The destruction of Lebanon’s economy is an ongoing crime

When there were budget approvals, they were always late and often lacked closing accounts.

On the sidelines of the World Economic Forum at Davos in early 2019, then-Foreign Minister Gebran Bassil responded to economic criticism of his country by telling CNN's Becky Anderson: "We should maybe teach them [Washington and London] how to run the country without a budget."

The approved budgets were always unbalanced, with spending rates distributed as follows: 40% for wages and pension funds, 30% for public debt service, and 10% for the energy and electricity sector. The remaining sliver was for investment in projects executed on regional and sectarian bases, guaranteeing shared returns for politicians and businessmen.

When international rating agencies began sounding the alarm on the country's credit situation and the IMF warned of banks' sovereign debt exposure, banks reduced their investments in government bonds and opted instead for more attractive corresponding investments at the Banque du Liban (BDL, the country's central bank), whose financing rates for public deficits and public debt increased in violation of the law.

The law requires the BDL not to grant loans to the public sector and leaves the central bank the full discretion to decide whether or not to finance the treasury in certain exceptional circumstances or in cases of extreme necessity, but surely not for three consecutive decades by referring contracts to the House of Representatives for approval.

The financial gap in the BDL's accounts showed that the bulk of its resources in US dollars came from financial engineering that attracted correspondent bank balances in return for high interest rates.

Most of the central bank's US dollar funds was spent to fund its interventions in the foreign exchange market to secure stability for the Lebanese pound's exchange rate, as well as to fulfill the public debt and related dues, secure the government's purchases of oil derivatives, pay the accumulated deficit of the Electricité du Liban Corporation and rental fees for Turkish ships to generate electricity, and subsidise the prices of foodstuffs, medical equipment, medicine, and so on.

Worse crisis since mid-19th century

The aforementioned engineering took place according to the "Ponzi scheme" model, in the words of French President Emmanuel Macron and UN Secretary-General Antonio Guterres.

A Ponzi scheme involves continuous borrowing at attractive interest rates to fulfill dues periodically; but risks collapsing at the first difficulty in securing new resources. Indeed, this is exactly what happened, engendering a crisis so severe that the World Bank classified it as one of the worst crises that humanity has known since the middle of the 19th century.

The national currency lost 95% of its value as a result of inflation due to the amount of cash in circulation, and the state suspended the payment of its stocks, starting with Eurobonds.

The central bank reduced its debt payments to banks in foreign currencies, prompting a severe banking crisis that paralysed banks and stripped them of liquidity in foreign currency.

Read more: Through the barrel of a gun: Lebanon's financial collapse explained

There GDP is estimated to have declined from $55 billion in 2017 to $20 billion in 2022, marking the largest decline among 193 countries. Prices also inflated rapidly, especially after the cessation of fuel, medicine, and foodstuffs subsidies.

As a result, Lebanon now ranks first in the world in terms of food price inflation, ahead of Zimbabwe and Argentina, according to the World Bank's assessment in late March 2023.

The hell of Aoun's term

Unemployment worsened, exceeding a third of the working force. Nearly 80% of the Lebanese people now live in poverty. Only the lucky few who get paid in US dollars or receive cash transfers from relatives abroad are able to sustain themselves.

The majority of the Lebanese have become incapable of securing basic needs such as education, hospitalisation, medical care, medicine, and electricity.

Power cuts became longer. Several weeks or months went by with zero power supply in many regions. Power's back now, albeit for one or two hours a day only. As a result, most official departments became completely and utterly paralysed.

This living "hell", as former President Michel Aoun had heralded to the Lebanese while running their state, prompted thousands to emigrate, legally if they have the means, or else illegally by journeying at sea in rickety boats. Many took these "death boats" to salvation but met their fate at sea, including mothers and children, in a scene reminiscent of the escape boats of Northern Vietnam in 1954.

In pictures: Lebanese depositors smash up, burn Beirut banks as pound hits new record low

What's shocking is that the system that caused the crisis is still in charge and has suggested recovery plans to whitewash crimes and throw a safety net to their perpetrators. They were waiting for people to become so weak and desperate in order to strongarm into accepting the central bank's unconstitutional temporary circulars.

One extension after the other, these circulars set ceilings for withdrawals from accounts in foreign currencies, on the condition that they be "liralized," that is, their value wholly or partly paid in the national currency using very low exchange rates (a haircut of sorts) ranging between 70 and 80% of the actual exchange rate.

This ensures that deposits are dissolved quickly and continuously and covers a significant part of the losses suffered by banks and the BDL. This trend has supported the process of separating new accounts denominated in foreign currencies from old accounts, which eliminates the possibility of restoring the latter's deposits.

Holding culprits accountable

Einstein said that problems cannot be solved with the same mindset that created them.

