By the strange virtue of its unresolved economic and financial crisis of now four year duration, Lebanon has become an examination room and nation-scale laboratory for analyzing an economic and financial catastrophe. The reasons are plain: this crisis of a small, highly and deeply dollarized country was composed of interconnected financial, economic, social, political, and external shocks and has been playing out at the cusp of a hyper-connected, hyper-(mis)informed, heavily globalized, extremely financialized and increasingly digitized world that cannot but expect to see novel and very hard-to-manage long economic waves and superfast financial cycles.
The people who were involuntarily subjected to this experiment seem to have shown a rebalancing of newly precarious and informal financial safety with equally precarious and massively externally secured social stability. They have done so through their behavior and coping adjustments over the past four years, which, a cynic might note, were not significantly distorted by government interference or by any notion of trust between people and their government.
It could further be hypothesized that firstly financial safety and price stability, the domains of central bank policy making that are also the mission of Banque du Liban (BDL), the Lebanese central bank, are not only requirements of stability and/or growth in economic outputs but also quintessential for social security and stability.
Secondly, it could be said that the slowly improving levels of financial safety, economic performance, and social stability in the country show no indication of sustainability. The evidence of informed altruism and healthy self-interest are focused on the here and now of rational coping, not on national or institutional rebuilding.
Attributes that characterize the Lebanese economy after four years of disruption and administrative chaos are economic informality, the dollarized cash economy and the inflow of remittances. Many economists and stakeholders in the industrial sector have told Executive that they consider economic informality to have doubled in the past three years, from an already high level that in the mid-2010s was estimated to be in the 30 to 40 percent range. As to the cash economy and remittances, the World Bank estimated earlier in 2023 that last year’s cash economy was worth $9.86 billion, or 45.7 percent of GDP by World Bank computation, and that remittances equaled 31.7 percent of GDP.
These estimated numbers present a blurry snapshot of the current level of “normalization” in people’s daily affairs, snapshots taken with substantial x factors of further growth of the cash economy and increasing pressures of informality in the first nine months of 2023 as well as fluctuations in inflows from remittances and external financing through diverse channels. It is clear, however, that external financial lifelines have been sustaining anything from peer-to-peer emergency aid to rebuilding of schools and hospitals to salaries of teachers, from civil society research pursuits to non-governmental aid efforts and private household sustenance.
This journalist’s daily experience of normalization of living conditions at the end of summer 2023 begins with the personal comfort of mornings that are once again filled with the excited sounds of hundreds of children before the school bell chimes and the national anthem rings out from the school yard next door. For more than two years after the Beirut Port blast, there had been only the sounds of demolition and restoration.
Further anecdotal observations of everyday life around the wider neighborhood and on trips around Lebanon in the second and third quarters of 2023 have made this observer sense a superficial “normalization” trend in traffic and transportation patterns from the availability of service taxis to the experiences of urban congestion on streets in the Beirut conurbation. At night, the city’s streets are – although sporadically – lit better and there has been “normalization” in the supply of electricity to those who can afford it. There is a new normal also in the supply chain flows and retail market availability of increasingly hard-to-afford consumer goods and especially imported foodstuffs, as in the difficulty to find a table at a mid-range but overpriced eatery in shopping malls during the expat visitation season.
The socioeconomic “normalization” delivers a picture full of contradiction. On one side it shows a social landscape of unbearable inequities that have sunk back into hiding but on the other side it also shows a panorama of how a society’s economic and social coping efforts have proceeded under a new survival formula. It is to be interjected here, however, that the perceived relative normalization of the economic crisis and living circumstances, where insufficient household incomes were the main source of societal pain, has in October 2023 been overthrown by exponentially rising fears over acute shortages of everything from shelter, food, and water to medical care and communication services because of the threat of war and foreign aggression that again came to loom over Lebanon.
Nothing normal in finance
The new normal in the financial services sector, by contrast to the societal picture in the first nine months of 2023, has stayed and is quite anti-normal and disturbing: commercial banks, which a little over one year ago overwhelmingly turned themselves into barricaded obstacle courses attracting only the most desperate or daring of customers, have retained their dysfunctionality. On the other hand, visible activity in the financial retail market has been swamped with flashy storefronts and marketing messages of purveyors of money exchange and cash transfer services. All in all, the new normal in finance is a market in alternation dominated by new and recurring stories of corruption and by the reality of zombie banks that have lost many decades’ worth of trust and human capital.
But is the ill health of financial markets really a recent problem? In the analysis of Fouad Zmokhol, dean of the school of business and management at the University of St Joseph in Beirut, financial safety in Lebanon has been a problem long before the onset of banks’ liquidity problems. “Financial safety and financial stability are headline issues in all economies, specifically the large developed countries. Taken into the Lebanese scenario, we have to be realistic in saying that financial safety and stability was never in existence in the country,” he tells Executive, emphasizing that financial safety and social stability were absent even during the 30 years until 2019, and that safety which was thought to exist during that period, was in truth fictitious.
