In recent days, Lebanese political and financial leaders attended the spring meetings of the International Monetary Fund (IMF) and the World Bank in Washington from April 15 to 20. They have been increasingly visible in the media and on social networks, touting Lebanon’s “achievements” nearly five years after the crisis erupted.

However, according to testimonies provided to L’Orient-Le Jour by multiple participants, the Lebanese delegation primarily encountered blunt criticism regarding the unacceptable delay in implementing the conditions outlined in the staff-level agreement with the IMF in April 2022.

There were also expressions of astonishment, and even irritation, from representatives of the institution. They observed that various parties within the Lebanese delegation — including MPs, the government and the Banque du Liban (BDL), Lebanon’s central bank — deflected responsibility.

This trend has become customary since the inception of negotiations with the IMF and was partly responsible for the initial suspension of negotiations in 2020.

“The delay in implementing reforms has inflicted significant harm on Lebanon and its people, especially depositors,” said caretaker Prime Minister Saadeh Al Shami. “Any further delay in addressing their plight will only compound the losses endured during the past four years of hardship.”

He emphasized, “While the objectives of the staff-level agreement remain relevant, substantial adjustments may be required given the passage of more than two years since its adoption.”

Meanwhile, caretaker Prime Minister Najib Mikati convened with a delegation from the Association of Banks (ABL) last Tuesday in Beirut, where he conveyed that “a government team is presently crafting a new draft law aimed at restructuring the banks.” He noted that this iteration would be “applicable this time,” though he refrained from elaborating.

Sources at the meeting indicated that Mikati displayed a conciliatory stance toward the banks, demonstrating an understanding of their concerns and a willingness to accommodate them.

Deadlocks

The recent IMF meetings have once again underscored the depth of disagreements prevailing in Lebanon regarding the necessary reforms and their implementation methods, particularly concerning the allocation of losses among banks, depositors and the government.

As a reminder, the ABL, in close collaboration with the central bank and influential political figures, has thus far succeeded in thwarting several successive government reform plans (in 2020, 2022 and 2024).

In the latest development, the proposals about sector resolution, drafted in coordination between the BDL, the Banking Control Commission of Lebanon (BCCL) and a government team, were rebuffed by the cabinet last February, following the disavowal of interim BDL governor Wassim Manssouri.

This string of setbacks has prompted some observers to perceive a “shadow plan” orchestrated by former BDL governor Riad Salameh, along with the banks and their political allies. It is aimed at safeguarding their mutual interests, even at the expense of forfeiting IMF assistance and perpetuating the paralysis of both the sector and the nation’s economy, rendering them akin to “zombies.”

Especially significant is Al-Shami’s observation during the Washington meetings, emphasizing that financial support doesn’t solely hinge on the IMF but also involves donor countries. He added that no aid will be forthcoming unless a final agreement is reached with the IMF.

Regarding the issue of sharing the losses, the primary argument put forth in defense by the ABL is now that the crisis is “systemic” and stems from public policies for which the State bears primary responsibility, along with its authorities and various bodies.

According to this simplistic interpretation of the crisis and its origins, all that’s necessary is for institutions to retrieve their deposits from the BDL, allowing them to “return the deposits to their holders.”

Representatives, both direct and indirect, reiterated this message in Washington, emphasizing the primary responsibility of the state. They asserted that the state had essentially borrowed money from the banks’ certificates of deposit, held by the central bank.

These claims are grounded in data released by the BDL, including a debt of $16.6 billion owed to the state, accumulated since 2007. However, the Finance Ministry does not validate this figure, as it possesses evidence indicating that it disbursed the amount to the BDL in Lebanese lira at the time, characterizing the transaction as purely a foreign exchange operation.

Additionally, other factors highlighted by the banks (and the BDL) — based on these figures — are indirectly associated with the expenses incurred to stabilize the exchange rate and what is referred to as “open market operations.”

The operations, as perceived by the BDL, were conducted on behalf of the state and aimed at maintaining monetary stability. They cumulatively total over $40 billion, which the BDL contends should be classified as losses.

According to the BDL’s understanding of Article 113 of the Money and Credit Code, if these losses are officially recognized, the state is purportedly obligated to cover them.

However, doubts persist regarding most of the figures presented by BDL, which have remained undisclosed for over two decades within the institution’s balance sheets under the category of “other assets.”

The forensic audit conducted by Alvarez & Marsal failed to resolve this controversy, particularly since BDL did not furnish all the requested information and data.

Moreover, there is disagreement regarding the interpretation of Article 113 concerning the coverage of BDL’s losses. The article pertains to a single loss-making year, for instance, rather than the aggregation of figures obscured by fraud or accounting concealment for a minimum of 20 years.

What’s more, the process of covering losses necessitates government authorization for audited accounts, subsequently submitted to Parliament for approval.

However, those advocating these arguments in Washington, purportedly in defense of depositors, were largely met with terse responses from their counterparts, who simply stated, “Go and prove it with a reliable audit, and come back to discuss the results.”

This stance reflects the IMF’s perspective, which deems attributing these charges to the state incongruous with the preliminary agreement. Implicitly, the agreement mandates spreading the losses, beginning with the banks, and assigning a portion to significant depositors. This could involve measures like canceling accrued interest on their deposits or converting them into bank shares.

What will happen next?

Nonetheless, the IMF’s skepticism regarding local delays isn’t the sole factor that might compel banks and BDL to relinquish their wait-and-see approach and perpetual impasse. Several forthcoming developments could potentially prompt a shift in their stance in the coming months.

One significant factor is the looming prospect of Lebanon being placed on the gray list by the Financial Action Task Force (FATF). This move could arise due to various reasons, notably the concerning proliferation of the “cash economy,” which poses inherent risks of money laundering, tax evasion and other financial crimes. This expansion is largely attributed to the delay in bank restructuring.

Additionally, there’s the looming threat of legal action against Lebanon by holders of foreign currency bonds (Eurobonds) in the New York courts.

Furthermore, a class action lawsuit has been initiated by depositors in the US (New Jersey) against BDL, its former governor Salameh and several banks.

Anticipated in the coming weeks is a similar legal action by other depositors in France. Meanwhile, trials in France and Germany involving the former BDL governor and others implicated in suspected embezzlement, fraud, money laundering and tax evasion are slated to commence shortly.

Moreover, it is expected that the financial prosecutor’s office in France will examine a complaint filed by Lebanese plaintiffs against Mikati. The plaintiffs allege suspicious transactions involving Salameh, with banks such as Banque Audi implicated.

At the heart of all these developments lies the steadfast refusal of the acting governor of BDL, Manssouri, to provide full transparency regarding the central bank’s financial records.

Some individuals have publicly accused him of concealing the actions of his predecessor, Salameh, potentially to shield him and influential parties within the ruling system from scrutiny.