Since the start of Lebanon’s financial woes at the end of 2019, the government has proposed several measures to address the liquidity crisis in banks. Yet all the suggested measures signify blatant infringements on the financial assets and deposits of individuals as well as those of institutions. This means there is a possibility that measures, if adopted, will trigger judicial procedures. Such court action might arise from Lebanese expatriates and it could also harm relations with the countries where these expatriates reside, including in the Gulf and European nations. In another flaw, the plan does not address the fate of deposits in Lebanese pounds and the huge losses incurred.
Furthermore, while representing major infringements to depositors, the government’s plan does so without providing convincing justifications. The failure of Banque du Liban (BDL) and the state to service its debts to commercial banks and depositors is a violation of the Constitution, and the Code of Money and Credit. In fact, these funds deposited with BDL by commercial banks amounted to around $71 billion, of which $58 billion has been spent by the state in financing its deficit and subsidies with hard currency, and over the past two years, used by BDL to manage the fluctuations in the parallel market rate.
The $71 billion estimate is a residual figure calculated from the balance sheet of the central bank and the commercial banks. BDL intervened in the currency market with its negative net foreign exchange positions. Under such circumstances, it must have abandoned the policy of pegging the exchange rate of LL1,500 to the dollar to save deposits and the banking sector.
The financial rescue plan composed by Caretaker Prime Minister Najib Mikati and approved by the Council of Ministers in May 2022, just before the government dissolved prior to the parliamentary elections, targeted the write-off of all categories of deposits, even the smallest ones. The write-off and discounts of depositor’s money can be summarized below. However, it should be noted that these figures, though lifted from the government’s plan, have to be viewed with room for error.
Mikati’s plan for the distribution of $104 billion in losses is as follows (all exchange rates are hypothetical):
• $16 billion is to be converted to deposits in Lebanese pounds (LBP) at the exchange rate of LL5,000/$1, and this amount can be withdrawn by the respective depositors over a period of 15 years. When using an exchange rate of LL20,000 to the dollar for calculation of the aggregate loss of this action to depositors, the result is $12 billion, which means that the equivalent of $4 billion will be preserved as LBP. This amount’s present value, at a 7 percent discount, is $2 billion.
• $35 billion, also withdrawable over a period of 15 years, will be converted into deposits in Lebanese pounds calculated on an exchange of LL12,000/$1. This would be the equivalent of $21 billion, so the loss will be $14 billion on the exchange rate. Its current value is $10.6 billion.
• $25 billion will be paid in dollars on deposits below $150,000. With a ceiling per deposit of $150,000, these deposits would also be withdrawable over a 15-year period. This tranche’s current value is $12.5 billion.
• $6 billion dollars will be paid for deposits between $150,000 and $500,000 and transferred in lira at the rate of LL20,000/$1 and paid within 15 years. Its current value is $3 billion.
• Perpetual bonds, without checking their current value, will be subjected to bail-in at $22 billion turned into bank shares ($12 billion)
• Perpetual interest-bearing bonds (unspecified) from banks ($10 billion)
The total that will be converted into Lebanese pounds is $79 billion out of $104 billion ($104 billion minus $25 billion). The present value of all deposits after these measures reaches only $28.2 billion. By excluding stocks and bonds, only $12.6 billion in dollar deposits will remain of the total $104 billion, and the remainder is converted into the lira, and its current value reaches the equivalent of $15.6 billion. Therefore, 88 percent of dollar deposits will be written off.
What the plan fails to address
The calculation of the accumulated interests since 2015 includes all the interests that exceed a certain percentage (which has not been specified). As such, there are many unanswered questions: Does it include the interest that was transferred abroad and if so, why is it not included? Are those who transferred their money abroad required to return the excess interest? And does this, therefore, mean that whoever kept his money in Lebanon will bear the burdens of money transferred outside by others?
The fault, of course, is not on the part of the depositor, but on the part of the banks and BDL, the latter is responsible for showering the markets with high interest rates. These interest rates accordingly tempted deposits, which were then deposited at BDL by banks with high interest rates.
As for the deposits that were converted into US dollars (estimated at $35 billion), $14 billion will be lost through the exchange rate of LL12,000 to the dollar. Although, it is possible that this money was originally converted from dollars to pounds and then to dollars. How are we going to deal with it?
The amount of $91.4 billion has been written off from deposits (calculated by deducting $12.6 billion in current value from $104 billion), is equivalent to 88 percent of the total. Therefore, only 12 percent of the dollar accounts will remain and 88 percent of all dollar deposits will be subject to be converted into Lebanese pounds. All the money converted into pounds and the rest in dollars will be withdrawn from banks over a period of 15 years. This means more write-offs are incurred due to the regressive time value of money.
It is necessary to review the risks of this plan because the government intends to place the burden on the depositors. It should be noted that Caretaker Prime Minister Mikati has reiterated on several occasions that the biggest burden will be on the citizen and announced that the cancellation of deposits will be mostly for accounts exceeding $100,000, but in fact, the write offs of deposits impact all categories of accounts.
A write-off for the economy
The economic impact of this measure will be devastating; depleting citizen’s purchasing power, alongside the lost trust in the state and the banking system. There are simple alternatives to this that are useful and confidence-building in the economy. The most important of which is the complete liberalization of the exchange rate, which in turn will contribute to reducing the deficit, which must be reduced to the lowest levels in the first year, and then move towards balance afterwards. Public sector debts, as well as the assets and liabilities of banks must be rescheduled based on the practices that prevailed before the crisis. This will allow deposit holders to withdraw from their deposits in dollars or in pounds from dollar accounts on the free currency rate if the dollar is not available in sufficient quantity.