Bank du Liban in Beirut. Lebanon's draft crisis plan would set out a comprehensive strategy for the restructuring of banks’ balance sheets. Image Credit: Supplied

Beirut: Lebanon needs external financing of $10 billion-$15 billion over the next five years to help it through its financial crisis, according to a draft government plan seen by Reuters.

The draft plan, which is being discussed by the cabinet, was dated April 6 and marks the most comprehensive blueprint yet on tackling the crisis. In it, the plan is described as a “good basis” for negotiations with the IMF.

The plan, which a source said was drafted by Lebanon’s financial adviser Lazard, did not explicitly say the country would go to the IMF - a move that requires broad political support. But it noted investors were expecting Beirut to seek IMF support which would unlock other financing.

Full bailout not an option

While mapping out losses of $83.2 billion in the economy, the plan noted that a “full bailout of the financial sector is not an option”.

It set out a restructuring of the central bank and commercial banks to include “a transitory exceptional contribution from large depositors” and outlined a special fund to compensate depositors’ losses that result from restructuring.

“As stated by the prime minister, the plan will make sure the assets of 90% of the depositors are preserved,” it said.

Parliament Speaker Nabih Berri told central bank governor Riad Salameh on Tuesday that bank deposits were sacred and could not be touched.

Since the crisis began, Lebanon has defaulted on its hefty foreign-currency debt for the first time and in late March it began steps towards restructuring the debt.

A coronavirus lockdown has compounded economic problems which include spiralling inflation, a weakening currency and capital controls that have prevented depositors from withdrawing their hard currency savings.

Exchange rate to weaken

The plan indicated the exchange rate weakening to 2,607 pounds to the dollar in 2021, and to 2,979 in 2024. The official dollar peg has been set at 1,507.5 pounds since 1997. It has lost more than 40% of its value since October.

The plan said public debt would be cut to 90% of GDP by 2027, compared to more than 170% at end-2019.

The plan assumes Lebanon will benefit promptly from the external financial support and successfully implement reforms.

The $83.2 billion losses stem from the impairment of assets held by the central bank, the impairment of banks’ loans portfolio and government debt restructuring.

Bank restructuring

The authorities would set out a comprehensive strategy for the restructuring of banks’ balance sheets, it said.

A phased restructuring of commercial bank balance sheets would include a full bail-in of existing shareholders estimated at $20.8 billion in capital write-offs, with the remaining $62.4 billion covered by the “transitory exceptional contribution from large depositors”, it said.

“The exact parameters of the contribution will be defined with the assistance of external advisors and in the context of a broad and good-faith dialogue with the commercial banks,” it said.

A special fund would compensate depositors’ losses, with the proceeds coming from a programme that will track and recover ill-gotten assets, the document said.

The plan estimated about $40 billion in central bank embedded losses, the result of “years of loss-making financial transactions” aimed at accumulating FX reserves to defend the peg and cover a balance of payments funding gap.