For Zmokhol, the 1989 Taef agreement to end the civil war involved a pact among warlords to usurp economic power in Lebanon and embark on a debt financing strategy for the country, thereby accepting a huge pileup of public debt and a government that was running on deficits and debt machinations that precluded achieving real financial safety and social stability.
Other indications for the situation of financial safety were elucidated throughout the first nine months of 2023 by the developments, or absence thereof, of banking and financial market reforms, by audits of the financial entities, by the changing of the guard at the central bank, and by fragile but fresh shoots of innovation.
The issue of first magnitude is the absence of financial sector reforms and correlated deterioration in the capacity of banks and financial market participants to channel stored monetary value into productive investments.
For investment expert Khaled Zeidan, chairman and general manager of financial consultancy Capital EE, pillars of the financial system are yet to be constructed – probably beginning with capital markets – but there is no going back to the previous system which was so deeply flawed that it practically failed by design. At the exit from the meltdown of the financial system, “the funding of the economy is the issue, because there is no medium to long term deposit base in the country now,” he tells Executive.
On a best-estimate assumed current GDP in the range of $25 to 27 billion today, the economy would require about 30 percent, or approximately $7 billion, in funding to securely resume growth but such large access to finance could not be supplied by commercial banks in the foreseeable future. “How do you fund the economy? Let’s say banks come back under a restructuring plan and you will have something like five or six banks instead of over 50 banks as before. Assuming that these banks will be able to address the market needs, I don’t expect them to be capable of addressing more than 30 percent [of it],” Zeidan elaborates.
A second facet in the recent financial developments is the effort of unmasking and cleaning up the sector’s governance breakdowns and illicit practices of the past 10 or 20 years. In a case of crucial institution-building failure for example, a thorough mess was made of seriously delayed regulatory innovation and underwhelming supervisory empowerment of the Capital Markets Authority (CMA).
What many say were political and clientilistic delays in reaching CMA operability, and therefore capital markets functionality, run into years of failures as far as establishing, staffing, and properly operating the CMA institution needed to invigorate the historically anemic but principally vital Lebanese capital markets. The extent of this failure has become clearer this summer, in the revelation of a long-suppressed CMA report of malpractice findings at financial brokerage Optimum Invest (OI) from before 2016.
The report actually surfaced in public debates in conjunction with the forensic audit of the Lebanese central bank, whose governor was at the same time the chairman of the CMA. However, public discourses of the OI case were not so focused on the OI report’s systemic implications – which among other things suggest that conflicts of interest and cronyism were deeply permeating and damaging the sphere of financial intermediaries. Instead, the primary focus of public attention throughout the summer of ‘23 was once again on the person of then-central bank governor Riad Salameh and his alleged culpability in every problem at Banque du Liban as investigated by a forensic audit – whose language was loaded with innuendo and whose preliminary findings appeared less than spectacular and revelatory to informed observers (for more on the culprits and victims, see story page zxxx).
The views of the professionals
Being not just an informed observer but an active professional stakeholder in the arduous task of unraveling the web of legal violations in the financial sphere of Lebanon is lawyer Iman Tabbara, who serves as board member in the Lebanese Private Sector Network (LPSN). She tells Executive that a group of lawyers, including herself, had been tracking the issue of not only the forensic audit conducted by financial services firm Alvarez and Marsal (A&M) but also two slightly earlier central bank audits by consultancies KPMG and Oliver Wyman. The lawyers actually obtained a court decision that forced the Ministry of Finance to make their results accessible. “As to the outcomes of the three audits, we were very well aware that the practices [of the central bank] were not in accordance with the applicable laws or the accounting standards that we knew of. Even the figures highlighted in the forensic audit we knew in an approximation,” Tabbara says.
Having gained the audit results, law firms were able to prove that their allegations of rule violations at the central bank were backed by relevant numbers and not just politically motivated witch hunts. But for Tabbara, the audits were still falling short from many of their objectives such as bringing financial sector and banking transparency and facilitating better accountability in commercial banking through individual audits of the top 14 commercial banks.
Moreover, in some ways audit debates in media and society, in their singular concentration on personal corruption findings at the top of BDL, even contributed to the Lebanese people being sidetracked “from the bigger issues that the regulatory authority was unregulated and that the central bank was the gate keeper or accountant of the deeply rooted, deep state”, Tabbara says.
Despite these shortcomings, the audits confirmed that legal professionals’ criticism of the central bank’s adherence to laws and standards is warranted. The audits flagged specific failures in BDL practices and behaviors, such as the A&M audit’s testifying to non-implementation of “Chinese Walls” of separation of responsibilities and authority between the governor, central bank departments and BDL-associated entities. “It was very alarming to us because it showed how one man, to whom all authority had been given, could design something of a monetary policy irrespective of any checks and balances in the central bank,” Tabbara elaborates.
