An amnesty for Lebanese banks disguised as a capital control law

A government-approved capital control bill was scrutinized by joint parliamentary committees on Tuesday and then postponed indefinitely. Several versions of this text have already been drafted, none of which have so far met the criteria for legislation that should have been approved in October 2019. Instead of limiting foreign currency bleeding, while the reforms needed to exit the crises foreseen by in the framework of a preliminary agreement with the International Monetary Fund (IMF) concluded in April, the law as it is conceived could replace it, solving in one fell swoop the issue of the financial crisis with the “irification” of deposits and shielding the banks from any legal action.

Billions of dollars essential to stop Lebanon’s economic and social collapse and to begin the redesign of its model have been squandered due to the failure to adopt this fundamental emergency measure. Central bank currency liquidity (BDL) fell from $ 33 billion to $ 9 billion in less than three years. And the balance of payments continues to show an annual deficit of over three billion dollars, or more than 15% of GDP. Today, when foreign currency capital has melted, the need to regulate its flows remains essential, but the current account on the table represents a real danger.

In the absence of a banking resolution law, a monetary policy based on the unification of the exchange rate, debt restructuring, a sustainable fiscal policy and, above all, a comprehensive macroeconomic strategy, this law would effectively bury hope. – certainly increasingly subtle – to bring Lebanon out of the most serious economic and social crisis in its history.

Voluntary confusion

This is why many voices that have consistently called for a capital control law since the outbreak of the crisis are now speaking out against the adoption of this version. The text maintains a confusion between two essential issues that should be dealt with separately: on the one hand, the regulation of capital movements, to ensure that the economy has the necessary currencies by stabilizing the balance of payments and the exchange rate; on the other hand, the question of the fate of some 100 billion dollars still officially registered in the balance sheets of Lebanese banks, which should be addressed in the context of a banking resolution law.

Several articles, in fact, consecrate the political choice made as soon as the crisis broke out, that is a particularly brutal and criminal adjustment for Lebanese society instead of a reasoned and fair distribution of losses to revive the economy. Not to mention the impunity for those responsible for a disaster that will go down in international annals.

Passing this law would legalize the concept of “fresh” dollars, which would be tantamount to canceling all deposits before October 17, 2019, while any decision on their fate and allocation of losses is the sole responsibility of a bank resolution law, priority. Such adoption would give the “committee” in charge of its implementation a discretionary power, paving the way for discrimination between depositors authorized to access their savings in foreign currency and others. It would keep the banks in their “zombie” status, unable to finance the economy, protecting them from any legal proceedings when they have defaulted for nearly three years.

It would transform the Lebanese economy into a controlled economy, with no horizon of returning to market rules, effectively consecrating the grip of powerful networks that have enslaved the administration for their exclusive benefit. Because controlling capital movements requires controlling all transactions with the outside world, and not just wire transfers and withdrawals. By entrusting this mission to a commission under the authority of the governor of the BDL (according to the amendment proposed by the Vice-President of the Chamber Elias Bou Saab), the bill perpetuates the arbitrariness of the system in place, while it is up to the government to decide, and justify in a transparent way, which transactions and imports are authorized – according to a strategic vision of the economic and social interests to be preserved. Indeed, the restrictions should be temporary while structural policies take effect.

Finally, as it stands, the bill would complete the transformation of the Lebanese economy into a “cash” and informal economy, long hampering any export-based recovery from a competitive private sector.

Effectiveness questionable

Lebanon today needs a capital control law for two main reasons: to regulate the terms of use of foreign currency assets remaining in the economy, mainly deposited with the BDL; and determine the use that will be made of foreign currency liquidity injected into the country as part of an IMF program (bilateral, multilateral, World Bank, etc. loans). The aim of the exceptional restrictions is to avoid accentuating the uncontrolled widening of the balance of payments deficit and to help stabilize the exchange rate by ensuring the effective orientation of the precious liquidities injected into the economy, so that they are used exclusively for the its restart.

However, from a macroeconomic point of view, in the absence of credible projections, it is not possible to measure whether the restrictions that will be the subject of this bill will be stronger or weaker than the current informal measures and what their impact on the balance of payments will be. and on the exchange rate.

Several factors question the effectiveness of the proposed mechanisms in the absence of an overall strategic vision and trust in transparent state institutions. This applies in particular to the control of currencies actually destined for foreign trade operations, given the widespread practice of false invoices. Even the limits imposed on banking operations may not be effective due to the heresy of establishing the distinction between “fresh” and “lollari” dollars, with the probable result of a continuation of foreign currency outflows.

The text also institutionalizes the use of the Sayrafa platform, which has no legal basis. This choice implicitly signals the renunciation of the unification of exchange rates, which was nevertheless considered a priority objective in the preliminary agreement with the IMF. This opens the way for an explosion of informality due, for example, to the official ban on foreign exchange transactions outside this opaquely managed platform by BDL (which is already unable to meet market demand). This bill could therefore accentuate the pressures on the foreign exchange market and maintain inflation, which is the opposite of its essential function.

The only pressing issue is to implement a global plan to emerge from the crisis based on a new economic and social model. Power hasn’t stopped playing for some time as it claimed it wanted such a plan. September will strike the hour of truth, because almost all commitments with the IMF for a three-year program have not been met. And it is a new phase of the crisis, even more acute, that is looming.

Director of Public Policy of the NGO Kulluna Irada.

A government-approved capital control bill was scrutinized by joint parliamentary committees on Tuesday and then postponed indefinitely. Several versions of this text have already been drafted, none of which have so far met the criteria for legislation that should have been approved in October 2019. Instead of limiting the bleeding of …

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