Lebanon: Lebanese parliament approves new government after long political gridlock

Event

On Monday 20 September, the Lebanese parliament approved a new government headed by billionaire and two times Lebanon’s prime minister, Najib Mikati. The parliament vote puts a halt to the political gridlock that left the country without a government for more than one year. The newly formed government will face important challenges as Lebanon is currently facing what has been described as one of the worst economic and financial crisis of the last 150 years. 

Impact

The approval of the new government is a welcome step as it would allow authorities to push forward a reform programme and negotiate support from the IMF and other donors. However, the political environment remains very challenging, which is likely to inhibit the reform process. Indeed, Lebanon’s economic, financial, and social situation is in a dire state – worsened by 13 months of political gridlock, inaction and policy inadequacy. During the last two years, Lebanon has experienced the collapse of its financial system, defaulted on its external commercial debt and the massive explosion at the Beirut Port damaged a large part of the capital. The Covid-19 pandemic has also aggravated the crisis given its domestic impact but also as Lebanon is reliant on the tourism sector, which accounted for more than 35% of current account receipts in 2019. Lebanon’s financial and socioeconomic difficulties need to be addressed by credible and structural reforms. The short mandate of prime minister Mikati will make it extremely challenging in the near future – parliamentary elections being planned in May 2022. Moreover, historically, Lebanon’s sectarian politics have tended to hinder economic reforms. For instance, the previous government could not find an agreement over key reforms such energy subsidies, the restructuring of the banking sector and the central bank and a new anti-corruption law. Additionally, the contended question about the size of the banking sector and the central bank’s losses, which led to a stall in the IMF talks in June 2020, still needs to be addressed and is considered as a key step to secure an IMF programme. 

In addition, Lebanon’s liquidity situation remains very precarious. The import-dependent economy has seen its foreign exchange reserves fall by almost half in 2021 compared to its 2019 level and has been struggling to import basic goods because of foreign exchange reserves shortages. 

The new government’s willingness to resume talks with the IMF and to implement the needed reforms are steps in the right direction. However, taking into account Lebanon’s challenging policy environment and standing liquidity problems, Credendo maintains its short-term political risk classification in category 7/7.  

Analyst: Andres Hernandez Cardona, A.HernandezCardona@credendo.com