When the State acknowledges a systemic crisis

The International Monetary Fund’s recognition of the systemic nature of the crisis has broken the deadlock that has dominated the performance of the government and Parliament regarding reform laws, since the outbreak of Iran’s support war in March 2026 and their preoccupation with managing the displacement crisis. In parallel, the government referred new amendments to the Banking Sector Restructuring Law, prompting the Finance and Budget Committee to schedule a session to discuss it on Thursday, to be followed, as expected, by sessions to study the Financial Gap Law. This raises the question: what will change in the approach to these two laws if the state recognizes that the crisis in Lebanon is systemic?

The classification of the crisis that erupted in Lebanon in 2019 as a “Systemic Crisis” carries particular importance, as its acknowledgment implies the simultaneous collapse of the financial sector, the banking sector, and the state’s public finances, leading to a fundamental shift in how solutions are approached.

The Banque du Liban and the banks had already acknowledged the systemic nature of the crisis from the beginning, while the state avoided its responsibilities, hiding behind the International Monetary Fund, which typically relieves states of certain obligations in order to secure repayment of its loans, estimated for Lebanon at a maximum of around $4 billion, and to guarantee future lending from supporting countries. However, after its acknowledgment in a published report that the crisis is systemic, the equation has changed, requiring the state to reconsider this matter and acknowledge its responsibilities, even after 6 years since the crisis began and the entry into its 7th year.

Financial and economic expert Nassib Ghobril told Nida Al Watan: “If the state had borne part of the losses from the beginning of the crisis, it would have created a positive shock. Depositors would not have suffered as they did, reforms would not have been delayed to this extent, and the crisis would not have lasted so long.”

Even the Governor of the Banque du Liban officially stated last week that the crisis did not originate in the private sector, but was initiated by the state and engineered over decades to finance chronic and structural public finance deficits through a mechanism characterized by disregard for risk. What happened, as is now known, is that the state borrowed from the central bank in Lebanese pounds and in dollars at very high interest rates, and these amounts must be repaid by the state. Thus, the snowball effect unfolded, and the central bank began offering banks high returns in exchange for placing their funds with it. This reality shows that the state is the primary responsible party for the crisis, according to the central bank itself.

What changes, then, if the state recognizes the systemic nature of the crisis? And is it necessary to include this in the Financial Recovery Law and the law on returning deposits?

Ghobril considers that “the term systemic does not need to be included in the law; it is sufficient for the local authority, meaning the state, to acknowledge that the crisis is systemic for the equation to change, given that the political authority is the one that misused the public sector, wasted public funds, and became addicted to borrowing. The state must assume its responsibility and participate in the losses.”

A disrupted transfer mechanism

Economics professor at the Lebanese University Jassem Ajaka offered a different perspective, explaining to Nida Al Watan that “the financial transfer mechanism in a systemic crisis is disabled. Bankruptcy is not limited to one, two, or three corrupt institutions; rather, in Lebanon there is a single network composed of the central bank, commercial banks, and the state, all interlinked in a destructive knot affecting public finances.”

Economic and legislative diagnosis

According to Ajaka, diagnosing the systemic nature of the crisis in Lebanon leads to the following economic and legislative implications:

From an economic perspective, acknowledging the systemic nature of the crisis makes it impossible to proceed with Central Bank Circular No. 154, which the IMF requires banks to comply with, and which mandates that banks increase their capital. This leads to three difficult realities:

1. A sovereign-banking knot

The state borrowed from the central bank, which in turn mobilized foreign-currency deposits belonging to commercial banks and ultimately depositors. Since the state defaulted on Eurobonds on 7 March 2020, the entire system in Lebanon collapsed.

2. The scale of liabilities

In systemic banking crises, according to IMF definitions, losses or capital shortfalls typically exceed 20% of system assets. In Lebanon, the affected amount reaches $70 billion, a figure exceeding GDP, meaning the scale of liabilities is enormous and constitutes a major problem.

3. Structural reform requirement

Without a comprehensive structural reform embedded in a clear legislative plan, the situation cannot be resolved. Losses have reached such levels that piecemeal solutions are impossible. Therefore, reform must be structural, comprehensive, and legislated to revive the economy.

Legally speaking

From a legal standpoint, Ajaka argues that the 2 draft laws, banking sector restructuring and the financial gap law, are no longer applicable in their current form.

Reform laws, particularly restructuring and financial regularization laws (i.e., the gap law), must form a single package, meaning one law. They may be divided into several texts, but they must remain interconnected and be voted on simultaneously due to their interdependence. He notes that lawmakers must revisit the provisions of the banking restructuring draft law.

Accordingly, all laws previously enacted by Parliament regarding banking restructuring and now the financial gap are no longer valid.

Second, the systemic classification will open a new battlefield, reviving debate over who bears the losses and how they are distributed. Given the scale of losses, discussions will be extremely difficult.

Third, the Capital Control Law will return to the legislative agenda.

Fourth, the final legal area affected is the Code of Money and Credit, particularly Article 91, which obliges the central bank to lend to the state, and Article 113, which holds the state responsible for any losses at the central bank. Ajaka believes Parliament will proceed with these amendments.

From all this, we conclude that the IMF’s recognition of the systemic nature of the crisis implies that the state must acknowledge its responsibility and its participation in bearing losses.

To date, disagreement persists over the classification of the crisis, despite the collapse of narratives attributing it to technical causes such as rising interest rates, the cost of maintaining the exchange rate peg, financial operations between the central bank and commercial banks, and banking profits. These factors existed, Ghobril told Nida Al Watan, “but they are not the cause of the crisis.”

The roots of the crisis lie, as is now well established, in political misuse of power, poor management of the public sector and state-owned commercial institutions, evidenced by a 160% increase in public spending between 2006 and 2018 without approved budgets, and the recruitment of 31,000 people into the public sector between 2014 and 2018, most without job descriptions or actual work.

Additional factors include two years of presidential vacancy, 11 months to form Tammam Salam’s government, and another 11 months to form Najib Mikati’s government in September 2021 after Saad Hariri’s withdrawal in July 2021 during President Michel Aoun’s term, as well as the waste of $45 billion in the electricity sector, failure to combat the shadow economy, and Lebanon’s involvement in regional wars and tensions with Arab countries. All these political obstacles and corruption, Ghobril says, “led to a crisis of confidence that turned into a liquidity crisis affecting all sectors, including banking.”

IMF program

Reaching an agreement with the International Monetary Fund, something the government has repeatedly stressed as essential to regain international confidence, is important for restoring global trust in Lebanon. However, such a program cannot be signed on the basis of imposing losses solely on the central bank, banks, and depositors while exempting the state from responsibility.

Loss distribution must include all three parties: the state, the central bank, and the banking sector, each according to its financial capacity rather than its accounting responsibility. The key point, according to Ghobril, is that “the state must not hide behind IMF standards and conditions to evade its responsibility, which has been the fundamental deadlock since the beginning of the crisis.”