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World News

As Lebanon's crisis deepens, politicians trade blame

BEIRUT (Reuters) - Lebanese politicians who have led their country into financial disaster are squabbling over who is to blame, stirring up old rivalries that may spell even deeper trouble ahead.

Lebanon faces its gravest threat since the 1975-90 civil war as its currency sinks, inflation spirals and protesters return to the streets, angered by an economic crisis made worse by a coronavirus shutdown.

Unrest this week in Sidon and Tripoli, where banks were torched and a demonstrator killed, is seen as a sign of what’s to come as poverty and unemployment soar. Prices of consumer goods have shot up 50% since October.

The government is trying to finalise a rescue plan, perhaps as soon Thursday. Many hope this will be taken straight to the IMF, widely seen as Lebanon’s only source of vital financial aid, albeit with tough conditions attached.

The plan must address huge gaps in the national finances including a projected $83 billion hole in the banking sector - an amount that will soon be equal to twice the size of the rapidly shrinking economy. How to divide the losses is one of the biggest problems ahead.

But while the government is backed by the pro-Iranian Shi’ite group Hezbollah and its Maronite Christian ally President Michel Aoun, it is opposed by important players in Lebanon’s sectarian politics: Sunni politician Saad al-Hariri, Druze leader Walid Jumblatt and Aoun’s Maronite rival Samir Geagea.

Once leaders of an alliance against Hezbollah and Syria, these three have grown increasingly critical of Prime Minister Hassan Diab, a little-known academic made premier by Hezbollah and its allies using their parliamentary majority.

Nabih Berri, the Shi’ite parliament speaker and Hezbollah ally, appears to be taking a position in the middle.

The old political fault line has emerged in a row over the role of central bank governor Riad Salameh, steward of the banking system since 1993 and architect of the fixed exchange rate that has crumbled since mass protests against political corruption and incompetence began last October.

Diab has rebuked Salameh over the currency crisis and a lack of transparency at the central bank. Hezbollah has also been critical, its deputy leader saying Salameh was in part responsible for the pound’s collapse.

AN AXE TO GRIND

Heavily armed and listed as a terrorist group by Washington, Hezbollah has its own axe to grind with Salameh: his application of U.S. sanctions that have shut the group and its followers out of the banking system.

Salameh has hit back, blaming successive governments’ failure to reform and vowing to defend the central bank’s independence.

Hariri, a traditional ally of Gulf Arab and Western states, has defended Salameh while accusing Diab of trying to destroy Lebanon’s free market economy and ignoring state corruption.

Jumblatt has meanwhile painted Diab as a nonentity doing the bidding of Hezbollah and Aoun. While Salameh had made mistakes, he was not to blame for $50-$60 billion of waste in the state-run electricity company, the responsibility of an energy ministry run for years by the party Aoun founded, Jumblatt said.

Lebanon’s leaders, all of whom are accused of complicity in the corruption that has led to the crisis, are trying to deflect accountability.

“This bickering will only lead to more suffering and deeper economic problems. If the exchange rate reaches extremely high levels, I don’t see how the state can continue to function,” said Mohanad Hage Ali, a fellow at the Carnegie Middle East Center.

The pound has more than halved in value since October.

A draft government reform plan set out the scale of the problem earlier this month, including the $83 billion hole in the banking sector and $40 billion of losses at the central bank.

The draft drew criticism from Hariri, Jumblatt and others, particularly because it called for an “exceptional contribution” from the banks’ large depositors.

The banking association also weighed in, telling the government to “keep your hands off” the banks and accusing it of squandering the money lent to it, endangering deposits.

COMPLICATED BY COVID

“Without a fair distribution of losses, the chances of coming up with a solution that would receive international support look slim,” said Khalil Gebara, senior policy fellow at the Issam Fares Institute for Public Policy and International Affairs. “In a country that is so sectarian, finding solutions ... is looking very difficult.”

Governments that aided Lebanon in the past are insisting Lebanon enact a reform plan before getting help this time.

“For Lebanon to be in a position to receive assistance from international financial institutions it must prove that it is ready to make difficult choices and decisions to show it is 100% committed to reform,” David Schenker, U.S. assistant secretary for Near Eastern affairs, told Saudi-owned Al Arabiya TV on Wednesday.

Nasser Saidi, a former vice governor at the central bank, says Lebanon needs a $25-$30 billion IMF package over three to five years. Lebanon must admit it needs the IMF and start negotiations as quickly as possible, he said.

Farouk Soussa, senior economist at Goldman Sachs, said the draft plan leaked this month was “technically extremely capable and thorough but politically naive”.

“The space between where the technocrats are and where the political forces - in terms of what is an acceptable recovery plan - is quite wide,” he said.

“It would have been very difficult under normal circumstances but in the context of COVID it only complicates the economic situation in Lebanon exponentially.”

Additional reporting by Samia Nakhoul and Davide Barbuscia; Writing by Tom Perry; Editing by Giles Elgood

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