Lebanon’s rival factions form new cabinet to salvage sinking economy

Lebanese Prime Minister Saad Hariri on Thursday night announced that the country’s rival political factions had finally agreed on a new 30-member cabinet after nine months of wrangling and paralysis.

“We first must apologize to the Lebanese people for the delay, especially to the young men and women who’ve been waiting for a glimmer of hope that conditions will be fixed,” Hariri said, referring to the dire state of the economy.

Lebanon was in imminent danger of losing $4 billion in soft loans pledged by the World Bank last year, with the global financial institution warning it could divert those funds to Jordan in February.

“All the problems are known and the causes of the corruption and waste and administrative deficiency are also known,” Hariri told reporters, promising “bold reforms” and stressing the new cabinet would adhere to a strict schedule.

Lebanon’s debt to GDP ratio is over 150%, and faith in the national currency has been slipping. Reports emerged late last year that Lebanese pound accounts worth more than half a billion dollars had been converted to US dollars.

The BdL circular was issued days after Goldman Sachs published a report warning that the Lebanese government has no choice but to restructure its public debt in order to avoid what Khalil described last month as an “economic crisis turning into a financial crisis.”

The next day, Moody’s downgraded Lebanon’s credit rating to junk over fears the country risked defaulting on its debt.

Hours ahead of Thursday’s government formation, the United Nations Lebanon representative called for more than $2.5 billion in international aid to the country to support the years-long Syrian refugee response and to shore up its crumbling infrastructure and utilities.

Placating the US Treasury

The US Embassy offered a conditional congratulations in a Tweet: “We welcome the formation of the new government and hope it will uphold its commitments to international resolutions and meet the aspirations and needs of the Lebanese people.”

Days before the government formation, US Assistant Secretary for Terrorist Financing Marshall Billingslea visited Lebanon, meeting with Hariri to seek assurances on combatting financing to Hezbollah – which the US classifies as a terrorist group. House Speaker Nabih Berri, who heads the Shiite party Amal, also held court with Billingslea.

The Finance Ministry, arguably the most critical portfolio in an era of expanding US sanctions, was on Thursday allotted to Amal.

Hezbollah, which upped its seats in Lebanon’s May 2018 parliamentary elections, gained influence in the new Lebanese cabinet – most notably the Health Ministry. The ministry receives millions in World Bank funding, which made it one of the most contentious possibilities for the militant group to lead. But in what has been seen as an olive branch, Hezbollah named a non-party member to serve in the post, Dr Jamil Jabak.

Raya al-Hassan, Lebanon’s former finance minister, will be the first woman in the country’s history to head the powerful Interior Ministry. Hassan, a member of the prime minister’s Future Movement, currently chairs the Special Economic Zone in the northern port city of Tripoli, which she has been working to prepare as a hub for eventual Syria reconstruction.

The Energy Ministry will also be headed by a woman, a member of President Michel Aoun’s Free Patriotic Movement.

Lebanon’s bonds rallied on the news, with a 2037 dollar issue jumping in price by 4.3 cents.

Goldman Sachs warned in early January, however, that the government must cancel around 65% of its debt if it is to achieve sustainable debt levels and that without action, Lebanon faces the possibility of a sovereign default.