Why the US should allow Lebanon's IMF loan application

On May 1, Lebanon, the small Mediterranean country in the Middle East that has been a theater for many of the region’s conflicts, applied for assistance from the International Monetary Fund. The application is liable to raise eyebrows in Washington, since one of the three parties supporting the current government in Beirut is the pro-Iranian militia-cum-political party Hezbollah.

The United States, along with many other countries, has designated Hezbollah as a foreign terrorist organization, and has stepped up sanctions against the group as part of its strategy of “maximum pressure” against Iran and its allies across the Middle East.

The IMF is of course not supposed to be in the business of furthering U.S. foreign policy objectives. Yet the U.S., which as the biggest contributor to the IMF, commands the largest block of votes (16.51 percent), has a track record of resisting assistance to states that it considers sponsors of terrorism. But it would be a mistake if Washington decides to oppose an IMF package for a state that it believes is at least partially in the hands of terrorists.

A failure of the ongoing IMF negotiations, which would also deter many other foreign donors from pitching in on their own behalf, could be calamitous. According to a June 8 report by the International Crisis Group, Lebanon’s economy is in a tailspin and its politics are dangerously unstable.

In March, the government defaulted on $31 billion foreign debt. The financial system is a gaping hole of impaired assets and losses some $60 billion deep (depending on which of currently five exchange rates is applied). The Central Bank is running down the reserves and may soon be out of dollars to pay for imports.

On the black market, the only place where actual dollars are available, the exchange rate for the Lebanese lira has dropped by 60 percent over the past nine months. Since Lebanon imports some 80 percent of what it consumes, the currency devaluation fuels runaway inflation, meaning that most Lebanese have lost around half of their effective purchase power.

The lockdown imposed on March 15 to combat COVID-19 has only accelerated this downward slide. With businesses starved of credit and demand plummeting, some 20 percent of the active labor force already lost their jobs before the pandemic. As the country gradually reopens, many more employees who have been furloughed without pay will find that their companies remain shut and that their jobs are gone.

While the social cost of the crisis has yet to hit with full force, the consequences are easy enough to predict. Protests that have rocked Lebanon since last October, but then dissipated during the lockdown, resumed in April. Unlike before, they quickly turned violent, with branches of local banks firebombed and one protester shot dead by the army in the poverty-stricken northern port city of Tripoli. A demonstration on June 6 led to violence in downtown Beirut. If and when social protests turn into hunger riots, over-extended security forces that are paid in an increasingly worthless currency will be less and less likely to control the situation. An accelerated deterioration of public services, such as health, education and the already failing electricity grid, may be only weeks away.

Yet as one reads responses from some U.S. commentators and government officials to the political and economic crisis and IMF application, much of the focus still remains on Hezbollah: how the party will supposedly sabotage reform, how it allegedly aims to exploit the crisis to expand its influence, how assistance should be leveraged to chip away at its power, or how sanctions against its allies may isolate the group.

This is curious, as most of the other Lebanese parties, among them staunch allies of the U.S. and its Western and Arab allies, had a big share in the networks of clientelism and corruption that have beggared the country. They stand to lose from serious reform measures as much as Hezbollah does, some perhaps even more.

What is more, putting a focus on isolating Hezbollah and ostracizing its allies, whose combined strength amounts to a clear majority in the Lebanese parliament, will only serve to make the country ungovernable. That is a disturbing prospect in particular for America’s European allies, who value Lebanon’s role as host to some 1.5 million Syrian refugees.

Political paralysis in Beirut would neither advance reform, nor help the cause of the broad civic movement that has challenged the political elite — Hezbollah included — since October 2019. On the contrary: the more the country descends into misery, state institutions disintegrate, and the security situation deteriorates, the more parties that still control resources and offer protection based on the solidarity of religious communities — again, Hezbollah included — will re-assert themselves.

Past experience across the region has shown that the disintegration of state institutions and state control can have dangerous and extremely costly consequences. It would be foolish to risk the destruction of yet another Middle Eastern state for the sake of scoring geo-strategic points.

Lebanon needs immediate external support to prevent state institutions from falling apart and to preempt a crushing humanitarian crisis. Beyond this, foreign donors and international institutions should focus on reform measures that help root out corruption and strengthen accountability. What role Hezbollah should or should not play in the future of Lebanon is for the Lebanese to decide, in the next round of parliamentary elections now scheduled for 2022.