Lebanon bankrupt?

Rabha Seif Allam, Thursday 7 Apr 2022

Comments made by Lebanon’s deputy prime minister about the country’s “bankruptcy” last weekend have drawn new attention to its ongoing negotiations with the International Monetary Fund.

Lebanon bankrupt

Lebanese Deputy Prime Minister Saade Chami’s statement in a television interview on Sunday that the Lebanese state and Central Bank were “bankrupt” signalled yet another debacle in the train of crises that have rocked Lebanon over the past two years.

The following day, Lebanon Central Bank Governor Riad Salameh denied that his institution was bankrupt after the story had sent shockwaves through the Arab media.

Chami’s statement came in response to a question on Al-Jadeed TV on progress in the Lebanese government’s talks with the International Monetary Fund (IMF). Chami is chairing the ministerial committee assigned to negotiate with the IMF mission currently on a two-week visit to Lebanon.

The question had to do with losses Lebanon’s creditors could sustain in the event of an agreement on a new schedule to settle debts Lebanon stopped paying nearly two years ago. Chami sidestepped the question with the remark on the Central Bank, the Banque du Liban.

Lebanon has declared bankruptcy once before. In March 2020, former prime minister Hassan Diab announced that his government would be unable to meet debt-servicing deadlines, setting in motion IMF-assisted consultations on rescheduling the debt, though the talks stalled amid tensions between the country’s economic decision-makers.

While the Lebanese cabinet takes decisions regarding revenues and allocations, the Central Bank governor is responsible for fiscal and monetary decisions concerning the banking sector and exchange rates, affecting payments for essential imports such as food, fuel, and medicine.

In July 2020, the IMF suspended its consultations until the Lebanese decision-makers could speak with one voice.

Over a year later, the new Lebanese government under Prime Minister Najib Mikati formed a new negotiating delegation to demonstrate Lebanon’s resolve to end the anarchy in its economic governance. The delegation and the IMF are discussing the legislation the parliament will need to pass within the two months before its term ends and new parliamentary elections are held.

The IMF has previously encountered conflicting interests among the country’s various decision-makers. Debt payments are financed by a group of international creditors and local commercial banks, represented by the Association of Lebanese Banks, which has lent the government money for decades.

The failure to expand and diversify the banking sector’s investment pool and excessive lending to the government precipitated the current crisis. When the government froze its debt-servicing payments, the banking sector went into shock and was unable to meet depositors’ demands to withdraw their assets.

The main task now is to assess the losses that will accrue from rescheduling the debt and distributing them among international creditors, commercial banks and their clients, and the government as embodied by the Central Bank.

This is the essence of the current talks with the IMF, which is helping to develop plans for the equitable distribution of losses. The government wants depositors to bear the burden of the losses due to the failure of the banking system, explaining the deputy prime minister’s remarks on Sunday.

Last week, the Lebanese government approved a draft law to limit transfers and withdrawals in order to stem the flight of capital or attempts to tamper with the dollar to lira exchange rate. The lira has already lost more than 90 per cent of its value in the past two years.

As a result, the law the IMF has been pressing for is coming too late. It should have been adopted at the outset of the Lebanese financial crisis in November 2019. According to estimates, $19 billion at least has fled the country since then and is unlikely to return to help compensate for the banking sector’s losses.

The capital control law, passed by the cabinet but still awaiting the approval of parliament, sets conditions on foreign currency withdrawals and transfers abroad with the aim of preserving the Central Bank’s remaining dollar holdings and ensuring they are used to pay for Lebanon’s basic needs.

The law should also bring order to the exchange rate, which varies depending on the anticipated use of the dollar. The dollar in Lebanon has an official rate and a black-market rate. The huge difference between the two has given rise to speculative activities that undermine the banks’ dollar holdings.

The new law is intended to put a stop to this by regulating dollar withdrawals at the official rate, thereby ensuring that the Central Bank and government have the reserves necessary to pay for essential imports of food, fuel, and medicine.

The cabinet presented the capital control bill to parliament last week to coincide with the arrival of the IMF delegation. However, the parliamentary committee concerned returned it to the government with a request for modifications.

The law sets a $1,000 per month limit on dollar withdrawals from individual accounts in Lebanon’s commercial banks. Previously, there was an $800 limit, half dispersed in dollars and the other half in lira at the rate of 12,000 lira per dollar, about half the black-market rate.

Some vital sectors were exempted from this provision, such as those that need to make regular payments for imported medical supplies or families supporting students abroad. Also exempted were accounts that receive “new money” in dollars from abroad, such as embassies and other foreign organisations operating in Lebanon.

The law also provides for the creation of a committee responsible for reviewing the restrictions periodically and modifying them in accordance with changes in the dollar reserves. The committee, appointed by the cabinet, would consist of the governor of the Central Bank, the minister of finance, two independent economic experts, and a judge.

The addition of a judge to a committee concerned with finance has raised eyebrows. But it can be understood in the light of recent developments that have stirred tensions between Lebanon’s judicial authorities and the Central Bank.

When the bank began to restrict withdrawals, many depositors filed suits with Lebanese and foreign courts to force the banks to release their savings in cash. Judicial rulings in favour of some depositors gave rise to complaints and undermined the limit that the Central Bank had attempted to apply to all.

Mount Lebanon Public Prosecutor Ghada Aoun, related and politically loyal to Lebanese President Michel Aoun, has also opened an investigation into Central Bank Governor Riad Salameh and his brother Raja on charges of money laundering and illicit profiting.

The brother has already been summoned and a warrant issued to detain him pending investigations. The Central Bank governor has been ordered to appear in court but has failed to attend five times, leading the prosecutor to issue an order to have him brought in forcibly.

The Lebanese judicial authorities have also requested the authorities in France, Germany, and Luxembourg to freeze the Salameh brothers’ assets, worth some 120 million Euros, pending the investigations.

While some hail the proceedings as long-needed steps to combat corruption in the banking sector in Lebanon, others see them as “populist” interventions by judicial agencies that lack competence in bank management. Some suspect a personal or political vendetta on the part of the president’s camp preparatory to the forthcoming elections.

The capital control bill provides for the designation of a particular judicial circuit to investigate banking violations precisely in order to avoid the problem of judges’ and prosecutors’ family and political loyalties.

Aoun has tried before to have Riad Salameh dismissed and to hold him responsible for the failure of the banking sector. These attempts ran up against Prime Minister Mikati, who argued that changing the Central Bank’s leadership would shake confidence in the banking sector.

The political clash between opponents and supporters of the Central Bank governor has also grown more acute in the lead-up to the elections. Some believe that the MPs who wanted to return the capital control bill to the cabinet were playing to the gallery of their constituencies, despite the importance of the law in securing the agreement with the IMF needed to help Lebanon out of its economic crisis.

Others counter that, as important as it is to agree with the IMF on a package of reforms, this should not take precedence over the right of MPs to study legislation because of its potential impact.

Depositors should not have to bear the brunt of the banking sector’s losses, still others say, which have resulted from three decades of bad policies among the country’s ruling elite.

*A version of this article appears in print in the 7 April, 2022 edition of Al-Ahram Weekly.

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