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Tuesday, May 21, 2024

Deepening Economic Crisis: Lebanon Will Default on Debt Payment

The decision will appease protesters who have clamored for the government to prioritize domestic concerns. But it does little to solve the nation’s financial woes.

Lebanon will default on $1.2 billion in foreign currency debts coming due on Monday, the prime minister said Saturday, as the country lurched deeper into an economic crisis that has set off widespread anti-government protests and left the country grasping for a foreign bailout.

Lebanon decides to default on a foreign debt payment for the first time in its history as the country struggles with a major financial crisis.

Amid a rapid devaluation of the Lebanese pound, shortages of imports, a slow-motion bank run and thousands of layoffs, the decision is likely to appease protesters who have clamored for the government to prioritize domestic concerns over repaying the Eurobond, as the debt is known.

But it brought Lebanon, one of the most indebted countries in the world, little closer to a resolution of fiscal problems that go back decades.

“The reserves of hard currency have reached a critical and dangerous level,” Prime Minister Hassan Diab said in announcing that the government would not make the debt payment. “It is necessary to use these funds to secure the basic needs of the Lebanese people.”

The 61-year-old became prime minister in January as part of a new government that formed after protests over the failure of leaders to deal with the economic crisis turned violent.

In October, anti-government protesters took to the streets in response to rising prices, high youth unemployment, poor public services and corruption.

Mr Diab added that more than 40% of the population could soon be in poverty as Lebanon tackles its worst economic crisis in decades. In a live televised address on Saturday, Mr Diab assured that negotiations to restructure the country’s debt, which stands at more than $30bn, would continue “with all creditors in a manner consistent with the national interest”.

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Some economists and policymakers had argued against default to preserve Lebanon’s unblemished record of repaying its debts, pushing instead to restructure it. Without giving specifics, Mr. Diab said the government would seek to negotiate with creditors to restructure the rest of its foreign currency debt, which totals $31 billion.

In recent weeks, the government has been consulting with the International Monetary Fund, signaling that it would seek a bailout if its divided political factions can reach a consensus. But any international aid package is likely to come at the price of austerity measures that will be difficult for an already frustrated Lebanese public to accept, and promises of reform that previous governments have repeatedly made and broken.

Yet there appears to be little choice but to look outside of Lebanon for help.

The country has floundered in the grip of simultaneous political and economic crises for nearly half a year, as the remittances from Lebanese working abroad, aid from Gulf countries and financial wizardry at Lebanon’s banks, which had kept the economy buoyant for years, began to collapse.

Read more: Has Efforts to End GCC Crisis been Suspended?

The slumping economy helped drive hundreds of thousands of Lebanese across the country into the streets in mid-October, denouncing the political elite for mismanagement and corruption that have left the country unable to provide basics such as 24-hour electricity and reliable running water.

That forced the government’s resignation and led to a month-long political vacuum, during which the economy slid further. But the cabinet that eventually replaced it, a mixture of policy experts and political appointees led by Mr. Diab, has failed so far to gain public confidence or head off further economic damage.

With Lebanon remaining heavily in debt, economists suggest that a rescue deal with the International Monetary Fund (IMF) is the only way forward – and real reforms would be needed for that to happen.