As Lebanon and Iran Grapple With COVID-19, are the IMF’s Hands Tied?

As Lebanon and Iran Grapple With COVID-19, are the IMF’s Hands Tied?

The IMF’s latest World Economic Forecast bears destabilizing news for Middle Eastern and North African (MENA) economies already roiled by social and political upheaval. Egypt alone is predicted to maintain a positive growth rate this year in the face of COVID-19—the other MENA countries are facing the most severe regional recession in over forty years.

The IMF is not just an outside observer in this looming downturn. Both Lebanon, on pace for a 12% contraction, and Iran, headed for its third straight year of sanctions-driven recession, are looking to the IMF for help as COVID-19 has inflamed pre-existing crises. That assistance, however, usually comes with conditions of governance reform and austerity that seem incongruous with the realities of two of the Mideast’s most opaque, convoluted economic systems. Can the Fund still help these countries overcome this challenge, or will IMF officials be left at a loss?

Challenging Lebanon’s culture of impunity

Even before COVID-19, Lebanon was in dire financial straits. Beirut defaulted on a $1.2 billion Eurobond payment due March 9th, leading many to conclude Hassan Diab’s new “technocratic” government had no alternative but to seek a lifeline from the IMF. Nonetheless, the conditionalities the IMF would impose prompted pushback from Hezbollah, whose paramilitary apparatus allows it to dominate Lebanese politics. Faced with the prospect of austerity measures and deep-cutting reforms, senior members of Hezbollah demonized the fund as an “imperialist tool” that would undermine Lebanon’s sovereignty as recently as February.

Just a few weeks later, however, Hezbollah began singing a very different tune. Where spokesmen once warned of “popular revolution,” Hassan Nasrallah himself admitted his movement did not oppose the IMF’s assistance so long as it did not harm “the national interest.”

Lebanon, however, has as many definitions of “national interest” as it does political factions, as its system of consociationalism divvies up the institutions of state along sectarian lines. Each religious group in the country has its own parties to represent its interests. The deep-rooted clientelist networks built up around them are largely to blame for the entrenched corruption and stagnation that drove protesters into the streets last year.

In Lebanon, the right connections can overcome even the most serious accusations of wrongdoing, as illustrated by one recent episode from the energy sector. In December, Beirut awarded a major fuel import contract to ZR Energy, owned by brothers Teddy and Raymond Rahme. Above and beyond the Rahme brothers’ involvement in Lebanon’s crisis-plagued banking sector—which has imposed strict capital controls to prevent a run on the banks—Raymond faces grave legal challenges over his activities in Iraq.

Raymond Rahme has been implicated by U.S. legal proceedings in events surrounding the 2004 murder of Dale Stoffel, an American military contractor owed $25 million by the post-Saddam Iraqi government that were reportedly paid to Rahme instead. In the past couple of years, Rahme has been linked to the alleged bribery of Iraqi regulators to seize $810 million of shares in telecom provider Korek from the French telecommunications firm Orange and the Kuwaiti logistics company Agility.

None of these allegations have impacted Rahme’s ability to do business inside Lebanon. As Carlos Ghosn demonstrated, Lebanon is a “safe space” for wealthy, well-connected citizens accused of wrongdoing abroad.

Until now, no amount of pressure from donors such as France has pushed Lebanon toward real reform. Now, however, the government itself estimates it needs at least $10 billion in outside help to resolve its financial crisis. Could sheer desperation change the calculus of Lebanon’s power players, Hezbollah chief among them? Given Lebanon’s usual financiers in the Persian Gulf are facing their own challenges, the answer may for the first time be yes.

Iran’s historic plea for help

Where the IMF’s potential challenges in Lebanon are largely homegrown, Iranian Central Bank head Abdolnaser Hemmati’s request for $5 billion in IMF credit to help fight Iran’s COVID-19 outbreak faces as many hurdles in Washington as in Tehran. Evaluating that request, the first since Iran’s 1979 revolution, is “taking time” according to IMF officials. In the meantime, the United States has already announced it will attempt to block any such assistance.

While America’s 16.5% voting share on the IMF board means it could likely veto the request, the Trump administration’s proclivity for sanctioning individuals and entities connected to Iran could make dispersal difficult even if the request were approved. Iranian president Hassan Rouhani accused Washington of engaging in “medical terrorism” by continuing its “maximum pressure” strategy and argued that the IMF should not discriminate when granting loans.

Rouhani’s government has already made the provocative choice of reopening Iran’s economy, calculating the sanctions-hit country cannot afford continued confinement. Since February, the virus has officially infected over 76,000 Iranians and killed nearly 4,800, although low testing capacity means the true tallies are certainly higher.

While Iran’s economic isolation has exacerbated failures to stem the outbreak, the state’s response has itself been problematic. Iranian leaders are widely suspected of hiding the initial outbreak in the city of Qom to promote turnout in February parliamentary elections. That vote came just weeks after the Iranian Revolutionary Guards Corp (IRGC) admitted shooting down Ukraine International Airlines Flight 752, and only a few months after a bloody crackdown on protests left as many as 1,500 dead.

Both of those episodes fatally undermined public confidence in Iran’s authorities, just as the government found itself in need of unprecedented public cooperation. Ironically, those brutally suppressed November 2019 protests were sparked by a cut to fuel subsidies – a move supported by the IMF.

Iran does, at least, have sympathetic voices advocating for it within the Fund. Whereas Europe and the United States mostly share the same message on Lebanon, the two sides are bitterly divided over Iran. The European Union has made it clear it supports Iran’s request for IMF assistance. In defiance of the American hard line, the EU has already greenlit €20 million in humanitarian assistance to help Iran deal with outbreak.

Unfortunately for the 80 million Iranians trying to survive both their government and the pandemic, those funds are nowhere near enough.

Building stronger foundations

COVID-19 did not cause Lebanon and Iran’s economic downturns but instead accelerated crises that were already well underway. Emergency IMF funds would help Beirut and Tehran meet their short-term funding needs—but both countries ultimately need deep structural change.

For Lebanon, that entails fundamental reforms to not only the banking sector but the country’s entire political economy. The IMF’s technical assistance could indeed help place the country on sounder footing – if the country’s elites allow it. For Iran, where the government’s mismanagement is being compounded by an aggressive sanctions regime, assistance will almost certainly have to come from elsewhere.

Image credit: Mehdi Bolourian (Fars News)/Wikimedia Commons

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