Her conclusions confirm to private sector stakeholders how important the completion of the audit and resolution process for central bank and the banking sector is. “There is no doubt that the private sector needs a proper and healthy banking system. Today we are unfortunately in a cash economy, which means that the banking sector is no longer playing its part. When the banking sector is no longer playing its part, this will affect the private sector negatively, in many ways,” she says.
A new guard
While it cannot be said today that any closure has been achieved in either the audit process or the process to repair the banking sector’s brokenness in terms of trust, capacities, manpower, and capital, an important intermediate step has been taken this summer in the changing of the guard at BDL’s leadership level. The experts and stakeholders in finance who talked with Executive during the research for this financial safety report commented very positively on the ascendance of First Vice-governor Wissam Mansouri, and specifically acknowledged his decisions on monetary issues such as retiring the relatively nontransparent Sayrafa platform in favor of the external Bloomberg platform for lira exchange rates.
Commenting on the early declarations and decisions of the acting BDL governor, USJ’s business school dean Zmokhol notes four positive signals, including Mansouri’s commitment to the central bank’s regulatory responsibility and approach to exchange market operations that aims to maintain balance at times when having to buy dollars for fuel or similar purchases. “[Mansouri] says he will not lend to the government while not being sure if the money would come back and has stopped the Sayrafa platform because he saw it as neither transparent nor ethical, and went into Bloomberg platform, which, however, has other pitfalls,” says Zmokhol – who otherwise sees no signs of progress towards financial sector rebirth on the level of Parliament or in the presidential issue.
Asked about his view on the adoption of the Bloomberg platform, Zmokhol approves the move in principle firstly because international platforms will not enter any local political games. “The second positive aspect is the psychological effect of being linked again to the global economy and appearing back on the radar of actors in global markets through presence of [the Lebanese lira] at a sort of floating rate,” he adds.
On the side of risks and potential pitfalls, the economist names the possibility of high and sudden fluctuations and currency speculations on a platform that is managed internationally, as well as such platforms’ computation of exchange rates relying on official money supply data and other official economic data that do not reflect the totality of monetary flows and economic activities, due to the massive role of the informal economy. “Providing a free float in a small economy may mean that you can have some major players, from locals to foreign banks to exchange offices and speculators, who can play around with the exchange rate by simply making big transactions,” Zmokhol warns.
Other negative effects would in his view be inevitable if locally controlled exchange rate information tools and data streams, such as opaque apps with unknown sources and concealed agendas, were continuing to contravene the concept of a unified exchange rate. Zmokhol finally sees arbitrage opportunities and risks of significant deposit withdrawal pressures in situations where either the Bloomberg market rate and a still existing low rate at the banking deposit level were scissoring, or when BDL were to adopt the platform’s rate for depositors’ withdrawals from hitherto inaccessible “old” dollar accounts – albeit this would in the short term be a boon to deposit holders.
Innovate and live
According to all who were queried by Executive, the start of the fourth quarter in 2023 is too early for new banks entering the Lebanese market from the region or new local banks acquiring operating licenses. Expectations are that this will change at some point because of currently unmet market opportunities. Capital EE’s Zeidan, who reasons that Lebanon’s resilience during the crisis years proved stronger than many had expected, says for example that there is a great opportunity for large regional banks to enter the financial market in Lebanon and do “huge business”.
As the country’s innate power of survival in the past three years has defied most conventional financial and economic logic, Zeidan and others among Lebanon’s entrepreneurial minds and economists still have faith in Lebanon’s capacity to rise quickly into a new financial culture. Tender shoots of innovation are present on the digital edge of the financial market (see story page 20) and in online banking (see interview page 26) – despite the still underdeveloped aspects of digital finance.
Thus it is undeniable today that on many fronts of finance, many more efforts are required. For a financial feat of the magnitude needed for new and more sustainable economic growth, – and based on the assumption that the political system becomes adequately functional – Zeidan in this sense calls for functioning capital markets and “multiple different verticals”.
To his mind, it is imperative for the Lebanese to develop market verticals for short-term commercial paper and longer-term debt, or bonds, and specialties such such as leasing or microfinance, plus the necessary support system of credit assessment. At the same time he has at least one eye firmly locked on the digital finance and tech realm, including e-wallet operators.
By his reading of the financial system, Lebanon can in no way “be restructured to be the way it was before the crisis” and may not have a future as a regional commercial banking hub – principally because of what he says is a global shift away from commercial banking. At the same time, he regards the long-term lesson of the financial crisis as a positive one. Since the county’s financial elites have quasi fallen on their own sword of corruption-prone and narrowly self-interested practices, Lebanon’s banking and finance model cannot be rebuilt with same mindset, he tells Executive: “This resulted in a new paradigm, where the Lebanese are forced by circumstances to reinvent the finance model that we [have used until] now. This, in my opinion, is going to give us an advantage five, six, or ten years down the road.”
Editor’s note: Interviews for this article were recorded in October 2023 and do not reflect updates or changes that may have occured since.