Lebanon’s stimulus package includes cancellation of central bank debt and discounts for depositors

Lebanese President Michel Aoun leads a final cabinet meeting before the government enters a gatekeeper status at the presidential palace in Baabda, Lebanon May 20, 2022. Dalati Nohra/Handout via REUTERS

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May 20 (Reuters) – The Lebanese government plans to cancel “a large part” of the central bank’s foreign currency obligations to commercial banks and dissolve non-viable banks by November, according to a financial recovery plan adopted on Friday by the Cabinet.

The document, seen by Reuters and verified as accurate by a minister, was passed by Cabinet in its last session hours before it lost its decision-making powers, following the election of a new parliament on May 15.

It includes several measures that are preconditions for the release of funds from a preliminary agreement with the International Monetary Fund reached in April that could help pull the country out of a three-year financial meltdown.

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Deputy Prime Minister Saadé Chami said approval of the plan was a “step forward”, but that Lebanon’s newly elected parliament needed to “quickly” adopt a number of prior IMF measures, such as amendments to banking secrecy regulations and a capital control bill that lawmakers have repeatedly failed to pass.

“We can put things on paper, but we have to make sure that everything we committed to will be executed in the future,” Chami said.

“I can’t predict whether they will or not, if there’s a political will to do it.”

The plan approved on Friday calls for a full audit of the Central Bank’s forex financial situation by July. Then, the government will “initially cancel a large part of the Central Bank’s foreign currency obligations to the banks in order to reduce the capital deficit of the BDL”, the document states.

The 14 largest commercial banks, representing 83% of total assets, would also be audited. Viable banks would be recapitalized with “significant contributions” from bank shareholders and large depositors.

The plan said it would protect small depositors “to the extent possible” at every viable bank, but did not establish a minimum amount to be protected – unlike the draft plans.

Unviable banks, however, would be dissolved by the end of November, he added.

He also said the government would unify the official exchange rate, ending a system where the government offered various exchange rates for different transactions.

Lebanon’s local currency has lost more than 90% of its value since its economic decline began in 2019, and banks have banned savers from hard currency deposits.

In April 2020, the Cabinet approved a stimulus package which was later torpedoed by powerful political parties, the Central Bank and commercial banks, which disputed the allocation of losses.

Mike Azar, an expert on Lebanon’s financial crisis and a former professor of economics at Johns Hopkins University in the United States, said the most recent plan was a “small evolution” of one agreed two years ago.

“That’s the only hope we have at the moment, but there are a lot of gaps in the text and there’s a slim chance it will be implemented,” Azar told Reuters.

The fragmentation of the newly elected parliament could hamper efforts to pass relevant bills.

“There’s room to edit it on the sidelines because a lot of the details are still not fleshed out,” he said.

The plan makes no mention of a sovereign wealth fund to manage state assets, but pledges to limit the use of state assets, which had been a request from Lebanese commercial banks.

Buying by banks is unclear. Last April, the Association of Banks of Lebanon (ABL) rejected a preliminary version of the same plan, which it said would leave banks and depositors to bear the “major part” of an estimated $72 billion hole. by the government in the financial sector.

A spokesperson for the association said it “has not yet met to discuss the government’s decision, which is why the ABL still supports its latest statement in this regard.”

Lebanese banks have been the main lenders to the government for decades, helping fund a wasteful and corrupt state that tipped into financial collapse in 2019.

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Reporting by Timour Azhari, Laila Bassam, Lina Najem, writing by Maya Gebeily; Editing by Hugh Lawson, Grant McCool and Nick Zieminski

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