The past year has seen the nation’s top political actors in the Cabinet and Parliament regularly present themselves as being busy in the people’s interest. A budget law was debated and adopted in Parliament. The amending of the banking secrecy law was pronounced. And, importantly and strongly noted by the world, the International Monetary Fund (IMF) and the Lebanese government in early April announced a so-called staff-level agreement – a step towards a formal agreement for a $3 billion facility with immense signaling power – conditioned on a set of prior actions and reforms.
Five pillars of action mentioned in the agreement were (a) restructuring of the financial sector, (b) fiscal reforms and debt restructuring, (c) reforming of state-owned enterprises, (d) strengthening of governance and anti-corruption frameworks, and (e) implementation of a credible monetary and foreign exchange system.
Laws that were specifically mentioned in the staff-level agreement as being needed in connection to an IMF deal were three: approval of an “emergency bank resolution legislation,” a reformed bank secrecy law, and the adoption of the 2022 budget. A set of supplementary government-initiated measures mentioned alongside these three legislative acts by Parliament were the completion of the Central Bank’s audit, unification of the exchange rate by the Central Bank, individual evaluations of the largest 14 banks, and cabinet approvals of a medium-term debt restructuring and fiscal strategy, as well as a bank restructuring strategy.
As already mentioned, the 2022 budget was passed. After modifications to the Ministry of Finance’s proposed budget law, Parliament approved on September 26, the 2022 budget with expenditures at 41 trillion Lebanese pounds, and a budgeted deficit of 11 trillion Lebanese pounds.
But upon a close look, this achievement does not impress. No one, neither the critics nor the hypothetical supporters of the budget law could deny that it was horribly late, having been adopted in September, nine months past the constitutional target date. In this sense, the only argument that could be constructed as somehow positive with regard to timing might be that this 2022 budget in its discussion and adoption was a lesser case of irresponsible procrastination than many previous ones.
Neither could anyone pretend that the budget law’s expenditure of 41 trillion Lebanese pounds as opposed to revenues of 30 trillion pounds made for a healthy, or even tolerable, deficit on grounds of a temporary emergency. Most commentating on the numbers instead saw this 2022 budget as a construct that was so rotten in its financial foundations that its assumptions were bound to crumble before the ink had dried.
Illustrating the many questions of this emergency budget was not just hastiness and non-transparency of its provisions but that the high deficit, according to an opinion by BlomInvest Bank, would have a hugely negative impact on inflation and the exchange rate if it “was to be financed primarily by BDL through the printing of money with no sterilization operations done [in] parallel.”
The Banking Secrecy Law in historic and global contexts
Lebanon’s President Michel Aoun (C) during a meeting with the International Monetary Fund delegation at the presidential palace in Baabda on March 30, 2022. (Dalati)
While approved in 2022 in satisfaction of the promises of the staff -level agreement and standing as a fulfilled legislative action alongside the budget, the best thing that can to date be said about the banking secrecy law is that it has been needed for many years. As such, in the market and the banking sector, a new banking secrecy law has long been understood as something that is no obstacle to financial development but rather the opposite, and can unleash growth in context of the globally financialized economies. All else that can be said at the start of the year after this law’s finally found legislative acceptance is that it is potentially beneficial in reducing corruption but it has yet to prove itself.
The law amending the provisions of banking secrecy went into force in October, denoted with its issuance in the Official Gazette. However, the history of banking secrecy in Lebanon goes back to the early days of independent statehood and the creation of the Central Bank. Lebanon Law No. 1/1956 on Bank Secrecy was adopted in 1956.
In essence, banking secrecy is an agreement between banks and the clients by which the client’s activities and details remain confidential and private. By enshrining it in law, the state guaranteed this privacy, enabling bank clients to hide their assets from all prying eyes. Article 2 of Lebanon Law No. 1/1956 prohibited banks in Lebanon from disclosing information about their clients such as their name or their funds to anyone whether it is a private individual or a public authority.