When Iceland fell into a financial crisis in 2008, it replaced the political and financial officials who caused the crisis, referred the culprits to the judiciary, and completely lifted bank secrecy on accounts to facilitate investigations.

Since day one, the state adopted a "capital control" law and requested the assistance of the IMF exclusively to restructure its financial sector. The IMF responded quickly, which helped the country restore its financial recovery swiftly and return to financial markets a mere three years after the onset of the crisis.

Unfortunately for Lebanon, the opposite took place. This is the fourth year of the crisis, and the measures and reforms requested by the IMF have yet to see the light.

Talk of a criminal audit of BDL accounts seems to have hushed. The issue of "capital control" is still point of contention, as attempts to pass a clause that retroactively exonerates banks from liability for their previous crimes continue.

Yet, the banks had strictly adopted the amendments to the bank secrecy law without retroactive effect, which proves that what matters to banks is banking secrecy, not bank deposits, which are the historical and basic justification for such secrecy.

Nevertheless, several reservations can be made on the performance of the IMF negotiating team, whose list of conditions was devoid of vital matters previously proposed by the IMF in its reports on Lebanon.

One such proposal was the effective enforcement of the illicit enrichment law by requiring public financial disclosure for senior public service workers and their relatives. Another was the strengthening of the BDL's independence by prohibiting the inflation and exposure of its budget on state debts, among others.

Solutions for economic salvation

The real solution to the Lebanese crisis lies in the conviction that French President Emmanuel Macron reached after a long experience with the Lebanese crisis. In a press statement last Christmas eve, Macron summed up Lebanon's salvation roadmap in two points: changing the political class and restructuring the financial sector.

For the latter to happen, the restructuring must not be restricted to or centred on banks as is currently proposed. Rather, a restructuring of the BDL and the Banking Control Commission should precede, following the most successful contemporary standards, as follows:

• With regard to the BDL, its primary task must be modified to be limited to achieving monetary stability.
• Its management must be distributed among three distinct bodies: a reporting body, a procedural and executive authority, and a third entity that handles internal auditing, coordination with external auditors, and contact with the Audit Bureau to review and evaluate the BDL's policies, as is the case in the European Central Bank and the Banque de France.
• As for the affairs of banks and other financial institutions, an independent supervisory and oversight body shall be concerned with their regulation and control and shall handle the investigation of violations and the issuance of administrative penalties for violators, similar to the German and Swiss authorities BaFin and FINMA respectively.
• The aforementioned body shall replace the Banking Control Commission, the Capital Markets Authority, the Special Investigation Commission, and the Insurance Control Commission.
• With regard to the restructuring of banks, it is crucial that banks are not solely required to re-secure the traditional positions such as capital, private funds, liquidity, solvency, etc., but also ensure the presence of banking leaders with untainted professional behaviour in bank management.
• It would also be useful to require banking sector employees to take a "compulsory oath" in which they undertake to carry out their duties with the utmost integrity and care, as their peers in the Netherlands do.
• This would entail several penalties for employees when they violate the oath but also protects them from higher pressures to commit violations and multiplies the penalties for those who pressure them.

Confidence-building steps

Organising the restructuring of the financial sector according to the abovementioned approach can help Lebanon rapidly regain the confidence of depositors and pave the way for prestigious Arab and international banks to return to the Lebanese market with various privileges reserved for the latter in return for their involvement and contribution to the restoring of deposits.

This can lay the foundation for the crucial issuance of legislation that obliges Lebanese residents to return no less than 75% of the balances of their bank accounts abroad under various penalties for non-compliance.

There would be no reason for these accounts to remain abroad under the pretext of better guarantee of efficient management abroad if similar standards are employed in restructured banking institutions in the Lebanese market.

Such a measure was one of the key decisions that countries took to address their severe financial crises, including Germany and France in the 1930s.

In Germany, the measure was implemented under the guidance of Professor Hjalmar Schacht after his appointment as governor of the Reichsbank, whereas in France, a decision by Prime Minister Paul Reynaud would introduce the measure.

Israel, too, prohibited its citizens until the 90s from having financial and bank accounts abroad except when needed and with a license. The former Prime Minister Yitzhak Rabin was forced to resign from his position when he was found to have retained a joint bank account with his wife in the United States despite the end of his mission as ambassador there.

If introduced, capital repatriation can have a significant impact, as the billions of dollars that would return to Lebanon would change everything, starting from the exchange rate of the national currency, which would soar to levels so far unfathomable.

Moreover, the impact will be noticeable in the restructuring of deposits and the mitigation of losses through attractive and equal opportunities for owners of localised and repatriated deposits to engage in programmes that contribute to the country's revival, which would generate massive returns for all those involved.

But all this can only begin when hegemony ends in the country and the ruling political mafia is replaced.