Lebanon’s Central Bank Governor, Karim Souaid, has reignited a contentious debate over a proposed plan targeting borrowers who repaid loans at exchange rates below the actual market value during the country’s ongoing financial crisis, stirring old tensions between bankers, traders, and economic bodies.

Souaid’s reported endorsement of legislation that would require borrowers who settled loans below their true value to repay the difference has raised alarm among merchants, investors, and media outlets. Critics, particularly those representing capital holders, warn that reopening this issue could unfairly penalize small borrowers who repaid loans at the official fixed exchange rate of 1,500 Lebanese pounds per US dollar. This has fueled widespread concern among many citizens who previously took on debt under difficult circumstances.

However, the proposal specifically targets large loans—often in the hundreds of thousands of dollars—granted to traders, investors, and industrialists who benefited from discrepancies between official and market exchange rates during the crisis, rather than consumer loans such as those for housing, vehicles, or education.

This is not the first time such a plan has been proposed. Two years ago, former Deputy Prime Minister Saadeh Al-Shami introduced a bill imposing a tax on borrowers who profited from repaying loans below their real value. His draft aimed to direct proceeds into a deposit recovery fund rather than the treasury, exempt borrowers from penalties, and exclude personal, housing, and loans under $100,000 from taxation.

Later, in 2024, then-Acting Central Bank Governor Wassim Mansouri introduced a one-time tax ranging from 15 to 17 percent on profits earned by investors who exploited exchange rate differences during the crisis. This measure targeted large dollar loans repaid at the official rate, generating substantial gains, with a focus on commercial and investment loans while exempting consumer credit.

Although the idea is not new, Al-Modon cited sources as saying that it will be seriously considered soon as part of a comprehensive effort to recover deposits through multiple channels. Insider reports suggest possible amendments, such as raising the loan exemption threshold from $100,000 to $300,000.

Officials emphasize that bank restructuring and loss distribution alone are insufficient to reclaim deposits without addressing several crisis-related issues. These include loan repayments at rates below their true value, misuse of subsidies, and illicit capital flight. However, all these efforts face significant legal challenges and political resistance from powerful actors within the government and parliament.

While no formal bill currently exists and the governor has not publicly elaborated on the issue, it is estimated that the total value of loans effectively repaid at below-market exchange rates could amount to roughly $20 billion.

The private sector’s loan portfolio shrank drastically from around $55 billion in 2019 to roughly $7 billion by the end of 2024. This indicates that most loans were repaid either at the fixed official rate of 1,500 Lebanese pounds per US dollar or through bank checks valued well below the dollar’s true market rate.

In principle, borrowers should not be held responsible for exchange rate volatility, the pound’s collapse, or the government’s failure to unify currency rates. The primary accountability lies with the Central Bank and government authorities. It is also difficult to hold borrowers liable for repaying loans below actual value years after settling their debts and receiving clearance from banks.

Nonetheless, questions persist about large borrowers—traders, investors, and contractors—who repaid loans worth hundreds of thousands of dollars at undervalued exchange rates,  while marketing goods and services throughout the crisis at market prices. Whether the profits they accrued under these conditions should be considered legitimate remains a key point of contention.

The proposal faces numerous obstacles. Some legal experts argue it is unconstitutional, lacking the defining characteristics of a tax and fairness. Critics also question why banks, which still repay deposits at rates far below market value, are exempt from similar taxation.

Conversely, other legal authorities believe the plan could move forward if legal impediments are removed. They propose a fixed tax based on loan size, with larger borrowers, especially merchants, facing a progressive tax scale.

Even assuming legal clearance, implementation poses technical difficulties. Linking each loan to collateral is complicated once loans are repaid and borrowers have obtained clearance, limiting banks’ and authorities’ ability to demand additional payments.

Furthermore, distinctions must be made among borrowers. Equating those who repaid loans in Lebanese pounds at the official rate with others who used “cheque dollars” — bank checks denominated in dollars but valued below market rates — and profited at depositors’ expense is unjust. Repayments have varied widely, with some checks worth only 15 to 50 percent of the actual loan value, complicating uniform application of any new measures.