In the second half of the past century, the disadvantages of absolute banking secrecy increasingly outweighed legitimate interests of asset holders, as banking secrecy was a facilitation tool of tax evasion, illicit profits, money laundering, and terrorism finance. Banking secrecy was reviewed and sharply restrained in many jurisdictions. The banking secrecy accorded to account holders in Lebanon, however, was only modified in small ways around the turn of the millennium, in order to avoid full blacklisting of the country’s financial system by the Financial Action Task Force (FATF). It meant the law was not seriously challenged in Lebanon throughout the 2010s.
List of proposals for legal measures in Pillar 1 of Executive’s Economic Roadmap
Fiscal policy
Measure 1.1.1 Improve deliberation and adoption of state budgets.
Measure 1.1.6 Launch work on a new, progressive tax policy and remove tax loopholes for offshore companies.
Measure 1.2.1 Unify and stabilize the exchange rate and incentivize initiatives that would increase foreign direct investment.
Measure 1.2.10 Mandate for all companies benefiting from public funds to be listed on the BSE with a 51 percent float.
Measure 1.2.11 Legislate and incentivize companies to facilitate trading of corporate debt contracts to allow for foreign currency investments to encourage exports.
Build capacities
Measure 2.1.2 Legislate and implement a census for Lebanon.
Measure 2.4.1 Further modernize existing laws pertaining to competition, anti-dumping, intellectual property, antitrust, small and medium-sized enterprises, quality-enhancing, bankruptcy and insolvency, code of commerce, and the building code.
Measure 2.4.2 Create legislation that would allow for small debts recovery.
Measure 2.4.4 Introduce e-government solutions and improve omni-channel access to governmental procedures, such as customs, to reduce red tape on import and export trade procedures.
Measure 2.4.6 Create a trade and finance program and restructure all trade debts.
Measure 2.4.7 To bolster the private sector, make sure that capital control laws still allow businesses of all sizes to maintain and grow their operations, allowing for international transactions when necessary, to keep Lebanon’s industries, services, and products relevant.
Measure 2.5.1 Complete and implement PPP legislation and empower independent oversight bodies that can contribute to the efficient delivery of services of PPPs, including the judiciary, regulatory bodies, and civil society.
State institutions
Measure 3.1.1 Develop new legislation to consolidate previous draft laws for decentralization at the municipality level.
Measure 3.1.2 Improve legislation for determining responsibilities and decentralization structures for levels beyond the municipality.
Measure 3.1.8 Ensure the implementation of whistleblower protection legislation and adequate mechanisms for reporting infractions.
Judicial reform
Measure 4.1.1 Examine all current legislation on judicial independence and transparency as a concrete measure toward building a strong judiciary.
Measure 4.2.3 Adopt laws to ensure the complete financial and administrative independence of the judiciary.
Regulatory frameworks
Measure 5.1.6 Develop new legislation to consolidate previous draft laws for the insurance sector to promote proper competition and better protect policy-holders.
Measure 5.1.8 Fully implement Law 28 (2017) on access to information and coordinate a national plan for combating corruption. Implement the national corruption commission legislated in 2020. Design and empower regulatory frameworks that facilitate the definition and recapture of illicit gains by politically exposed persons and public servants on all levels.
Measure 5.1.9 Enhance competitiveness in the economy by passing legislation and measures to improve the doing business environment, as per Policy Priority 2.4: Enhance the Business and Investment Climate.
A weak budget
Jinan Tfaily, a lawyer who specializes in public law, says that the liquidity crisis of 2019 was accompanied by local and international reports talking about the transfer of millions of dollars from Lebanon abroad, and all its owners benefited from the absolute banking secrecy law. Regarding the positive repercussions of lifting bank secrecy, Tfaily emphasizes that this issue constitutes a basic and pivotal starting point for the issue of inquiry and investigation in the context of operations to fight corruption and recover illegally acquired funds.
Access to bank accounts of suspected persons to conduct an approach, comparison, and confirmation of evidence on illegal enrichment (especially in the event that they own funds that their regular resources do not enable them to own) will according to Tfaily ensure that the issue of combating corruption does not remain just a populist slogan empty of content and without effectiveness or practical implementation.
