Corruption could undermine EU financial package, says Lebanon's finance minister

Youssef Khalil tells The National that substantial reforms should accompany aid after €1 billion pledge

Lebanese Finance Minister Youssef Khalil said only substantial reforms can lift the country out of its deep financial crisis. Reuters

Lebanon's caretaker Finance Minister, Youssef Khalil, has cautioned that the impact of the recently announced financial package of €1 billion ($1.07 billion) to the cash-strapped country could be undermined by corruption unless accompanied by reforms.

“This is a risk,” Mr Khalil said. “The modalities to prevent this will be discussed in the coming weeks.”

Five years into an economic crisis labelled by the World Bank as one of the worst since 1850, vested interests in Lebanon's ruling elite have been accused of obstructing the much-needed financial reforms necessary to secure the country's access to a $3 billion aid package from the International Monetary Fund (IMF).

Despite pressure to make aid conditional on reforms, the European Union nonetheless this week pledged a financial package of €1 billion euros to prop up Lebanon's faltering economy.

In an interview with The National, Mr Khalil said that only substantial reforms could lift the country out of its deep crisis, despite a slowing economic contraction since 2022.

“We've succeeded in boosting state revenues this year, but this will only provide a respite of two or three years unless structural reforms are implemented,” he said.

These much-needed reforms have been prevented by “the economic and political structure of the country”, he said.

After a severe financial crisis shook the country in 2019, Lebanon reached what the World Bank described as a “temporary bottom” in 2022, allowing the volatile exchange rate to temporarily stabilise, due to tourism and significant remittances from the Lebanese diaspora.

However, the spillover of the Gaza war into Lebanon has curbed initial predictions of growth for the country's economy, which had been projected to expand in 2023 for the first time since 2018, by 0.2 per cent.

Finding a way out

Mr Khalil said one of the main reforms that helped bolster state revenues was the increase in the exchange rate used to calculate customs duties on imports. This, he said, enabled the government to increase public service workers' salaries.

The 2024 budget proposal put forward significant tax and VAT increases, but was criticised by some observers for its lack of long-term vision.

“We cannot live like this on customs revenues eternally,” Mr Khalil admitted.

International donors have demanded structural reforms of Lebanon's public sector, with a focus on revamping the dilapidated electricity sector and its public utility, Electricite du Liban (EDL).

These reforms have yet to be initiated.

Nonetheless, Mr Khalil said he remains optimistic about Lebanon's ability to emerge from the crisis.

He see hope in tourism revenues and the potential for investments through public-private partnerships, which allow large-scale government projects to be completed with private funding, thereby alleviating pressure on public finances.

“Confidence is key and can be restored,” he said.

Many experts believe that restoring confidence hinges on the adoption of an economic recovery plan, one of the prerequisites outlined by the IMF, which Lebanon's elite has displayed minimal interest in implementing.

Three different plans have already been jeopardised because of the lack of consensus on how to allocate Lebanon's massive financial losses.

The IMF, with whom Lebanon signed a staff-level agreement yet to be implemented, has consistently criticised, in unusually strong terms, the country's elite for its inaction.

“The IMF plan is there to be proposed but not imposed,” Mr Khalil said, claiming the plan's failure came from a lack of flexibility on how to adopt the required reforms within the Lebanese context.

He added that the broader political context is key to Lebanon' economic recovery.

South Lebanon, which is being pounded on a daily basis by the Israeli army amid the continuing border conflict, has endured “significant destruction”. No estimates have yet been made of how much it could cost Lebanon to rebuild.

“Who will foot the bill, what the cost will be, poses a significant challenge,” Mr Khalil said.

Crisis responsibility

Lebanon's 2019 economic crisis, which came after decades of public funds being squandered, plunged more than 80 per cent of the population into poverty, destroyed the value of the local currency and pushed the banking sector to insolvency.

The government estimates that about $70 billion was lost, with many ordinary Lebanese citizens losing their entire savings which were stuck in banks.

Lebanon's former central bank governor, Riad Salameh, long lauded as the “financial wizard” who kept the banking sector flourishing, is now wanted by the European judiciary on accusations of corruption and is widely viewed as the culprit for the economic collapse.

Mr Khalil, who joined the central bank in 1982 as an economist, has consistently denied any knowledge of wrongdoing during his tenure.

As the director of the financial operations department at BDL (Banque du Liban), from 1994 until he became a government minister in 2021, he oversaw the financial engineering strategy implemented from 2016, in which the dollar-starved BDL offered lavish interest rates to banks in exchange for their dollars.

This policy resulted in massive losses at the central bank, which were not publicly disclosed at the time. It has since been blamed as one of the causes of the economic crisis.

Its critics have labelled it a “Ponzi scheme”, where fresh borrowing is used to pay back debt.

In hindsight, Mr Khalil acknowledged the excesses of this policy.

“It was originally designed to buy time until we could establish more robust monetary and economic strategies, but everyone got carried away and overdid it.”

Banks have been the target of protests across Lebanon since 2019, with depositors angry that they have been unable to access their savings.

BDL and some other banks in Lebanon have tried to deflect responsibility for the losses from the period on to public policies, claiming that the financial sector had lent money to the government, which they accuse of misusing funds.

In early 2023, Lebanon's central bank said it had been owed $16.6 billion from the state since 2007.

But Mr Khalil insisted that there is a shared responsibility in the crisis. “BDL was part of all political and economic decision-making.”

“The state, the central bank and the banks – all have made mistakes.”