Nick Grinstead, Senior Regional Security Analyst

With little popular goodwill and diminishing time before key decisions on economic recovery and debt management need to be made, Prime Minister Hassan Diab’s new government appears to be gathering the low-hanging fruit – changes in the consumer sector – while leaving the more difficult reforms in the political and banking sector for later. This comes after the Lebanese cabinet barely won its parliamentary vote of confidence last week as a quarter of MPs boycotted the session. Outside parliament, anger filled the streets as demonstrators protesting corruption and economic malaise protested the Hezbollah-backed cabinet by blocking the building and wounding an exiting MP.

Given the lack of public support or broad political consensus behind Diab’s government, the PM and his ministers have chosen to take a slow and measured approach, announcing the formation of technical committees to study the situation rather than take immediate action. This may be the safest short-term course of action as the cabinet gathers support for the more important and painful reforms ahead. In a bid to jump-start this process, last Wednesday the government announced that it had invited the IMF to provide technical advice on economic recovery for Lebanon. Engaging with international lenders at some point was almost a certainty for Lebanon, although there was a conspicuous lack of mention of a bailout or debt restructuring in the announcement. The IMF’s reputation for austerity-driven measures could be used to justify decisions like VAT or gas price increases that will directly affect the Lebanese consumer sector. The Diab government may think that the IMF’s reputation will give it political cover to carry out these reforms and allow it to defer moves against the banking sector.

Following the IMF announcement, Diab’s government further telegraphed its strategy to delay the more serious reforms by decided to postpone a decision on whether or not to make the upcoming March $1.2 billion Eurobond repayment. Making the March payment is a bit of a lose-lose situation for the government and Lebanon’s finances: if they make the payment, its foreign reserves deplete even further, putting more strain on the lira and creating a perception that the government prioritizes its external debts over the well-being of its own citizens while using their own deposits no less. In the other scenario, Lebanon does not make the payment and defaults and while the March payment is the largest the upcoming tranches, it is only one of several large bond payments the country must decide on in the coming months.

Both the invitation of the IMF technical team and the wavering on bond repayments demonstrate the government’s preference for incremental measures with a near-term focus on consumer sector reforms. Diab’s cabinet may be betting that decreasing subsidies and increasing revenues through VAT, petrol, and electricity hikes will be easier to pull off and would satisfy demands of international lenders like the IMF in order to unlock bailout packages. While the latter part may be true, these price hikes will undoubtedly cause large-scale demonstrations in Lebanon.

The intensity of these demonstrations will be further exacerbated if these reforms and the upcoming bond repayment are given a go-ahead without equal and simultaneous measures taken to reform the country’s banking sector. Many demonstrators blame politicians and the country’s private banks equally and the IMF’s approval will do little to ease the anger if only consumer sector reforms are announced. Indeed, in the event of an announcement of bond repayment without commensurate banking reforms, there is a high probability that Lebanese banks will be targeted by rioters again.