Lebanese parliamentarians are yet to agree on a solid socioeconomic recovery plan capable of situating Lebanon on a pathway to recovery and prosperity. In early February of this year, the Deputy Speaker of Parliament, Elias Bou Saab, and a few other Lebanese parliamentarians headed to Washington to discuss a number of difficulties that Lebanon faces locally, most notably the presidential vacuum, the IMF deal to Lebanon, and the sanctions imposed by the US on some Lebanese politicians and businessmen.
The Washington visit lasted a week and included meetings with US administration officials and members of the Senate and Congress, as well as senior officials of the World Bank and the International Monetary Fund. According to Megaphone news, an independent Lebanese news outlet, Bou Saab has informed the IMF delegation that “the only solution on the table for Lebanon is to liquidate and exploit the state assets in order to repay the losses, adding that the option to reschedule public debt and restructure banks is not possible, given its political cost”.
Liquidating the state’s assets is most surely not the only option available to address the ongoing socioeconomic crises, but it is portrayed as such because it is the only one that avails the political-financial class locally. It further rejuvenates the cycle of political exploitation and comes at the expense of sacrificing assistance to the most vulnerable. Nevertheless, what remains unanimous among the majority of parliamentarians is their refusal to let the banking sector (commercial banks and the Central Bank) in Lebanon bear the brunt of the crisis.
The Kinship of the Political and the Financial
Historically, Lebanon’s sectarian system developed in close relation with the expansion of capitalist markets (both being connected with colonial rule), and under the disproportionate influence of a political-economic power bloc, which emerged with the independence of the Lebanese state in 1943. This power bloc emerged as a consolidation of dominant mercantile-financial bourgeoisie and quasi-feudal or urban-based political elites who continue, even at the present moment, to maintain a grip on the state’s resources.
Bankers have been an integral part of the ruling political parties for decades. Their power was first consolidated by the Eddé brothers who formulated the 1956 banking secrecy law and the Association of Banks in Lebanon in 1959. The banking secrecy law has created serialized banking accounts that were protected from state regulation, including that of the Central Bank. As for the Association of Banks, its main goal was to advance and defend the interests of its Lebanese and non-Lebanese member banks locally and on international markets. These two institutional banking pillars have helped convert the Lebanese banking industry into an organised political community which weighed heavily on parliamentary decisions. Nevertheless, the overlapping of the political and financial spheres has shifted the economy’s direction towards an almost total dependency on the service sector at the expense of industrial and agricultural growth. Notably, the banking industry has become the most profitable sector out of all services, specifically following the end of the civil war in 1990. As one banker recently said to L’Orient Today: “Lebanon is a small country; it is no surprise that politicians, who are also businessmen, are involved in a sector as profitable as the banking sector. This is nothing more than simple investments''. This can also be seen when looking into the commercial registry, which reveals a long list of political figures from across the political spectrum who have a past or present affiliation with banks.
Commercial banks have benefited enormously from tax exemptions, huge interest rates to the government, and a banking secrecy law that has been used to hide suspicious activities. They have accumulated immense wealth and expanded exponentially since the 1990s, all while having the political cover they need to get away with massive wealth grabs. Despite the many signs of an impending catastrophe, those in power, shielded by the Central Bank, capitalised on a false sense of security and wealth consolidated through an unrealistic exchange rate of 1507.5 against the dollar. The debt-to-GDP ratio has continuously exceeded 130% ever since 2010. What is more worrying, however, is that the Central Bank has consistently been the biggest borrower of loans from commercial banks, while it was simultaneously loaning money to a failing state. The Central Bank was in no way able to return those deposits, especially given that the government was unable to service its debt with minimal productivity and a stagnant economy. Had the exchange rate been allowed to move with the market, it would have sent a dangerous signal long ago about how the economy was actually doing. This, however, did not occur.
What Now? Debunking the Parliamentarians Supposed “Solution”
What, then, do we need, in order to carve out a pathway to recovery? First and foremost, any economic plan set forth must fully declare the total number of losses incurred at the level of government and the banking industry. Afterwards, there has to be a well-thought-out program that pushes for an equal distribution of losses and strong protection of small depositors.
However, the dominant political proposals at the moment are moving in the exact opposite direction, as echoed by Bou Saab’s recently made remarks to the IMF delegation in the US, in addition to the Lebanese government’s response to the IMF mission which visited in late March. It seems that most parliamentarians are refusing the equitable distribution of losses and the recapitalisation of banks. Instead, they are advocating for a bail-out strategywhere public assets get privatised/liquidated and transferred to the banking sector. As it has been repeatedly stated by financial experts, including World Bank and IMF staff, the value of governmental assets and public real estate (which can be sold or privatized) constitutes only a fraction of the financial losses which the World Bank estimates to be three times the GDP of 2021 (totalling $72 billion). The losses are too big to “bail-out”, but this has been advocated politically since it protects the interests of the financial-political power bloc at the expense of the most vulnerable who, in the case of a bail out, will have to be paying even higher taxes in order to increase government revenue .The IMF and the World Bank are therefore against such an improbable solution and support instead the need to respect the hierarchy of claims through an equitable burden-sharing recovery plan.
We are now four years into an economic collapse and we still have not seen any meaningful reforms or strategic economic plans. In the meantime, our politics is inhibited by a presidential vacuum and a caretaker cabinet with limited capacities to operate. The crisis in Lebanon is unprecedented at all levels and the coming months are decisive. Our debt is an internal problem which needs national restructuring and an equal distribution of losses through a bail-in (rather than a bailout) strategy: those who benefited from the phantom returns of the set interest rates in previous years ought to be paying their share of the costs. With 1% of depositors owning 50% of deposits, it is quite clear who the system has been benefiting the most with its high interest rate strategy that was initially made to attract foreign currencies. The system created a very small group of millionaires and billionaires who are now fighting to sustain the sanctity of their wealth, if they have not already benefited from their connections with the power bloc by sending millions of dollars abroad in the absence of a capital control law.
Neither the IMF nor donor countries will be willing to budge in to assist a corrupt power bloc that is seeking to advance its own interests over that of its people through improbable solutions such as liquidating the state’s assets. This has been made clear in numerous IMF press releases and the official statements made following the Lebanese parliamentary visit to Washington. Private interests of the financial-political power bloc have become the main obstacle in reaching a deal with the IMF. In essence, those in power must stop stalling on the needed reforms and advance equitable solutions which can potentially unlock badly needed aid from the international community. Hence, rather than liquidating the state’s assets to recapitalize the banking sector, the financial-political power bloc ought to consider an equitable recovery program that protects small depositors and brings large ones on board as shareholders in new banks (bail-in), especially given the insolvency of state institutions and the banking sector at the present time. It is also extremely essential to restructure viable banks under a time-bound plan while demanding the exit of unviable banks. However, determining the viability of existing banks requires an amendment of the banking secrecy law passed in October 2022 and a special audit of the Central Bank. This brings us back to the urgent need for a political consensus in Parliament that prioritizes a hierarchy of claims over the interests of the political-financial bloc.