Economic postcards from Beirut

Global investment bank Goldman Sachs, in a report titled “We Could Be in for a Long Wait,” assessed that the Lebanese government is unlikely to make meaningful progress toward securing a Staff-Level Agreement with the International Monetary Fund (IMF) or reaching a debt-restructuring deal with Eurobond holders without resolving the issue of Hezbollah’s disarmament. The report warned that progress on economic reforms would remain delayed as long as the question of Hezbollah’s weapons remains unresolved and continues to pose risks of renewed instability and conflict. At the same time, it noted that Lebanese authorities have made notable advances on the reform agenda this year, particularly through Parliament’s amendment of the Banking Secrecy Law and the enactment of the Banking Resolution Framework.

These assessments emerged following the Beirut One conference, which convened for two days last month with the aim of repositioning Lebanon on the regional and international investment map. The event attracted leading global financial institutions, including Goldman Sachs, Bank of America, Morgan Stanley, and Jefferies, alongside asset management firms and private equity funds. While government officials used the forum to convey the message that Lebanon is “open for business,” “back on the regional map,” and aware that significant work remains to attract investments and projects, several high-profile institutions leveraged their presence in Beirut to meet with public- and private-sector stakeholders and to issue reports reflecting their impressions of the country’s economic and political outlook.

Also, it stressed the importance of enacting the Financial Gap Law in order to address and equitably distribute losses in the banking system, and noted that Lebanon's economic crisis and sovereign default cannot be resolved without such legislation.

But it indicated that there are significant disagreements among stakeholders about the timeline of the application of the banking system’s losses, even though there is consensus among on the order and sequence of the allocation of the losses. It said that Banque du Liban argues that the hierarchy of claims should be applied after the exclusion of so called ''anomalous deposits'', which include balances inflated by excessively high interest rates, the deposits converted from Lebanese pounds to US dollars at the former official rate of LBP1,500 per dollar, and balances derived from earnings whose legitimacy or legality cannot be verified. Also, it pointed out that Banque du Liban estimates the amount of ''anomalous deposits'' denominated in foreign currency at $35 billion, which would reduce Banque du Liban’s liabilities to around $50 billion after disqualifying these deposits, and would allow the banks to write down an equivalent amount in Certificates of Deposits that Banque du Liban owes them.

But it noted that the IMF asserts that the hierarchy of claims should be enforced prior to any reduction in bank deposits, which would legally eliminate the banks' equity at the very start of the process. It said this divergence between the IMF and Banque du Liban remains a major sticking point that must be addressed before the government reaches a potential agreement with the IMF, even though Banque du Liban contends that the banks' shareholders' equity would still be almost entirely erased under its plan.

Also, it noted the clear difference between Banque du Liban and the Ministry of Finance about the treatment of a $16.5 billion overdraft owed by the latter to the former. It noted that Banque du Liban favors a full repayment via a perpetual and low interest Treasury bond, which would preserve its balance sheet and would allow it to avoid a further write-down of liabilities that would ultimately imply a deeper haircut for depositors. But it indicated that the ministry is concerned about the impact of such debt on the public debt's sustainability, as the overdraft is equivalent to about 50% of current GDP.

However, it considered that external pressure is likely to push the government and various parties towards a compromise on unresolved economic issues within the framework of a broader political agreement that resolves the issue of the weapons. Moreover, it considered that the risk of persistent stagnation on economic reforms remains elevated, given that the design of the electoral system makes it unlikely that the political landscape will change significantly in the upcoming parliamentary elections. As such, and given the list of challenges it enumerated, the report estimated that “the risk of inertia is significant”, which could delay much-needed reforms in the foreseeable future. 

In parallel, in a post-visit note, the investment banking arm of Bank of America identified several factors that could impact Lebanon's macroeconomic and financial outlook in the foreseeable future. It said  that these factors consist of progress on political reforms or, in other words, resolving the issue of Hezollah’s weapons; tensions between Israel and Hezbollah; the enactment of the 2026 budget; a potential delay to parliamentary elections scheduled for May 2026; the Parliament’s debate of the Cabinet-approved amendments of the Banking Rsolution Framework; the Cabinet’s target of approving the Financial Stability and Deposit Recovery (FSDR) Act by the end of 2025; a potential agreement between the Ministry of Finance and Banque du Liban on the recognition and treatment on the disputed $16.5 billion foreign-currency loan that the government owes to the Central Bank; and a revision of the time series for the country’s nominal GDP.

Further, it indicated that, while a long delay to parliamentary elections could provide the legislature additional time to enact challenging reforms, it would also prolong the tenure of the current parliament, which has a weak track record on reforms. Also, it estimated that a compromise on the implementation of Lebanon's financial recovery framework is unlikely prior to addressing the disarmament of Hezbollah. Further, it said that the FSDR Act does not appear to be currently aligned with the International Monetary Fund’s conditions, that there is still no domestic consensus on the use of Banque du Liban’s gold reserves within the FSDR Act, and that applying the hierarchy of claims in the banks’ restructuring process remains contentious.

In addition, Bank of America considered that a potential normalization of ties with Saudi Arabia could be an important sign of political and financial support to Lebanon, rather than an indicator of commercial support, and will likely depend on what it termed “domestic political reforms”. It added that the restoration of relations with the Kingdom could provide financing assurances within an IMF program and a conference on reconstruction, as well as for the holding of a conference in Riyadh to support the financing needs of Lebanese Armed Forces. It also noted that a return of Arab tourists to Lebanon could support the country’s external sector, but noted that this is likely to depend on political stability.

While the two leading investment firms do not underestimate the importance and urgency of the “technical” aspects of the economic recovery, they returned from their trip with the impression that political and security issues constitute the main obstacles, or at least the main challenges, to Lebanon’s economic emergence from the economic crisis and that the recovery will become possible once the political and security road is safe to navigate.