Lebanon faces poverty trap as the elite 'sabotage' third recovery plan

They say the third time is a charm.

That is not proving to be the case for the third version of Lebanon’s long-expected government economic recovery plan, aimed at addressing the country’s financial losses that exceed $70 billion and restructuring its insolvent banking sector.

The stakes are high. For depositors, locked out of their savings, it will lay out the mechanisms of restitution. Except for some well-connected Lebanese, most have lost all their life savings. For the banks, it will determine which will survive and which will be forced into bankruptcy.

It is also a condition to secure a much-needed $3 billion loan programme from the International Monetary Fund, a prerequisite for unlocking any foreign financing.

Despite the urgency of the situation, five years into a crisis labelled by the World Bank as one of the worst since 1850, which has pushed 80 per cent of the population into poverty, the government’s economic recovery plan, which was met with staunch opposition, is not on the agenda of the Council of Ministers this Tuesday.

“As such, it is highly unlikely for the plan to be adopted in its current form, given the opposition it has faced,” Deputy Prime Minister Saade Chami, one of the plan’s contributors, told The National.

Mr Chami said the 60-page draft law had drawn heavy criticism from various corners – the Association des Banques du Liban (ABL), economic organisations, MPs and some ministers – before it had even been debated.

“Some have criticised the draft law even before reading but they have done so on hearsay and before they had the chance to discuss it with its authors,” he said.

Dismissed as a Ponzi scheme, a fraudulent system in which funds from new investors are used to pay off earlier ones, the Lebanese economy – fuelled by exorbitant interests on deposits – completely collapsed in 2019 after decades of squandering of public funds.

Opponents and defenders of the recovery plan are clashing over how to divvy up the enormous bill of this unsustainable policy among stakeholders – the state, the central bank, shareholders and depositors.

Opponents of the plan argue that it is too lenient towards the state, which should bear the responsibility for misusing the funds lent by the financial sector.

Those who defend it say the state is financially broken and simply lacks the means to bail out depositors – at least for now.

“Any draft law is susceptible to changes and amendments, let alone a law that deals with very complicated and difficult issues such bank resolution and how to deal with the large financial gap that exists in the banking sector,” Mr Chami said.

“Having a plan, even if imperfect, that could be changed and amended is preferable to having none at all. But this requires joint and genuine efforts on the part of those who are responsible for it in the first place. One person alone cannot make that happen.”

A ‘stillborn’ plan

The plan, crafted with the assistance of the central bank, Banque du Liban (BDL), was sent to ministers in February for their comments before a scheduled Council of Ministers meeting later that month.

The meeting was cancelled, however, and there has been no word since on when the proposal will be reviewed.

“The plan is stillborn,” Henri Chaoul, a former Finance Ministry adviser, told The National.

This resistance to much-needed reforms, he explained, has been coming from the same coalition of politicians and bankers united in one aim – to deny the colossal financial losses.

“Bankers don’t want to declare bankruptcy, while politicians resort to populism to delay facing the harsh truth,” he said.

A depositor holds a placard during a protest outside Fransabank’s headquarters in Beirut, Lebanon, on March 8, 2024. AP

“It’s all about the attitude towards reforms. It’s simple to shoot down any solution without offering an alternative.”

The Lebanese elite’s prevarications appear to have tested the patience of the IMF. Its representatives are scheduled to visit Lebanon in the first half of this year for the Article IV consultation, which is conducted annually for all member countries to assess their financial condition, although a date haas not been set.

Official sources told The National that this is related to security reasons, as a border conflict between Lebanon’s Hezbollah militia and the Israeli military is raging in the south of the country.

But several informed sources said the IMF may skip the visit this year, deeming it pointless until tangible progress is achieved.

It is deja vu. In 2020, the plan of Hassan Diab, prime minister at the time, crashed and burnt, much like the government’s plan in 2022.

“All these plans are cut from the same cloth,” Mr Chaoul said. “And they all stumble over the same hurdles.”

