Lebanon approves plan to distribute financial losses in response to IMF recommendations

In a long-awaited pivotal step, the Lebanese government finally approved the draft law on financial regulation, bank restructuring, and loss distribution, more than six years after the outbreak of one of the worst economic crises in modern history, which deprived hundreds of thousands of Lebanese of access to their savings and life's earnings.

The draft law was approved during a stormy cabinet session, with 13 ministers voting in favor and 9 against, reflecting the deep political and technical divisions over how to address the country's enormous financial deficit. According to AFP, the draft law outlines a specific hierarchy for distributing financial losses, starting with the state and the Central Bank of Lebanon, then commercial banks, and finally depositors—a move that has sparked widespread controversy in economic and public circles.

Context of the crisis and historical background

Since the fall of 2019, Lebanon has been experiencing an economic collapse that the World Bank has ranked among the worst in the world since the mid-19th century. This collapse has caused the local currency (the Lebanese pound) to lose more than 98% of its purchasing power, leading to a drastic erosion of citizens' purchasing power and unprecedented increases in poverty and unemployment rates. This has been accompanied by banks imposing informal but strict restrictions on withdrawals of foreign currency deposits, rendering depositors' money mere "numbers" in bank accounts with no tangible value.

The importance of the decision and its relation to the International Monetary Fund

The significance of this step lies in its being the cornerstone and primary requirement of the International Monetary Fund (IMF) for proceeding with a final agreement with Lebanon. The IMF stipulates the enactment of legislation that addresses the accumulated losses in the financial sector (estimated at over $70 billion) and restructures the banking sector to make it viable before releasing a $3 billion financial aid package. This aid is considered essential for restoring international confidence in the Lebanese economy and unlocking assistance from donor countries.

Upcoming challenges and the legislative path

Despite the government's approval of the draft law, the road ahead remains long and arduous. The decree must still be referred to the politically divided Lebanese parliament for debate and a vote. The draft law is expected to face fierce resistance within parliament, particularly from the banking lobby, which refuses to burden banks with the lion's share of the losses, as well as from political forces that fear public anger resulting from any potential "haircut" on deposits.

Commenting on this development, Prime Minister Nawaf Salam told reporters after the session that "the draft law is not ideal and may not meet everyone's aspirations, but it is a realistic and fair step on the path to restoring rights, stopping the collapse that the country is suffering from, and restoring health to the banking sector," stressing the need for everyone to bear responsibility to save what remains of the national economy.