Within the aftermath of Lebanon’s devastating monetary and socio-economic disaster, the reconstruction of the banking sector and restoration of macroeconomic stability demand pressing and complex interventions. This disaster, characterised by the collapse of depositor confidence, war-induced infrastructural devastation, and institutional dysfunction, requires a scientific decision of the deposit disaster because the cornerstone of a broader restoration framework.
Efforts by Banque du Liban, the central financial institution of Lebanon, have offered restricted liquidity via initiatives equivalent to Circulars 158 and 166, the primary issued in June 2021 / up to date in November 2023, the second issued in February 2024 and amended in October. That is an method grossly inadequate to satisfy the pressing financial and social wants of the inhabitants. The federal government’s dealing with of dollar-denominated deposits has exacerbated the state of affairs via measures which can be legally and ethically indefensible. These embrace writing off as much as 90 p.c of deposits by transferring them to phantom entities, changing them into non-performing sovereign bonds, or exchanging them for Lebanese kilos at egregiously undervalued charges. Such mechanisms have irrevocably broken public belief within the monetary sector and additional eroded confidence in state establishments. Regardless of objections from Lebanon’s state legislative council, key parliamentary blocs, and depositors themselves, these measures persist, highlighting the federal government’s reluctance to confront the structural dimensions of the disaster.
A sustainable decision necessitates the great restructuring of the connection between the central financial institution, banks, and the federal government at massive. The integrity of deposits should be preserved on industrial banks’ steadiness sheets alongside corresponding liabilities, specifically, the deposits held by industrial banks on behalf of their purchasers on the central financial institution. The outright cancellation of those deposits not solely lacks authorized justification but in addition dangers compounding the central financial institution’s fiscal and operational challenges. Retaining these obligations throughout the central financial institution’s steadiness sheet ensures transparency and aligns with the broader framework for disaster decision. Furthermore, arguments positing that these liabilities impede financial coverage are unsubstantiated; quite the opposite, the annulment of those obligations would expose the establishment to additional authorized scrutiny with out yielding any operational benefit.
One pragmatic intervention to deal with liquidity constraints is decreasing the extreme unjustifiable reserve necessities on international forex holdings imposed on Lebanese banks. At current, these reserves complete $10.7 billion—a determine among the many highest globally. Lowering the reserve ratio to the worldwide common of two p.c would unlock roughly $9 billion in liquidity, which may very well be distributed to depositors as an preliminary reimbursement of 10 p.c of their frozen accounts. This measure would offer speedy aid and represent a pivotal step towards restoring confidence within the banking system.
Along with releasing obligatory reserves, the central financial institution holds roughly $25 billion in gold reserves, a vital asset amassed via a long time of depositor contributions. Allocating half of this reserve—roughly $12.5 billion—to offer supplementary liquidity for banks might additional alleviate the deposit disaster. Collectively, these actions might return roughly 24 p.c of frozen deposits to account holders. This twin method is supported by Lebanon’s authorized framework; Article 75 of the Code of Cash and Credit score explicitly permits the central financial institution to leverage gold reserves to stabilize liquidity, contingent on coordination with the Ministry of Finance.
The reluctance to make the most of gold reserves displays a misinterpretation of their function inside financial coverage. Gold, as a universally liquid asset, might be readily traded in world monetary markets. Opposite to traditional objections, deploying a portion of those reserves just isn’t solely legally permissible but in addition economically prudent, notably within the context of Lebanon’s acute monetary disaster.
Nonetheless, technical options alone can not restore depositor confidence. Basic reforms to financial governance are crucial to deal with the systemic points underlying the disaster. A vital step is the abolition of Lebanon’s outdated twin a number of trade fee system, which perpetuates financial distortions. The adoption of a totally liberalized trade fee is important to fostering market equilibrium and avoiding the recurrence of financial instability. Whereas the present trade fee stability is attributable to fiscal self-discipline, it stays tenuous within the absence of structural reforms.
One other precedence is addressing Lebanon’s placement on worldwide “gray lists” for monetary compliance deficiencies. Restrictions on capital outflows have curtailed the speedy threat of systemic flight, however long-term credibility hinges on clear reforms that align with world monetary requirements. Encouragingly, a major proportion of newly injected liquidity is prone to flow into domestically, addressing urgent client wants somewhat than exacerbating exterior imbalances.
The central financial institution’s main mandate should be reoriented towards managing home liquidity, imposing stringent regulatory oversight, and selling macroeconomic stability. Its function is to not generate excessive returns however to safeguard public welfare and rebuild belief within the monetary system. Present practices, such because the restricted withdrawals allowed below Circulars 158 and 166, are grossly insufficient and contravene authorized and moral requirements. The continued freeze of deposits with out curiosity violates elementary ideas and the Code of Cash and Credit score.
Lebanon’s restoration is determined by decisive actions to resolve the banking disaster and reestablish public confidence. These embrace returning liquidity to depositors, reforming trade fee mechanisms, and responsibly leveraging gold reserves. Such measures, when mixed with sturdy regulatory oversight and a dedication to institutional transparency, can set the stage for complete financial restoration. The banking sector’s stabilization just isn’t merely a technical problem however an ethical and strategic crucial for Lebanon’s broader reconstruction and sustainable improvement.
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