Whereas adoption of a modified banking secrecy law works towards aligning Lebanon with international financial standards and is a step towards an IMF agreement, experience from changes in banking secrecy in European jurisdictions suggest that the process of recovering illicit gains and closing loopholes against outflows of corrupt holdings is at best arduous. Even in the best of circumstances, much time would be required to see this law’s efficacy in Lebanon. Numerous local observers furthermore consider it unfathomable that this law could in itself transform the opaque Lebanese financial system of the past, especially given the fact that the 2022 budget law, while adopted, has been put on the feet of the weakest clay.
Looking at this weakness of the budget from the perspective of its ability to support a fiscal reform path that is congruent with the conventional financial wisdom habitually promulgated by the IMF, and knowing that the IMF demands are still very far from being met – given how the Law for Regulating and Restricting Financial Transfers (the Capital Controls law) and the Banking Restructuring Law have not been approved by time of this writing – it could neither shock any Lebanese observers in terms of content nor should it awe anyone in terms of candor that the IMF has expressed its strong irritation with the Lebanese process.
The evaluation of the progress made by Lebanese lawmakers in six months between the announcement of the staff-level agreement and the end of September of last year actually was a dressing down clad in diplomatic phraseology. “Progress has been made, but progress has been slow. Only few measures have been so far implemented and there is still progress on others,” Jihad Azour, director of the Middle East and Central Asia Department at the IMF, told a regional press briefing in October. Of course, since the IMF should never be mistaken for an institution that is isolated from geopolitics, this pill came with a sugar coating. “We encourage the authorities to accelerate and pursue those needed measures,” Azour added, in a manner not so different from the many reiterated, always well-intended, and persistently fruitless appeals of foreign governments and institutions for political action regarding an election, cabinet appointments, or overdue reforms.
Moreover, since the IMF comments last October, nothing new has been said or seen on behalf of Lebanon that could change this damning assessment in the least, although similar outcries over the slowness of the Lebanese process and diplomatic admonishments for this or that political and policy action did surface in the last quarter of 2022 and at the beginning of this year.
This means that in terms of the deal with the IMF and the urgency thereof, Lebanon is in a rolling checkpoint scenario, where it has to be asked at every hour if the legal action of 2022 was just slow, or devastatingly counterproductive. But the ultimate crack in the facade of the Lebanese state as a democratic enterprise, and deep fault-line threatening the people’s best interest requires answering the question if there were any redeeming factors that would make the Lebanese political powers that are into a reliable or calculable partner.
This question answers itself in the negative if the scope of consideration of legal omissions and lacking legislative actions is widened beyond the years of the Lebanese crisis that triggered the request for IMF assistance in 2020.
Build and reform
It is worth recalling that the demands for budgetary discipline and fiscal fairness are key propositions of the Executive Economic Roadmap (RM) and have been so since its first edition in 2018. As a matter of fact, the very first policy measure – 1.1.1 – proposed in the first of the magazine’s RM iterations has been the demand to “improve deliberation and adoption of state budgets.” The proposition (proposed measure 1.1.12) to “Complete good-faith negotiations with the IMF to unlock technical assistance and financial support, around a credible economic recovery plan, and carry out all structural reforms that relate to the improvement of the fiscal performance of Lebanon under existing commitments,” has been an addition in response to the economic collapse.
The Build & Reform pillar of the Economic Roadmap actually emphasizes throughout its four agenda priorities the need for administrative reform, capacity building, effective, transparent, and consistent regulations, and judiciary independence. These are needs for change that pre-existed the economic crisis by many years. Only examining the Build & Reform pillar, proposed measures in the sectors of fiscal policy, capacity building, strengthening of institutions, judicial reform, and developing regulatory frameworks, actually include almost 20 recommendations involving legislative acts.
In conclusion, there can be no doubt that legislative actions just before and during the crisis years have been insufficient to ward off the economic crisis or deal with it in a quick and responsible manner. However, there is also no question that the track record of the Lebanese Parliament before the economic crisis was insufficient for answering the real needs of the productive sectors and steering the economy towards sustainable prosperity. These facts, which stand irrespective from the need to carefully examine any idea promoted by the IMF to Lebanon, should be reviewed carefully by anyone seeking a way out of the economic misery.
