Lebanon’s Economic Crisis: New Government Faces Challenges of Reform and Recovery

Lebanon’s new government, under Prime Minister Nawaf Salam, aims to address the country’s deep-rooted economic crisis, marked by a banking sector deficit of $80 billion and a plummeting national currency. Experts emphasize the need for major structural reforms, transparency, and accountability to restore trust and secure international aid. The challenges ahead include navigating Hezbollah’s influence and mobilizing parliamentary support for legislative changes.

Lebanon is currently at a critical juncture with the appointment of a new president and cabinet. The country faces the daunting challenge of reversing its economic collapse, which has persisted since 2019, resulting in an $80 billion deficit in the banking sector and stagnation in debt restructuring due to political conflicts. The national currency has plummeted by 90% during this period, rendering the country heavily reliant on dwindling foreign reserves without sufficient reforms to secure IMF support.

Prime Minister Nawaf Salam, who assumed office in January, vowed to “rescue, reform and rebuild” Lebanon alongside President Joseph Aoun. However, experts emphasize the urgent need for deep structural reforms to restore trust and stabilize the economy. According to Fadi Nicholas Nassar, a senior fellow at the Middle East Institute, the path to recovery is fraught with challenges, including a legacy of financial collapse and trauma from incidents like the Beirut port explosion.

The economic landscape demands a comprehensive independent audit of Lebanon’s financial sector, as called for by economist Jassem Ajaka, to facilitate fair distribution of losses. Ralph Baydoun, a research director, notes that international confidence hinges on robust anti-money laundering measures and a transparent framework for addressing financial discrepancies.

Salam’s commitment to ending sectarian quotas in financial roles serves as a hopeful signal for reform. Lebanon’s banking sector has contributed significantly to the crisis as banks heavily invested in the central bank, causing political deadlock over loss distribution. Ajaka recommends restructuring, emphasizing protection of depositors’ interests while determining each bank’s financial status.

Adviser Farida outlined a phased recovery strategy prioritizing small depositors through an audit of bank reserves and recovery of misappropriated funds, while larger deposits would be restored over time. This alternative avoids using public assets for banking losses, contrasting previous governmental proposals. The Depositors’ Union insists on accountability as critical for future reforms, cautioning against shifting losses to public resources.

Hezbollah’s political clout poses major obstacles to reform, as its entrenchment deters international investment and impedes Lebanon’s reintegration into the economic fold. Nassar stresses that true sovereignty requires dismantling Hezbollah influence, asserting that governance must transition from patronage to meritocracy, ensuring basic services are available to all citizens.

The potential for recovery depends on the reduction of Hezbollah’s influence, alongside the recent geopolitical shifts favoring closer ties with the West. Economic projections from the World Bank anticipate significant damage costs from the Hezbollah-Israel conflict, necessitating international aid for reconstruction.

President Aoun reiterated the new government’s commitment to urgent legislative action needed for reform during a recent World Bank meeting. Nassar stresses that results, not rhetoric, will define the government’s legitimacy. International sponsors remain skeptical, emphasizing the need for substantive reforms, highlighted by Ajaka’s call for a ceasefire with Israel and an independent judiciary.

Lebanon’s marginalization necessitates active lobbying for integration into global trade networks, especially following setbacks like the Beirut Port explosion. Haytayan, an energy expert, cautions against overreliance on the oil and gas sector for economic recovery, advocating for a focus on regulatory reforms in the electricity sector.

Despite imposing challenges, the Energy sector presents a potential for strategic advantage by targeting European markets for future gas exports. Farida highlights that legislative changes, requiring parliamentary support, are essential for implementing reforms and addressing the pressing financial crisis. It remains uncertain if the new administration can deliver a comprehensive recovery plan against a backdrop of historical inefficiencies in public finance management.

Lebanon is facing significant economic challenges, exacerbated by political instability and a long-standing financial crisis. The newly appointed government must prioritize transparency and enact structural reforms to regain national and international trust. Accountability mechanisms and independent audits are critical to protect depositors and ensure fair distribution of financial burdens. The country stands at a pivotal moment where decisive action can influence its recovery trajectory and reintegration into the global economy.

Original Source: www.arabnews.com