Lebanon shows why the lack of transparency at the IMF is a huge problem

The organisation's analysts do not care about listening to the opinions of others, regardless of their stature, knowledge, or impartiality. This comes even as their decisions are full of contradictions, and while they claim to be above politics. And all the time, it is evident that politics plays a significant role in approving, withholding, or even terminating loans.

And the IMF's plans are not always sound. They have sometimes led to further indebtedness and the enrichment of elites, demonstrating that good policies cannot be bought. Sometimes, its reports can feature sections copied from previous documents on other countries without being properly adjusted.

Lebanon redaction and lack of transparency

The crisis in Lebanon has drawn international attention to the issue of a lack of transparency at the IMF.

According to the Swiss newspaper Le Temps, an IMF representative from Spain, Faro Perez, opened a meeting with the Governor of Lebanon's central bank by saying, "You are on the edge of the abyss."

The newspaper also reported that Riad Salameh, the former governor of the Banque du Liban (BDL), managed to ensure 14 pages were deleted from an IMF document that could have warned of the extent of the financial crisis was about to go through.

The document – on the country's financial sector and published in January 2017 – was redacted on the pretext that it would undermine financial stability.

The redactment hid the assessment that the BDL was struggling with a net deficit of $4.7bn — an amount worth about 10% of the nation's gross domestic product. It also said that national banks lacked the liquidity necessary to deal with any crisis. It would have revealed significant distortions in lending, showing that 43% of total lending was going to the real estate sector.

If the IMF had revealed this information, Le Temps concluded, it could have resulted in a far less devastating financial crisis in Lebanon. At the very least, the Lebanese people would have received prior warning.

Two days after the Swiss revelations, Salameh denied the allegations. He said the rules were followed as the document was prepared, including how issues between the IMF team and the relevant parties in Lebanon – not just at the BDL – were raised as it was drafted.

After that, the comments made to the IMF may or may not be taken into consideration as the IMF's board approves the final report of directors.

In response to Le Temps' reporting, an official said the IMF had issued an early warning and possible solutions in the report to strengthen the financial system, according to a summary from Reuters.

The IMF emphasised the need to reduce economic and financial risks, including relying on new deposit inflows to cover the large fiscal and external deficits. The official also mentioned that substantial resources are required to ensure the bank is adequately capitalised in the event of a severe shock.

The official also said countries are not obligated to disclose their net reserves, even though many do. Responding to a question, he said the IMF could proactively push for the disclosure of the net reserve deficit in line with the "IMF's transparency standards," which allow a country to request the removal of elements from an initial report if the publication of those elements would have a negative impact on the market.

The official declined to comment on whether Lebanon had specifically made such a request. Nor did he comment on whether there is an official threshold for the size of net reserves.

IMF fails to sound the alarm

Some clear points about what happened with the IMF's oversight of Lebanon reveal how the organisation works and its priorities.

The IMF report was conducted under the Financial System Stability Assessment (FSSA) programme, which aims to comprehensively evaluate the financial sector and its resilience through stress testing. It became mandatory following a decision taken by the IMF's executive board decision in 2013.

Such a report is only effective if all relevant factors are clearly disclosed, including the accurate and transparent alignment between the central bank's assets and its foreign currency liabilities.

Transparency and accountability are, in theory, requirements just as important to the BDL as its independence. That is clear in Article 13 of the Code of Money and Credit. Writings by specialists, including the "Central Bank Transparency Law" enacted in June 2020, underline and defend these principles.

Rather than agreeing to redactions, officials preparing the IMF report should have pointed these obligations out to the BDL. And then included the information in the report produced under the FSSA programme.

Eye-catching cancellation

Furthermore, Article 75 of the Code of Money and Credit mentions a special account called the "Stabilisation Fund," which has appeared in the accounts and balance sheets of the Bank of Lebanon since its inception. But it was cancelled by Salameh after he took office as governor in the 1990s.

It was recently reinstated with a multi-billion dollar balance, and its results were combined with those of another Treasury account – as stipulated in Article 115 of the Code of Money and Credit – to record the discrepancies between the central bank's gold and foreign currency assets at the official exchange rate and their actual market value.

The IMF's "Central Bank Transparency Law" emphasises the need for the central bank to strike an appropriate balance between transparency and the legitimate need for confidentiality.

Failing to reveal the discovery of changes on this scale seems to be at odds with those obligations.

The deleted pages of the redacted IMF report also back up a research paper published by Dr. Tawfik Kasbar in August 2017, which pointed to the looming financial crisis. His work found that the net foreign currency reserves of the Central Bank of Lebanon were negative for the second year at the end of 2016.

In response to Kasbar's report, the BdL said that its balance sheet includes liquid foreign currency assets under the heading of foreign currency reserves. If other medium and long-term assets of the bank were included, it claimed,  "the net foreign currency reserves … would show a positive balance that adequately covers the stability of the Lebanese pound and overall financial stability."

When the crisis erupted, its events soon told a different story. There was a gap of around $70bn in 2019, caused by a decline in assets relative to liabilities that had gradually developed before 2015.

This suggests that the account secrecy introduced by the Central Bank of Lebanon was intended to conceal losses and was not based on a legitimate need, especially since 2016 was a presidential election year and the governor's name was in circulation.

Disclosing any gap in the accounts of the Central Bank of Lebanon – such as those that were, in effect, discovered – would have completely eliminated his chances in the presidential race.

Looking away from financial disaster

The IMF experts were required to present their initial assessment report in 2016 in a manner reflecting the true financial situation. And the reality was that Lebanon was heading toward financial disaster.

As the former US treasury secretary, Timothy Geithner, put it, the IMF should be the trusted reference point for the truth. If it fails to tell it, others cannot be blamed, he argued.

On the other hand, there is a risk that the BDL would have objected to publishing a report that includes clear failures, under the pretext that this would have negative consequences for the fragile financial stability. In this case, the IMF will have two options:

First, it can accept the objection of the BDL and remove the elements proposed by the IMF from the report before publication. This would result in a non-transparent report that does not accurately reflect the truth, thus undermining its credibility.

Second, the IMF refuses to comply with the governor's requests and decides not to publish a deficient report that does not serve its intended purpose. This approach would also have consequences, as the public would quickly understand the real reasons behind the non-publication.

But in choosing the first option, the IMF, in effect, failed to sound the alarm. In doing so, it presented a misleading picture to the public in the assessment report published in early 2017.

If people had received access to the information in the initial version of the report, as prepared in 2016 it would have been possible to address the crisis earlier and mitigate the extent of the losses on the BdL's balance sheet.

Shameful choice and potential legal action

Instead, what happened was shameful. No investigation was carried out in Lebanon to verify whether the governor of the BdL should have sought the redactions. No investigation was opened by the IMF regarding the allegations against the governor and its own relevant officials.

There are legal precedents for the IMF to be sued over lapses of judgment. In theory, Lebanese people, including depositors who have funds locked out of their reach in its banks, should take action against the organisation. Cases have been accepted against the IMF in the Washington courts.

Perhaps this could be a route for citizens to demand compensation for their losses, which may have been prevented if proper transparency standards had been upheld.