RIYADH: The agreement between Lebanon and the International Monetary Fund on preconditions for a four-year Extended Fund Facility could fuel reform momentum, yet will not have an immediate impact on Lebanon’s sovereign creditworthiness, S&P Global Ratings said on April 14.

This comes as the US rating agency believes that the persisting political dysfunction and weak governance in Lebanon will be challenging to fulfill preconditions in order to gain the approval of the IMF’s board.

“We see a high likelihood that the preconditions for IMF board approval will not be met before the next general elections, to be held in May, given the short time before then. 

“We see a risk that progress on reforms by the end of 2022 will be insufficient for Lebanon to achieve the IMF board’s approval,” S&P said in a statement.

Lebanon has to implement a set of reforms to rebuild its economy and improve governance, to get the IMF approval of the EFF, which comes with around $3 billion in funding, under the staff-level agreement reached with the IMF on April 7.

Those reforms include cabinet approval of a banking sector restructuring plan, parliamentary approval of bank resolution legislation, and initiation of external evaluation of the 14 largest banks.

The banking sector restructuring plan is difficult to implement, according to S&P. An earlier plan suggested the writedown of government debt and discounting of banks’ deposits with the central bank, to protect small depositors and limit the fiscal costs, was not implemented due to political wrangling.

Lebanon’s banking sector and Banque Du Liban restructuring will be tied to the government’s debt restructuring strategy, as BDL owns 40 percent of government debts, and commercial banks about 25 percent.

Required reforms also include parliamentary approval of a revised bank secrecy law based on international standards. 

Lebanon is also expected to get parliamentary approval of the 2022 budget and cabinet approval of a medium-term fiscal and debt restructuring strategy. 

Other reforms include the completion of an audit of BDL’s foreign asset position and its unification of the multiple exchange rates in the economy.

The long-term constraints on Lebanon’s institutional setting coming from a fragmented political landscape will make it difficult to push through reforms, according to S&P.

Still, the rating agency sees the Lebanese authorities’ clear articulation and acknowledgment of the steps they need to take as a positive sign. 

Engaging in an IMF program will create a policy anchor for the authorities and could unlock further bilateral and multilateral support crucial for stabilizing macroeconomic conditions in Lebanon and rebuilding the economy, S&P added.