Presence Of Hezbollah In Lebanon Renders National Unity Government Ineffective, Hinders IMF Aid
By Alex Dooler
A proposed National Unity Government (NUG) in Lebanon following the shock resignation of Prime Minister Hassan Diab and his cabinet is expected to be ineffective, said Carlos Abadi, Managing Director at financial advisory firm DecisionBoundaries.
His comments come as the President of the French Republic, Emmanuel Macron, received a hero’s welcome in Beirut earlier this month, promising a ‘unity government’ for the struggling nation. Former Prime Minister Saad Hariri is expected to lead this new unity government with the support of the United States and Saudi Arabia, were it to go ahead, said one Lebanese government source.
But the proposal contains its own pitfalls, according to Abadi. “France fails to understand the extent of the stranglehold on power held by Hezbollah,” he said.
Hezbollah is a Shiite Muslim political party and militant group in Lebanon, which exerts significant influence over the country’s politics.
“Under an NUG, the ultimate bearer of power will remain Hezbollah,” said Abadi, adding that such powers are “by force of its arms.”
The presence of Hezbollah in Lebanon’s political landscape is especially pertinent since the country will need to make customs reforms in order to unlock more aid from an IMF program, one bondholder told Debtwire, a move Hezbollah is expected to oppose.
The IMF’s required reforms to unlock longer term support also include the restoration in solvency of its public finances, elimination of the current multiple exchange rate system, and a comprehensive audit of the central bank, a report by Moody’s said last week.
A National Unity Government would also likely be unacceptable to the demands of protesters on the streets of Beirut, giving rise to an “unstable equilibrium” even if it were to be swiftly formed, said Nafez Zouk, lead EM Macro Strategist at Oxford Economics.
This is because such a structure of governance can be seen as merely “cosmetic,” according to a report in Foreign Policy. “The government’s resignation will not change the system as long as the same political elites maintain their power and control over other institutions.”
Diab had voiced his support for elections to be held in the next few weeks, bringing hope of a speedy resumption of negotiations between the government and the funds involved in its debt restructuring talks, said Zouk.
This is because funds cannot currently negotiate with the country’s caretaker government, Zouk added.
But others were less optimistic about a speedy transition of government. Diab’s assurances are worth little, Abaid said. He is a figure “who no longer yields the power to make such promises.”
Lebanon’s fractured political scene often gives rise to lengthy negotiations following its elections, the Moody’s report said, pointing to the recent parliamentary elections held in May 2018.
It took eight months to form a new government following those elections, meaning that necessary reforms to unlock an $11 billion investment aid package pledged during the Paris IV conference in April 2018 was spurned, according to Moody’s.
Likewise following the resignation of Saad Hariri’s government in October 2019, it took three months before Diab, his successor, had the mandate to advance economic reforms and to negotiate an external financial support package with the IMF, the Moody’s report said.
A political system which is slow to react will prove testing for Lebanon – a country which harbors debt at around 175% of GDP, and with estimates of the cost of its recent catastrophic explosion ranging between $7 billion and $15 billion, said one bondholder.
This time could well be different though, said Zouk, citing the possibility of a quicker formation of government in light of the challenging economic and humanitarian outlook.
Creditors in the mix
How Lebanon’s creditors fare will not just depend on the continued influence of Hezbollah in blocking the necessary IMF reforms relating to customs, but also to other potentially more important power-plays, said the government source, including who is chosen as the country’s next finance minister.
“A possible candidate is Talal F Salman, presently lead negotiator with the bondholders and a senior member of the IMF negotiating team. He would probably be viewed most positively by both the IMF and bondholders. He is also regarded as the architect of the default and a key figure in the financial recovery plan,” said the government source.
Some of the other candidates for the position are expected to mean further delays and a resumption of the status quo, said the government source.
It is unclear whether the next government will press on with the forensic audit into the Central Bank of Lebanon announced last month, for which the IMF has conditioned its aid, the source said.
Such an audit will be especially important in light of press reports that its central bank had inflated assets to the tune of $6 billion by using unorthodox accounting measures.
The future of Riad Salameh as the central bank governor is now also on the table with both Washington and Paris, which was not the case prior to the crisis, said the government source.
Representatives for the Government of Lebanon declined to comment.
Alex Dooler is a reporter at Debtwire CEEMEA, covering distressed debt. He can be reached at firstname.lastname@example.org.