The International Monetary Fund has described recent changes to Lebanon's bank resolution legislation as a major step, while cautioning that obstacles to putting the law into practice could prolong the country's economic recovery.
The reforms, approved by parliament last week, are among the measures the IMF has requested for Lebanon to regain access to external financing intended to lift government debt out of default. That debt came into default after decades of excessive public spending by the country's ruling class, a pattern that pushed the economy into a deep crisis in late 2019.
Since the crisis began, Lebanese banks imposed sweeping capital controls that denied many depositors access to their savings and curtailed new lending. The latest bank resolution framework is designed to tackle large funding shortfalls within the financial system and forms part of a broader set of initiatives intended to rehabilitate the banking sector and allow frozen depositors to recover their funds gradually.
Key changes in governance
Among the most significant amendments are revisions to the Central Bank's governance arrangements. The composition of the Higher Banking Commission - a decision-making body within the Central Bank - will be modified, giving the commission authority to determine whether a bank requires restructuring or liquidation and to set out the steps for its rehabilitation.
"We met 99% of what they wanted," said legislator Alain Aoun, a member of Parliament's Finance and Budget Committee, speaking about the adjustments made to satisfy the IMF's concerns.
Federico Lima, the IMF's representative in Lebanon, emphasized that the "effective implementation of this new bank resolution framework is critical." He added that discussions continue with Lebanese authorities on revisions needed to align the draft Financial Stabilization and Depositor Recovery (FSDR) law with international principles.
In January, Lebanon's Prime Minister Nawaf Salam said the IMF had demanded changes to an earlier draft of the rescue law, leading to further redrafting and negotiation.
Economic damage and fiscal losses
The government estimated in 2022 that losses from the financial crisis totaled about $70 billion, a figure analysts and economists now suggest is likely higher. The World Bank has ranked Lebanon's economic contraction among the most severe globally since the mid-19th century.
Depositors were blocked from dollar accounts during the crisis and the Lebanese pound lost more than 90% of its value. In addition, the recent conflict with Israel has been estimated to have caused approximately $7 billion in damage.
"This is the only country in the world that has had a banking crisis for seven years and has not tried to find a solution," a senior Lebanese official said, adding that remaining in the current situation should not be an option.
Legal and procedural uncertainties
Although parliament has passed the amendments, the law still requires the president's approval. There is also the prospect that members of parliament or other stakeholders could challenge portions of the legislation before the Constitutional Council, which has previously annulled provisions of financial laws. Such a challenge could introduce significant delays.
The draft law has already been rewritten multiple times to accommodate competing demands from various financial institutions and interests. The IMF has urged improvements to ensure the law meets international standards and has also recommended tax reforms aimed at mobilizing public spending for reconstruction efforts.
Officials and IMF representatives stress that passing the amendments is only the first step. The successful implementation of the revised legal framework, alignment of the FSDR law with international norms, and progress on related fiscal measures will be necessary for Lebanon to secure the financing needed to address the banking sector's shortfalls and begin restoring depositors' access to savings.
Summary of current status
- Parliament approved amendments to the bank resolution law, changing the governance of the Central Bank and empowering the Higher Banking Commission to decide on bank restructuring or liquidation.
- The IMF welcomed the changes but underlined the need for effective implementation and further alignment of the FSDR law with international principles.
- Pending presidential approval and the risk of Constitutional Council challenges could delay the law's enactment and Lebanon's access to IMF-linked funding.