Context of laws that were adopted in 2022
At a time when much of the debate has been focusing on the preconditions and legal measures linked to an IMF deal, it is worth noting that Lebanese Parliament has taken some legislative decisions that are not required as preconditions for an IMF deal. Some of these met emergency needs without adding to the longer-term prospects of tax fairness and development but were of peripheral relevance for negotiations with international funders, such as the laws on borrowing to finance grain and medicine importation and disbursal. Other laws carry positive implications, foremost among them the procurement law. Examples for this legislative action are the following:
Law No. 304 dated 28/10/2022
This law provides for a mechanism for opening credits and disbursement of the loan agreement provided by the World Bank at a value of $150 million to implement the emergency response project to secure wheat supplies.
With dual background in the local economic crisis and global food price inflation, the law met an emergency need. Since Lebanon relies on importing a majority of its goods, such as wheat, and the imports need to be paid in dollars, as the economic crisis has worsened, the cost of paying for these imports has drastically increased.
Law No. 287 of 12/4/2022 to support the locally produced pharmaceutical industry
Similar to Law 304, the Law 287 was adopted in an attempt to mitigate an acute crisis that has manifested itself in the inability of private households and public health insurance providers, and the Ministry of Public Health (MoPH) as de-facto insurer of last resort, to cover the cost of healthcare, including medicines.
After the approval of this law proposal in Parliament, a plan by the MoPH is to further increase substitution of imported medical drugs with locally produced ones. Under the plan, whenever pharmaceutical producers in Lebanon complete the process of registering a local drug as an alternative to the imported one and put it on the market, remaining subsidies for the imported substance are automatically lifted.
The Conventional Mediation Law
The oft-lamented slowness of the Lebanese legal system in resolving commercial disputes has been exacerbated in recent years in the form of growing backlogs of court cases at times when judges and courts were not able to function normally or even paralyzed by strikes. Mediation, as an alternative method for resolving disputes, was the subject of the Conventional Mediation Law 286 which was adopted in Parliament on March 29, 2022.
Mediation in this sense of resolving disputes between parties to a business contract is “a flexible process conducted confidentially in which a neutral person, the Mediator, actively assists the parties in working towards a negotiated agreement of a dispute or difference, with the parties in ultimate control of the decision to settle and the terms of resolution,” explains Diana Bou Ghannam, an associate at law firm El Muhtar and Associates.
The Conventional Mediation Law of 2022, which followed after and complemented the issuance of a Judicial Mediation Law in October 2018, opened alternative dispute resolution options to litigants in various fields and use mediation in resolving their disputes away from lengthy and very costly court proceedings. The law arrived just in time to help reduce some of the pressures that have come to bear on court systems, Bou Ghannam tells Executive.
Public Procurement Law
A law deserving of greater and lasting attention is the public procurement law. Public Procurement Law 244/2021, which Parliament had passed in June 2021 without much further debate, was published on July 19 of that year in The Official Gazette. Campaigners for this law had been pushing for it from two sides, efficiency and transparency, with arguments that a better procurement mechanism will have benefits in combating corruption and at the same time open possibilities for better serving citizens while unleashing cost advantages. The law’s guiding principles are being described as: integration, transparency, competitiveness, efficiency, accountability, integrity, professionalism, sustainability, and local development. The law went into effect on July 29, 2022.
Legal expert Jinan Tfaily comments that the new procurement law expands the oversight of the Public Procurement Authority to include all procurement operations carried out by the state, its institutions, councils, funds, departments, independent administrative bodies, municipalities, and their federations, and courts that enjoy particular budgets, security and military wires and their units, and purchases of public utilities operating from private companies for the benefit of the state, up to the purchases carried out by the Banque du Liban ( with the exception of printing and issuing currency). She notes that several amendments of Law 244 were approved within the 2022 Budget Law, such as amendments pertaining to contracts with hospitals, medical centers, and laboratories, to vetting of municipal servants and contractors, and to appointments of receiving committees. These and other clarifications are expected to assist (especially smaller) municipalities in adhering to Law 244 to the best effect.
