Testing Lebanon’s Banking Sector – Is it Resilient?

Thursday, February 18, 2021
Opinion by Jean AbiNader

An extensive Reuters article on the weakened banking sector in Lebanon raises a number of concerns that go to the heart of the survival of this once critical segment of Lebanon’s success. In August 2020, the Central Bank issued new reserve requirements of 20% that had to be met by the end of February 2021. There is no guarantee that even half of the banks will be able to come up with that amount given the reluctance of investors and depositors to support an already bankrupt sector.

How did it get this bad? Well, most of the finger-pointing is at that same Central Bank. Rather than face the damning political task of pushing for restraints on the political oligarchy which swelled the country’s budget deficits, the Bank adopted “financial engineering,” called a Ponzi scheme by many, to fund the massive government debt. It operated on the assumption that attractively high interest rates would keep foreign currencies flowing into the country, despite dwindling hard currency deposits to justify the rates.

The collapse of this faux financing regime began when expatriate Lebanese, international investors from the GCC, and others began reducing their investment activity around 2016 as the country slide deeper into debt. Lebanon is now the third most indebted country in the world on a debt to GDP ratio, and there is no solution in sight. Negotiations with the IMF for financial restructuring have encountered tough resistance from the banking sector and the government.

The banks are the country’s largest debtors as they hold the largest amount of government bonds. According to the Reuters article, “Commercial banks have lost roughly 49 trillion Lebanese pounds in deposits in the past two years, equivalent to around 22% of current total assets and large depositors are likely to be in the firing line in any resolution of the banking crisis.” In another blame game exercise, no one in authority would initially agree on the actual size of the debt, although most have settled on a $69 billion deficit in the combined balanced sheets of the banks and the Central Bank, of which the currency reserve mandate will only raise around $4 billion.

The second blow from the Central Bank in August 2020 was an appeal to the banks to ask their biggest depositors to repatriate up to 30% of their deposits. The request has hit a wall of sand, with little or no compliance. It is anticipated that less than half of the country’s large banks will meet the 20% requirement, and many of them have liquidated overseas businesses or converted local dollar deposits into equity instruments to meet the threshold.

Bloomberg also looked at the rising inflation rate in Lebanon as a result of its constantly fluctuating currency. Once pegged at 1500 lira to the dollar, the new government rate is around 3900 while the black market rate has gone as high as 8800 lira to the dollar. “Lebanon’s annual inflation rate reached a record high and food prices soared by up to 400% in December, highlighting the dramatic impact on consumers and businesses of the country’s worst financial crisis in decades.” The country recorded an annual inflation of 84.9% in 2020, up from 2.9% the year before. Consumer prices reflected inflation and rose 145.8% from December 2019 to December 2020.

While the banks and the Central Bank obfuscate and the caretaker government cannot take actions without the consent and facilitation of the three presidents: the president, prime minister, and speaker of the parliament, the Lebanese people have seen their savings frozen by informal capital controls with rigid constraints on withdrawals. Without leverage, they are unable to access the banks with the ease of the large depositors and shareholders.

Lebanon’s elites have allowed the middle class to decline dramatically and the government to remain in paralysis. Economic predators are consuming devalued and damaged real estate as shelters for their deposits, with the result that the banking sector is now a pariah in the international financial community. Once one of the most respected institutions in the country and the region, it is now fumbling for its future, and its rehabilitation will only come about through a massive restructuring and attraction of large amounts of funding. No wonder those who can are leaving the country and those who remain suffer. Who knows how long the tensions of daily survival will continue to be largely non-violent.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force on Lebanon.