Political disagreements in Lebanon regarding a contentious banking bill might hinder the nation’s attempts to finalize an agreement with the IMF and implement necessary reforms during an ongoing financial crisis.
This bill stands out among the reforms introduced by Prime Minister Nawaf Salam’s administration since it took office last year. The government aims to reshape the banking sector and strike a deal with the IMF—something his predecessor could not achieve.
Lebanon’s economic collapse in 2019, triggered by a foreign currency crisis and years of policies from a central banker facing embezzlement allegations (which he denies), has been labeled by the World Bank as one of the most severe in nearly 200 years.
Since then, the local currency has lost over 90% of its value, banks have restricted access to savings, the government has defaulted on its debts, and large portions of the population have fallen into poverty.
Over six years later, there remains a split among Lebanon’s finance ministry, central bank, and banking sector regarding how to distribute the estimated $70 billion in losses from the crisis between commercial banks and the state.
The disputed bill is a crucial component of the IMF’s conditions for financing contracts and details how to reimburse the many depositors whose savings have been locked away.
As lawmakers prepare to formally discuss the bill in the weeks ahead, debates about who should absorb the most losses are expected to escalate.
“The government is trying to satisfy large depositors, banks, the public, and the IMF simultaneously, but that’s a tall order given current debt constraints,” explained financial crisis expert Mike Azar.
According to the proposed plan, all depositors could receive up to $100,000 within four years, with the central bank covering 60% of the costs and commercial banks the remaining 40%.
Additionally, larger depositors would be issued securities from the central bank, tied to returns from its assets or liquidation proceeds, set to mature over 10 to 20 years based on the deposit amount. Commercial banks would shoulder one-fifth of these payments.
Azar noted that this bill has long been the most contentious among Lebanon’s reform attempts since it would require bank shareholders to incur losses while acknowledging that not all funds would be returned to depositors.
Banks have expressed concerns that the legislation jeopardizes their future, lacks assurance that the securities will maintain their value or be repaid punctually, and disproportionately affects the wealthiest clients.
The Lebanese Bankers Association stated earlier this year, “The draft law seems like a liquidation of the banking sector, jeopardizing the large depositors crucial for the Lebanese economy and eroding trust in banks.”
The disagreement focuses primarily on how much financial support the government will provide to fund the proposal and whether commercial banks should absorb losses before applying deductions for items like interest and foreign remittances.
Lebanese officials believe that securing an IMF agreement is vital for recovery. However, the IMF insists that Lebanon must reform its banking sector and enact laws addressing the crisis’s losses before financial assistance can be granted.
Previous administrations have struggled to implement most of the reforms the IMF requires, hindered by internal disputes and pushback from economic and political elites. A tentative agreement reached with the IMF in 2022 ultimately faltered because authorities couldn’t make the necessary changes.
Recent governments have asserted their commitment to reaching an agreement. They’ve already implemented laws regarding bank confidentiality and set out a framework for addressing defaulting banks—reforms deemed important by the IMF.
Nonetheless, the latest version of the draft law falls short of meeting IMF requirements. The Fund is concerned that the reforms won’t allow the government to cover public services and fulfill debt obligations. They also request that banks exhaust their capital before deducting deposits.
This stance puts them at odds with commercial lenders, the central bank, and some politicians who prefer the state to absorb a larger share of the losses and to prioritize deductions.
Finance Minister Yassin Jaber noted that if the state must bear most of the financial burden, taxpayers will ultimately foot the bill. He remarked, “Who will pay? The state? The Treasury? A nation is its people.”
According to Jaber, the government’s priority, per their agreement with the IMF, is to protect retail savers, who comprise the majority of the population. He mentioned that 85% of accounts would be fully repaid within the initial four years of the plan.
Some lawmakers intend to propose adjustments in the upcoming discussions to satisfy the IMF’s criteria, while others advocate for changes aligned with the positions of banks and the central bank. Ministers from the influential Lebanese Army party have voiced opposition to the law in the cabinet.
Banks and several politicians are critical of the government for allegedly misusing much of the funds lost in the crisis and avoiding accountability.
Nassib Ghobril, chief economist at Byblos Bank, one of Lebanon’s largest banks, pointed out, “The state can’t act as if it’s removed from the crisis, sitting by as if on a beach while the issues unfold miles away.”
A significant concern for the IMF lies in the stipulation that states may need to recapitalize their central banks if required.
Azar cautioned that this requirement could potentially impose a substantial debt on the nation, possibly leading to a second default, as both the central bank and the banks may struggle to fulfill future payment obligations outlined in the bill.
The proposal also states that the Treasury must determine with the central bank the extent of the nation’s debt, although the specifics of this amount are fiercely contested.
Critics argue that substantial loans risk balancing the central bank’s finances while diminishing bank liabilities, potentially undermining government spending and the wider economy.
The central bank stated that it has “cooperated” with the Treasury to identify “the state’s obligations.” Discussions regarding the bill have been termed “constructive,” with officials asserting that “there are no insurmountable obstacles, just serious and ongoing negotiations.”
Jaber expressed hope that the government could reach a deal with the IMF that maintains the sustainability of Lebanon’s debt and allows them to move forward.
However, he cautioned that if the demands of the central bank and banks are met, it may result in Congress “nullifying the agreement with the IMF.”
