribution, if Lebanon opts to default on its internal debt, economic confidence and the financial account would be dented to the extent that Lebanon would be suffering from financial account deficits for the foreseeable future. The ABL contribution considered that the government needs to settle its debt with BDL via a Government Debt Defeasance Fund (GDDF) as a first step, given the Central Bank’s key role in Lebanese financial sector restructuring and public debt reprofiling. In details, the GDDF would own the government’s assets (valued at around $40 billion), and in turn issues long-dated, interest bearing securities for the same $40 billion amount to BDL, before finally cancelling the government’s debt to BDL.
• Domestic debt reprofiling: Can be accomplished by negotiating a relief package with domestic depositors, including considerable coupon reductions that would aid in placing Lebanon on a sustainable debt path.
• Foreign debt reprofiling: Would pave the way to tapping international capital markets in the medium-term. The foreign debt reprofiling calls for the restructuring of Eurobonds by exchanging the outstanding issues for either new New-York law securities or for new securities governed by Lebanese law.
• Debt sustainability analysis: ABL considered that in the event aforementioned debt profiling proves successful, the debt to GDP ratio would be projected to spike at 176.5% in 2021, before steadily declining to attain 72.5% in 2030.

1. A sustainable medium-term fiscal strategy that can also finance much needed social measures: The ABL’s goal is to reach a primary surplus of 2.1% of GDP through a mix of fiscal consolidation measures (on the revenues and expenditures sides) added some comprehensive debt relief measures. The ABL proposes the establishment of a Social Safety Net (SSN) that shields the most vulnerable segments of society from the aforementioned measures.
2. A monetary and exchange rate unification policy that would contain the considerable inflationary pressures and avoid hyperinflation: The exchange rate unification needs to come in the wake of the IMF program and would reduce the large external funding needs, since the depreciated currency would aid in boosting the tourism industry and stimulating export activity.
3. A financial sector restructuring based on an orderly banking sector approach: After settling debt owed by the Government to the BDL, the banking sector restructuring must be implemented using a case-by-case approach in a careful and progressive manner. It added that the banking sector restructuring is a major pillar of the recovery due to the fact that:

• A healthy banking sector has a strong impact on any sovereign rating, particularly in Lebanon where the banking sector is relatively large compared to the size of the economy
• The banking sector’s balance sheet is closely tied to those of the BDL and the Government
• The banking sector has traditionally borne a disproportionate share of the Government’s tax receipts
• A properly functioning banking sector serves as the birthplace of a professional’s career and of other employees

In this vein, the ABL’s contribution mentions that capital shortfalls must be assessed on a case by case basis under the guidelines of Basel III and encourages weakly-capitalized financial institutions to merge.

1. A strong diversification strategy of the economy in addition to structural reforms: The ABL stressed on the fact that the country has a low contribution of productive sectors to GDP and accordingly Lebanon must: shift the Government’s resources and efforts towards key areas (transport, electricity production and distribution), improve the business environment (cost of doing business and public sector corruption), develop high value-added productive sectors (agriculture, health, high tech medical equipment, etc.) and ensure macroeconomic stability (fiscal discipline and consistent monetary & exchange rate policies).

Subsequent to the implementation of the ABL’s plan, Lebanon’s transformation would lead to: an economic diversification (35% of GDP from productive sectors), a medium-term balance of payments surplus, 350,000 new jobs in the formal economy, and a potential real growth, with a GDP per capita of $15,000 by 2030.