In the aftermath of Lebanon’s devastating financial and socio-economic crisis, the reconstruction of the banking sector and restoration of macroeconomic stability demand urgent and sophisticated interventions. This crisis, characterized by the collapse of depositor confidence, war-induced infrastructural devastation, and institutional dysfunction, requires a systematic resolution of the deposit crisis as the cornerstone of a broader recovery framework.
Efforts by Banque du Liban, the central bank of Lebanon, have provided limited liquidity through initiatives such as Circulars 158 and 166, the first issued in June 2021 / updated in November 2023, the second issued in February 2024 and amended in October. This is an approach grossly insufficient to meet the urgent economic and social needs of the population. The government’s handling of dollar-denominated deposits has exacerbated the situation through measures that are legally and ethically indefensible. These include writing off up to 90 percent of deposits by transferring them to phantom entities, converting them into non-performing sovereign bonds, or exchanging them for Lebanese pounds at egregiously undervalued rates. Such mechanisms have irrevocably damaged public trust in the financial sector and further eroded confidence in state institutions. Despite objections from Lebanon’s state legislative council, key parliamentary blocs, and depositors themselves, these measures persist, highlighting the government’s reluctance to confront the structural dimensions of the crisis.
A sustainable resolution necessitates the comprehensive restructuring of the relationship between the central bank, banks, and the government at large. The integrity of deposits must be preserved on commercial banks’ balance sheets alongside corresponding liabilities, namely, the deposits held by commercial banks on behalf of their clients at the central bank. The outright cancellation of these deposits not only lacks legal justification but also risks compounding the central bank’s fiscal and operational challenges. Retaining these obligations within the central bank’s balance sheet ensures transparency and aligns with the broader framework for crisis resolution. Moreover, arguments positing that these liabilities obstruct monetary policy are unsubstantiated; on the contrary, the annulment of these obligations would expose the institution to further legal scrutiny without yielding any operational advantage.
One pragmatic intervention to address liquidity constraints is reducing the excessive unjustifiable reserve requirements on foreign currency holdings imposed on Lebanese banks. At present, these reserves total $10.7 billion—a figure among the highest globally. Reducing the reserve ratio to the international average of 2 percent would unlock approximately $9 billion in liquidity, which could be distributed to depositors as an initial repayment of 10 percent of their frozen accounts. This measure would provide immediate relief and constitute a pivotal step toward restoring confidence in the banking system.
In addition to releasing mandatory reserves, the central bank holds approximately $25 billion in gold reserves, a critical asset accumulated through decades of depositor contributions. Allocating half of this reserve—approximately $12.5 billion—to provide supplementary liquidity for banks could further alleviate the deposit crisis. Together, these actions could return approximately 24 percent of frozen deposits to account holders. This dual approach is supported by Lebanon’s legal framework; Article 75 of the Code of Money and Credit explicitly permits the central bank to leverage gold reserves to stabilize liquidity, contingent on coordination with the Ministry of Finance.
The reluctance to utilize gold reserves reflects a misinterpretation of their role within monetary policy. Gold, as a universally liquid asset, can be readily traded in global financial markets. Contrary to conventional objections, deploying a portion of these reserves is not only legally permissible but also economically prudent, particularly in the context of Lebanon’s acute financial crisis.
However, technical solutions alone cannot restore depositor confidence. Fundamental reforms to monetary governance are imperative to address the systemic issues underlying the crisis. A critical step is the abolition of Lebanon’s outdated dual multiple exchange rate system, which perpetuates economic distortions. The adoption of a fully liberalized exchange rate is essential to fostering market equilibrium and avoiding the recurrence of monetary instability. While the current exchange rate stability is attributable to fiscal discipline, it remains tenuous in the absence of structural reforms.
Another priority is addressing Lebanon’s placement on international “grey lists” for financial compliance deficiencies. Restrictions on capital outflows have curtailed the immediate risk of systemic flight, but long-term credibility hinges on transparent reforms that align with global financial standards. Encouragingly, a significant proportion of newly injected liquidity is likely to circulate domestically, addressing pressing consumer needs rather than exacerbating external imbalances.
The central bank’s primary mandate must be reoriented toward managing domestic liquidity, enforcing stringent regulatory oversight, and promoting macroeconomic stability. Its role is not to generate high returns but to safeguard public welfare and rebuild trust in the financial system. Current practices, such as the limited withdrawals allowed under Circulars 158 and 166, are grossly inadequate and contravene legal and ethical standards. The ongoing freeze of deposits without interest violates fundamental principles and the Code of Money and Credit.
Lebanon’s recovery depends on decisive actions to resolve the banking crisis and reestablish public confidence. These include returning liquidity to depositors, reforming exchange rate mechanisms, and responsibly leveraging gold reserves. Such measures, when combined with robust regulatory oversight and a commitment to institutional transparency, can set the stage for comprehensive economic recovery. The banking sector’s stabilization is not merely a technical challenge but a moral and strategic imperative for Lebanon’s broader reconstruction and sustainable development.
