Central Bank of Lebanon Gov. Riad Salameh gave an interview to the Arab News outlet Aug. 25, saying that depositors’ money in Lebanon was still available despite arbitrary capital controls. The governor noted that the ban on international transfers would be resolved once reforms were implemented. Experts nonetheless believe that most of the political class intends to avoid reforms at all cost, shifting instead all losses on private business and depositors to maintain its grip on the system. The resignation of the fourth Lebanese negotiator with the International Monetary Fund (IMF) is an indicator they might right. However, foreign lenders could have a better chance with an international recourse.
Lebanese bankers do not seem to all share Salameh's optimistic account. In a previous interview with Al-Monitor, a senior manager working at one of the top 10 Lebanese banks admitted, “Banks are currently operating in a situation of complete illegality in the absence of a capital control law. Clients do not have free access to their dollar deposits and can’t make international transfers, and it does not look like it’s going to change soon in the current apathy of the state.”
The Lebanese ruling elite is still bargaining over the economic reforms required by the IMF, which are also a cornerstone to any international debt restructuring. “International donors affirmed, however, that any external aid in relation to the economic crisis and tied to structural reforms would be based on an agreement with the IMF,” Nassib Ghobril, chief economist at Byblos Bank, told Al-Monitor. Yet, Talal F. Salman, an economic adviser to the Finance Ministry and lead Eurobond negotiator, submitted his resignation from the IMF talks on Aug. 30, he was the fourth to quit in the last few months.
On July 13, the IMF warned the Lebanese authorities that delaying reforms would worsen the already dire economic outlook. The gross domestic product contraction rate, which was estimated at 4% in 2019, reached 18% in July according to Ghobril. The inflation rate reached nearly 60% in May. Without a deal, banks, which are directly exposed to the Lebanese sovereign debt, will have to write off their losses from their balance sheets.
The only solution, according to Ghobril, lies in a rescue plan based on an IMF deal, entailing a wide reform program of the electricity and telecom sectors, imposing formal capital control, fighting corruption, overhauling the banking sector and doing a forensic audit of the state electricity company Electricite du Liban and Banque du Liban (BDL, the Lebanese Central Bank). “Generally, when a country defaults on its obligations, it has already started negotiation or reached an agreement with the IMF before it actually does. In Lebanon, the government started negotiations three months after the decision to default [on foreign currency debt] and has failed to reach any agreement [with the IMF] after 16 rounds,” Ghobril noted.
Henry Chaoul, a financial adviser who represented Lebanon’s government in talks with the IMF before his resignation in mid-June, said he believes that some politicians do not want to do the necessary reforms. “They don’t want an IMF deal for different reasons. They don’t want to open their books, they don’t want to do reforms, they don’t want to do capital control or go after ill-gotten money,” he told Al-Monitor.
Paul Morcos, attorney at law and founder of the Justicia law firm, told Al-Monitor he believes that this political class has no intention of putting an end to the clientelist system that it has so carefully crafted to its advantage. “There is no will, no vision on their part,” he said.
Ghobril accused the government of shifting the blame on the banking sector instead of starting with public sector reforms.
Negotiations with the IMF have also been rocky as the central bank, and the government failed to agree on the size of losses set out in the plan. According to the Financial Times, the IMF has advised Lebanon that its central bank has accumulated losses of as much as $49 billion, figures the central bank and the parliament played down. The disagreement over losses between the government and the central bank threatens the future of the IMF deal.
“The BDL doesn’t want to talk about its losses or open itself for further criticism. Banks don’t want [an IMF] bail-in that will result in [the] dissolution of their ownership [as larger depositors will be given instead shares for their money],” Chaoul said.
In addition, the haircut on deposits is already happening, explains former banker Dan Azzi in an interview with Al-Monitor. As all players maintain the status quo, which equates to doing nothing, the problem is resolving itself in Darwinian fashion, he said, with the fittest or the strongest "wasta" (obtaining privileges through connections) surviving.
“Further lirification will wipe out people’s wealth. The Lebanese pound has lost over 80% of its value to the dollar in recent months. It’s the biggest regulated Ponzi scheme, with over $75 billion in play,” Azzi underlined.
International lenders could be luckier than Lebanese lenders. Morcos explained that they have judicial recourse in New York and London. “While obstacles such as sovereign immunity prevent them from prosecuting or freezing Lebanon’s assets they may try to seize the central bank’s assets,” he said.
In Lebanon, things are nonetheless quite different. “Politicians are worried about a forensic audit taking place because it will start at the central bank and move to state-owned enterprises, where everything [theft] is hidden. They prefer that people with large and midsize deposits carry the loss instead,” Chaoul noted.