Lebanon’s broken financial sector entered a new phase of uncertainty as Circular 151, permitting banks to release dollar deposits at the obsolete rate of 15,000 LBP to USD, approaches its expiration date. The withdrawal rate stands in stark contrast to the current market rate of approximately 89,500 LBP to USD, raising the question about whether the central bank will realign withdrawal rates with prevailing market conditions.

LIMS has elucidated that a combination of various central bank circulars functions as implicit capital controls. These directives allow depositors to withdraw up to $400 per month in USD, enforcing withdrawals in Lebanese pounds for amounts exceeding the limit at a fixed rate of 15,000 LBP to USD. This translates to an 85% penalty for exceeding the withdrawal cap, serving as a formidable deterrent. The primary aim of these circulars is to curtail withdrawals and dissuade depositors from accessing their funds, reflecting the insolvency and illiquidity plaguing the Lebanese banking system.

LIMS has underscored the central bank’s challenge of adjusting the withdrawal rate to align with the current market level before instituting a bank restructuring process. A surge in withdrawal demands would compel banks to turn to the central bank for the redemption of deposits, amplifying the strain on the already depleted central bank reserves. In response, the central bank, grappling with substantial losses, would be compelled to print more money, risking an uncontrollable hyperinflation. Consequently, prevailing wisdom suggests that unifying the exchange rate necessitates the implementation of capital controls to stave off a potential bank run.

LIMS has reiterated the imperative need to disburse the remaining foreign exchange reserves to depositors as a priority, before expending further resources on failed policies, and before deciding on the suitable banking system’s restructuring and loss distribution. Additionally, LIMS argued for increased competition in the banking sector by allowing new institutions to enter the market, stimulating the economy while the established banks undergo restructuring.

• Why The Delay In Unifying The Exchange Rate? What Comes After Circular 151? January 12, 2024: Leb Economy, Article AR      
• This Is The Only Scenario For Deposits, January 15, 2024: Lebanon Debate, Article AR
• New Circulars From The Central Bank, January 17, 2024: El Marada, Article AR