China vs. IMF: 10 things you need to know now

By Salam Yamout  

A lot of political debates have been going on about the correct approach and what the right step should be for Lebanon but the equation is much less complex than they are making it out to be. Here is everything you need to know about this issue in 10 points:

10- All countries act upon their best self-interests. Countries have a strategy on where and how to invest their money and the goal of said investment could be political, humanitarian, or economical. Whether it be the IMF or China, both options have strict conditions, their own benefits and drawbacks and their own risks. We are never to forget that there is always an agenda and nothing comes for free.

9- The IMF is a special fund set up to assist countries hit by crises by providing them financial support. Money received by the IMF are loans in USD that are placed in the country treasury to give the country breathing room, or a margin of flexibility until the country sorts its problems. Several countries have had recourse to IMF loans with mixed results. Usually, the IMF puts on tough conditions for the government to implement in order to receive IMF funding, these conditions do not always meet countries’ needs. The more the government is prepared with a solid plan for bold reforms, the more chances it has to survive the IMF program.

8- The best Lebanon can get from IMF is USD 10 Billions over 5 years, i.e. USD 2 Billion per year over 5 years. Lebanon’s financial loss (deficit) is estimated at around USD 60 Billions and for the last 10 years, Lebanon government borrows between USD 3 – 7 Billion per years just to spend on its operation. Needless to say that without serious reform to cut spending and increase revenues, while restarting a crippled economy and providing social services, the IMF financial support is a drop of water in the sea of needed money.

7- The biggest problem in Lebanon besides the deficit is the need for USD. Since our economy is based on the USD and we import a lot more than we export, we need dollars to buy 80% of our food, medicine, fuel, cars, and everything we consume. Lebanon has been over-exporting twice as much as any other country its size. There used to be a time where dollars (remittances, tourism, petro-dollars) made their way to Lebanon, but since 2010 these dollars have been decreasing. So Lebanon needs to find a way to reintegrate fresh dollars into the economy.

6- No country currently wants to loan us money anymore due to our lack of responsibility, since we were not even able to manage our own budget. In addition, foreign states have lost trust in Lebanon and its government due to the lack of implementation on reforms it has promised for the longest time. Hence, the IMF is one of the few options left to inject funds back into the treasury.

5- China's aid to Lebanon is part of its foreign investment strategy, notably “the Silk Road Project” or the “Belt and Road Initiative (BRI)”, which involves building roads and ports across Asia, Europe, and Africa to facilitate trade routes to China. The BRI strategy works by signing infrastructure projects with a country's government and is implemented mostly by Chinese companies as loans to be paid back by said governments in US Dollars. However, China’s foreign ivenstment strategies are not suitable to debt “overhangs” countries like Lebanon and can lead to asset seizure similar to the Sri Lanka’s Hambantota port seizure.

4- China could loan the government money for implementing infrastructure projects and Lebanon would have to repay the loans in US Dollars. This means that China could be a substitute for CEDRE but can't be a substitute for the IMF who will loan the government of Lebanon US Dollars deposited into the Lebanese treasury.

3- China is our biggest trade partner for imports. There are no laws nor practices that hinder us from doing business with China which we are currently doing and should continue doing. This said, one should not think IMF vs. China, but rather why not IMF, and China, and as many other countries as possible to get all the money we can get (given that we start reform before spending more debt money).

2- China or not, what we should always demand is a fair and transparent procurement process. What we do not want is to sign closed contracts with anyone since commissions on contracts are the main source of corruption in Lebanon. Our eyes have to remain wide open on how we conclude contracts, as well as with whom we conclude contracts.

1- Finally and most importantly we must look at the long term benefits rather than the short term gains. Nobody will do for us what we do not want to do to ourselves. We have a lot of work to do internally to ensure that any foreign aid we receive will be properly managed. Our aim should be to rebuild our crippled economy and create jobs, not just use the money on payroll, perks, and un-necessary projects.

We must tread lightly as the actions we take today will determine the future outcome of our country.