Lebanon’s Gap Law faces IMF resistance

Source: Nida Al Watan

The International Monetary Fund has responded negatively to the draft Financial Gap Law approved by the Lebanese government. The Fund’s management appears broadly uncomfortable with the state’s acknowledgment of its debt to Banque du Liban, estimated at $16.5 billion, even though the proposal suggests repayment at an exchange rate of 15,000 Lebanese pounds to the dollar, through perpetual bonds with no maturity date. The IMF is also reportedly dissatisfied with the government’s commitment to contribute to the recapitalization of the central bank under Article 113 of the Monetary and Credit Law. These concerns come on top of multiple other reservations, including the hierarchy of responsibility and the proposed method for wiping out banks’ capital.

Listening to Prime Minister Nawaf Salam’s statements at the Davos forum and later in Paris, the government appears to be showing more flexibility toward the IMF than necessary. While Salam has been careful to stress that the Fund does not issue dictates and that negotiations remain possible over acceptable amendments to the law in exchange for approval, past experience casts doubt on official Lebanese assurances. Historically, the IMF has consistently succeeded in imposing its conditions, often bluntly, including obliging governments to override decisions of the Constitutional Council.

This posture of excessive accommodation is what has led to a direct clash between the state and its central bank. The irony is that the grievances voiced by Banque du Liban’s governor, Karim Saïd, on which he based his objection to the Gap Law, largely mirror those raised by the IMF, but from the opposite direction. What Saïd views as an infringement on the central bank’s rights, the IMF considers an unnecessary concession by the government.

In brief, Saïd supports the law in principle, particularly in terms of fairness and the distribution of responsibilities, but rejects several of its details, stressing that “a financial law cannot be ambiguous.” His objections can be summarized across three levels:

First, the state must clearly define its share of the losses and commit explicitly to paying it.
Second, cash repayment of deposits cannot be confined to a four-year period.
Third, shareholders’ rights in banks should not be erased before balance sheets are fully cleansed of all irregular claims.

These objections also highlight the points of contention with the IMF. On the first issue, the Fund wants the state to disavow its responsibilities entirely and refrain from committing any funds to the solution, citing public debt sustainability. Although the government has partially complied with this condition, the IMF appears to be pushing for full and unconditional compliance.

Regarding the repayment of deposits below $100,000, Banque du Liban’s opposition is grounded in the current lack of available funds, making it necessary to keep repayment timelines flexible and contingent on the gradual securing of liquidity.

On the question of wiping out banks’ shareholders’ rights, the IMF favors an immediate write-off and zeroing of capital before calculations are finalized. The central bank, by contrast, advocates completing forensic and accounting audits first, then implementing write-downs in line with audit results. Put more plainly, the IMF seeks to hold banks accountable based on total deposit liabilities, around $83 billion, while the draft law trims recognized deposits, reducing the payable amount to roughly $51 billion. The question then arises: is it reasonable to erase rights before settling these discrepancies?

The prevailing atmosphere points toward a harsh confrontation. The government continues to offer concessions to the IMF, while Banque du Liban has decided to assert its rights and refuse to subordinate its position to the Fund’s preferences.