The International Monetary Fund has welcomed the Lebanese parliament's passing of amendments to a bank resolution law as a major step, but challenges to implementing the law could further delay recovery for an economy battered by years of financial collapse and the conflict with Israel.
The reforms are among the IMF's requirements for Lebanon to access funding to bring government debt out of default after decades of profligate spending by the country's ruling elite, sending the economy into a tailspin in late 2019. Banks imposed sweeping capital controls, locking depositors out of their savings, and stopped issuing loans.
In January the IMF had demanded changes to the draft rescue law, Lebanon's Prime Minister Nawaf Salam told Reuters at the time.
Now, the bank resolution law aims to address vast funding shortfalls in the financial system and is among a set of measures that ultimately aim to fix the banking sector and allow depositors who have been frozen out of their savings to gradually recover their money.
CHANGES TO GOVERNANCE PROCEDURES
“We met 99% of what they wanted,” legislator Alain Aoun, who sits on Parliament’s Finance and Budget Committee, told Reuters.
The most notable amendments to the law include changes to the Central Bank’s governance procedures. The makeup of the Higher Banking Commission – a governing body within the Central Bank — will be altered, Aoun said. The amendments empower the body to “decide the fate of Lebanon’s banks,” and would determine if a bank requires restructuring or liquidation and any further steps to rehabilitate it.
Federico Lima, the IMF representative in Lebanon, said on Wednesday that the "effective implementation of this new bank resolution framework is critical."
"In addition, we are continuing discussions with the Lebanese authorities on the improvements needed to align the draft Financial Stabilization and Depositor Recovery (FSDR) law with international principles," he added.
In 2022, the government put losses from the financial crisis at about $70 billion, a figure that analysts and economists forecast is now likely to be higher.
POSSIBLE CHALLENGE
Last week, the parliament passed amendments to the law, but it would still be pending approval by the Lebanese president.
The possibility of members challenging the law before the Constitutional Council — which has precedent for annulling provisions of earlier financial legislation — could also bring further delays.
The draft had already undergone several rewrites because of competing demands from different financial institutions; the IMF called on Lebanon to improve the law to bring it in line with international standards and consider tax reforms to spark public spending on reconstruction efforts.
The World Bank ranks the Lebanese economic crisis among the worst globally since the mid-19th century. Depositors were frozen out of dollar accounts and the Lebanese pound fell by more than 90%. Additionally, the war with Israel was estimated to have caused $7 billion in damages.
"This is the only country in the world that has had a banking crises for seven years and has not tried to find a solution," a senior Lebanese official told Reuters. "Staying where we are shouldn't be an option."
