The International Monetary Fund warned that Lebanon must make further progress in restructuring its banking sector in order to secure a comprehensive reform program that could receive IMF support and help the country emerge from the worst economic crisis in its modern history.

In comments to Asharq, the IMF said Lebanese authorities have achieved “some progress” on the restructuring file, but stressed that “more work is needed for the draft law to become aligned with international standards, including the hierarchy of claims,” referring to the so-called “financial gap law” approved by the government before the end of last year.

The issue of the hierarchy of claims — which determines the order in which losses are distributed among bank shareholders, creditors and depositors — has become one of the most politically sensitive and contentious elements of Lebanon’s reform agenda over the past several years.

Lebanon’s banking sector has strongly opposed proposals that would force banks to absorb the largest share of financial losses stemming from the country’s economic collapse.

Securing an IMF-backed reform program is widely viewed as essential for Lebanon to unlock international financial assistance and restore confidence after years of overlapping political, financial and economic crises.

Lebanon defaulted in 2020 on nearly $30 billion in international bonds after capital inflows dried up, while the central bank became unable to repay roughly $80 billion owed to commercial banks, according to Bloomberg. The collapse triggered severe financial paralysis and wiped out much of the savings of ordinary Lebanese citizens.

The country’s economic difficulties have worsened further amid ongoing regional conflict and escalating hostilities between Israel and the Iran-backed Hezbollah group since late 2023, tensions that intensified with the outbreak of the current Iran war.

Lebanese Finance Minister Yassine Jaber told Reuters in remarks published Thursday that the fallout from the conflict could cause Lebanon’s economy to contract by between 7% and 10% this year.

Jaber also warned that the direct and indirect damage caused by the conflict could reach $20 billion.

According to information obtained by Asharq, several international institutions and donor countries are conditioning any financial support for Lebanon on the government’s ability to finalize an agreement with the IMF.

Central Bank Governor Karim Souaid urged the international community earlier this month to adopt a parallel-track approach in which financing is provided simultaneously with the implementation of reforms, rather than waiting for reforms to be fully completed before aid is released.

Writing in the Financial Times, Souaid said Lebanon still had a realistic opportunity to reach an agreement with the IMF, noting that Lebanese authorities had limited room “to impose counter-conditions,” which he said improved the chances of a deal.

The IMF said ongoing discussions with Beirut are also focused on preparing a medium-term fiscal framework that includes “concrete measures to mobilize additional revenues” in order to expand urgently needed social and capital spending.

The fund added that such a fiscal framework would form the basis for restructuring Lebanon’s sovereign debt.

At the same time, some Lebanese economists argue that the IMF itself bears part of the responsibility for delays in resolving the crisis.

Salah Assiran, head of Lebanon’s National Council of Economists, told Asharq that the IMF “took six or seven years to acknowledge that Lebanon’s crisis is a systemic crisis,” referring to a report issued by the fund only a month ago.

Assiran added that the Lebanese parliament has been waiting for more than a month for the IMF to submit written comments on the draft restructuring law so lawmakers can formally approve it and move forward with implementation.

He said Lebanon cannot proceed to the next phase of reforms without fully recognizing the scale of financial losses and agreeing on the hierarchy of claims “to determine who will pay, and how much they will pay, in order to close the financial gap.”