But Lebanon is not circling back to square one: It is plunging deeper into crisis.

“The longer we delay, the more challenging the situation will become and the greater the losses. The faster we move with the reforms, the less time we need to recover deposits,” Mr Chami said.

“Time is of the essence and its passing is a loss for depositors. Past solutions are no longer up-to-date. What has been missing is the political courage to act decisively,” a BDL source told The National.

Bailout, ‘lirification’, state assets

The latest plan says amounts below the protected threshold of $100,000 will be reimbursed to depositors gradually.

This accounts for about $20 billion of the $90 billion deposited at the central bank, said Jean Riachi, chief executive of the Lebanese Investment and Capital Bank.

Banks unable to return deposits will be restructured, including the resetting of their capital to zero.

As for the remaining $70 billion in deposits above $100,000, these will be removed from banks’ balance sheets and reimbursed through various mechanisms.

These include bail-in, where a portion of the deposits is exchanged for equity participation; lirification, which means converting the funds into Lebanon’s depreciating lira currency; and conversion into securities linked to a deposit restitution fund tied to state assets.

The ‘deposit wipeout plan’?

The plan’s adversaries have called it the “deposit wipeout plan”.

“The time of recovery and the threshold for protected deposits is not acceptable for depositors,” the BDL source said.

“They are aspects worth discussing, such as time of recovery for protected deposits and bailout mechanisms with are too vague, but the plan should not be outright dismissed,” Mr Chaoul stressed.

For the Association des Banques du Liban, the banking lobby, deposit recovery could be maximised if the state dips into its pocket.

“Banks shoulder the burden of the current plan, with no real expense for the BDL or the Lebanese state,” a leaked document attributed to ABL said.

Mr Riachi said: “Banks argue that the state should be responsible for all deposits. But the real reason is that there’s not even $20 billion in the system, maybe for just four or five banks.”

“Most of the banks do not have the funds to pay the amount protected, so they play on politicians’ populism, all under the guise of sacred deposits.”

ABL told The National it would be making no official comment on the plan.

But it has long argued that the state should bear the losses. The crisis, the banking lobby claims, did not arise from banks’ risky investments but from a “systemic crisis” tied to state policies, which led to deficit accumulation, and the BDL, which drained its reserves to prop up the exchange rate.

“We never denied the state’s responsibility and the need for it to contribute to the solution,” Mr Chami said. “But it can’t contribute to the extent that is being demanded given the dire fiscal situation.

“We keep saying that the contribution of the state could increase with time once we put all the necessary reforms in place.”

Billions of dollars in ‘illegitimate deposits’

Another point that has fuelled outrage within the banking sector is the proposed distinction between legitimate and illegitimate deposits.

“The current financial losses are indicative as it assumes that all deposits must be protected but it does not account for illegitimate deposits,” Lebanese lawyer Karim Daher said.

“This refers to funds acquired through illegal means, such as drug trafficking, terrorism financing, fraudulent bankruptcy, embezzlement, smuggling, extortion, insider trading … as defined by Lebanon’s anti-money laundering regulations.”

The plan sets the threshold for proving wealth authenticity at deposits of more than $500,000 and at $300,000 for public officials.

“Cases where deposits are not protected include situations of acting as nominees for wrongdoers and potentates, as well as money resulting from tax evasions or dormant accounts that are supposed to revert to the Lebanese state, partially or totally depending on the due diligence of the banks,” Mr Daher explained.

“Estimating is tough but we could recover billions.

“Not only would it narrow the deposit gap, but also expose Pandora’s boxes of collusion among bankers, politicians and entrepreneurs.”

The issue of legitimate deposits is “good from a moral standpoint” but dismissed as “very complex” in the leaked ABL document.

“According to actual international standards, there are not technical excuses not to track funds in Lebanese banks. The audit could technically be done even before a plan is adopted,” the BDL source said.

Mr Chaoul added: “For years, Lebanese have demanded accountability. Finally, we have a plan heading in that direction and the same so-called elite is now sabotaging it.”