The Institute of International Finance (IIF) issued on July 21, 2022 a report titled: “Lebanon: Mounting Challenges” in which it discussed the multiple challenges facing the country. In details, the IIF report commented that the country is in a state of political paralysis which could postpone the urgent reforms required to potentially unlock $15 billion in financial assistance from the international community ($3 billion from the IMF and $12 billion from the CEDRE conference). The report noted that a “consensus” government needs to be formed and that said government must not be affected by political bickering in order to implement the necessary reforms (including the measures highlighted in the IMF staff level agreement) that would increase internal and international confidence in Lebanon. Concerning the Lebanese economy, the IIF revealed that between 2018 and 2021, the country’s economy contracted by 45%, with inflation reaching 211% y-o-y in May 2022. In addition, the report noted that unemployment levels in Lebanon increased from 11% in 2018 to 30% in 2021. The IIF has also revised its economic growth projections for 2022 to 3%, backed by a strong tourism activity, especially during the summer. The report also revisited the average inflation forecast from 96% to 156% for the year 2022 primarily due to a larger depreciation of the pound in the parallel market and higher global food & oil prices. Furthermore, the report noted that the current account deficit of $2.7 billion and the net capital outflows of $2.3 billion will lead to an additional drop in BDL’s reserves (excluding gold and Eurobonds held at BDL) to $9 billion in 2022. With regards to the government’s reform plan, the report commented that some elements need to be re-examined to ensure that the IMF agreement places the Lebanese economy and financial sector on a solid basis. The IIF noted that the haircut on deposits could be reconsidered, stating in this respect that it believes the government and BDL should assume a larger portion of the financial losses (estimated at $73 billion). The report also added that the government’s medium-term projections are “too conservative and cautious”, stating in this respect that the economy could recover rapidly assuming all the reforms recommended by the IMF kick-in on a timely basis and assuming the $15 billion in external financial assistance is received between 2023 and 2026 (equivalent to 70% of the year 2022’s GDP). The report also suggested some options that would make deposits more accessible, such as rendering a large portion of “eligible” FC deposits accessible in LBP in the context of a comprehensive reform program with the IMF. In this vein, the report stated that said program will restore confidence, put the economy on a strong recovery path and stabilize the unified exchange rate at a much favorable level than the current black market exchange rate. Accordingly, BDL could provide enough liquidity in LBP, thereby allowing banks to meet deposit withdrawal demand in LBP. Furthermore, the report added that a sizeable portion of FC deposits of the top 5% of large depositors (exceeding $200K) could be settled by a “Deposits Recovery Fund” (DRF) that could include certificates of deposits issued by banks from their accounts with BDL and carrying a 4% average annual interest rate paid by BDL. The government may also transfer 50% of any future primary budget surpluses to the DRF (expected to exceed 2% of GDP). The report also provided other options to boost the assets of the DRF such as the government giving concessions to multinational companies to rebuild and manage the Beirut port over a period of 20 years, establishing a National Real Estate Fund (NRF) which, if managed properly, could generate large annual dividends. From another perspective, the IIF noted that some of the IMF’s key actions need to be implemented as soon as possible regardless whether a new cabinet is formed or not, namely approving an appropriate emergency bank resolution legislation, adopting the reformed banking secrecy law, completing the audit of the BDL, unifying the multiple exchange rates, ratifying the 2022 budget to start regaining fiscal sustainability, preparing & approving a medium-term fiscal framework, and formally adopting a capital control law. On a similar note, the IIF urged Lebanon to restructure the electricity, telecom, water and port sectors and other state-owned entities. The IIF has drafted two scenarios for 2023 and beyond, an Optimistic scenario and a Pessimistic one. The “Optimistic” scenario assumes that the authorities will implement the much needed economic reforms which would will unlock external financial support. Under this scenario, real GDP growth could accelerate to 6% in 2023 and to 8% in 2024 while Inflation would gradually decrease to double digit levels in 2023-2024 and to single digit levels in 2025-2026 aided by the appreciation of the unified exchange rate and lower commodity prices. The current account deficit may also drop from 12% of GDP in 2022 to circa 3% of GDP by 2026. The report also stated that the budget could register large primary surpluses in 2023 and onwards as government revenues recover from 9% of GDP in 2022 to 17% in 2026. Furthermore, the IIF mentioned that BDL’s reserves could gradually rise from below $9 billion in 2022 to $30 billion in 2026, noting that a potential IMF program would put Lebanon’s public debt on a downward trajectory. The report also mentioned that Lebanon would be able to recover its GDP in USD terms within 4 years (a rise from $23 billion in 2022 to $53 billion by 2026). As for the “Pessimistic” scenario, which assumes that the parliament will continue to block urgent reforms thereby rendering the IMF agreement null, BDL would be forced to use most of the obligatory reserves (official reserves would drop to below $1 billion). Public debt would remain around 200% of GDP in the absence of debt restructuring or a haircut on Eurobonds. The report also noted that Lebanon will become a failed state under this scenario (case of Venezuela, Somalia and most recently Sri Lanka), with GDP continuing to contract and the black market exchange rate depreciating to above 40,000 LBP per USD by end of 2022 and LBP 110,000 per USD by end of 2026. Finally, the report commented that the risk of disintegration of the country will be very high and the majority of deposits will be inaccessible, always under the pessimistic scenario.