Lebanon’s missing piece: Who will pay for the banking collapse?

After seven years of financial crisis, Lebanon is trying to revive negotiations with the International Monetary Fund (IMF). Beirut is seeking a new staff-level agreement, a key step towards a full financing program. But beneath the signs of progress lies a far more contentious question: who will ultimately absorb the roughly $70bn in losses accumulated since the 2019 financial collapse? The government, the Banque du Liban, commercial banks and depositors remain at odds over how the burden should be shared, while legislation on the financial gap, the 2027 budget and banking reform are still being debated.

In April 2022, Beirut and the IMF reached a Staff-Level Agreement (SLA) that paved the way for a four-year program worth about $3bn. The agreement, however, never became an operational program. The required reforms were not implemented on schedule and the process gradually stalled.

Four years later, Prime Minister Nawaf Salam’s government is seeking to put the talks back on track.

During discussions in September 2026, the IMF welcomed several steps forward, including amendments to Lebanon’s bank resolution law adopted in August. The Fund described the changes as an important step towards restructuring the banking sector and establishing a framework for dealing with insolvent banks in an orderly manner.

But the IMF has made clear that substantial work remains.

On October 1, IMF spokesperson Julie Kozack said several conditions still needed to be met before the Fund could move towards a new program. These include banking legislation aligned with international standards, credible legislation addressing the financial losses, a 2027 budget, and a medium-term fiscal framework capable of ensuring debt sustainability.

In other words, Lebanon has made progress, but it has not yet crossed the finish line.

What would an IMF deal actually involve?

Two stages need to be distinguished: the Staff-Level Agreement and the full financial program.

The SLA is a technical agreement between IMF staff and the Lebanese authorities. It sets out the economic policies and reforms that the Fund is prepared to support.

A full program requires further approval, including by the IMF’s Executive Board. Only then can financing actually be released.

The 2022 program envisaged around $3bn over 46 months, alongside a restructuring of public debt, a comprehensive overhaul of the banking sector, fiscal reforms, stronger governance and transparency, and a new monetary and exchange-rate framework.

The program now under discussion follows broadly the same logic: repair the financial system first, then rebuild confidence and create the conditions for renewed investment and external financing.

The IMF’s agenda centers on four broad priorities: restructuring banks and recognizing the losses accumulated across the financial system, restoring fiscal and debt sustainability, strengthening governance, transparency and tax collection, establishing a monetary and financial framework that would allow banks to gradually resume their role in financing the economy.

The central question: who pays?

This is the heart of the negotiations. Lebanon’s financial collapse has generated losses estimated at around $70bn, a figure that has been used in official assessments since 2022. The IMF argues that these losses must be formally recognized and allocated if the country is to rebuild a viable banking sector.

But deciding who bears them is both economically and politically explosive.

Four groups are at the center of the debate: the Lebanese state, the Banque du Liban, commercial banks and depositors.

The IMF has consistently argued that losses should be allocated according to a clear hierarchy. Shareholders and subordinated creditors should absorb losses before depositors are affected. At the same time, the Fund wants to prevent an excessive burden being placed on the state, which could further undermine public debt sustainability.

That is where the negotiations become particularly difficult.

The proposed financial gap and deposit recovery law is intended to determine how the losses will be allocated and how depositors can gradually recover their funds.

The draft legislation provides for a mechanism to repay deposits over time. But the financing of that mechanism and the distribution of the losses remain among the most contentious issues on the table.

The Banque du Liban factor

The Banque du Liban (BDL) is at the center of the crisis because it carries a substantial share of the financial system’s accumulated losses.

The IMF wants any restructuring to preserve the central bank’s viability while allowing the banking system to become functional again. It is also calling for a clear, independent and transparent framework for resolving troubled banks.

The situation became more complicated after President Joseph Aoun referred certain amendments to the banking resolution law adopted in August to the Constitutional Council.

On October 1, the IMF said it would assess any changes to the legislation to determine whether they remained consistent with international standards.

What is still blocking an agreement in October 2026?

Several hurdles remain.

1. The financial gap law

This is arguably the biggest obstacle. The legislation must determine who absorbs the losses, in what order and under what conditions, while providing depositors with a credible path towards recovering their money.

2. Banking reform

The new bank resolution law represents an important step forward, but its implementation and any potential amendments are being closely watched by the IMF.

3. The 2027 budget

The Fund is calling for a credible budget consistent with debt sustainability. It also wants externally financed spending to be properly incorporated into the public accounts.

4. A medium-term fiscal framework

The government is working on a Medium-Term Fiscal Framework designed to improve expenditure management, strengthen revenues and gradually create fiscal space for reconstruction and social protection.

5. Tax revenues

The IMF is also calling for the implementation of the increase in VAT to 12 per cent, approved by the government but not yet applied when the Fund conducted its September mission.

t has also stressed that increases in public-sector salaries and pensions need to be accompanied by measures to ensure that the additional spending can be financed sustainably.

Why does the IMF matter so much to Lebanon?

The importance of an agreement goes well beyond the few billion dollars the Fund could provide directly.

An IMF program would primarily serve as a seal of international credibility.

After years of financial crisis, a sovereign default and a paralyzed banking system, an agreement would signal that Lebanon is capable of implementing a coherent economic reform program.

It could also help restore investor confidence, unlock additional international financing and pave the way for broader support for reconstruction.

France, for its part, considers the IMF process an important component of efforts to mobilize the international financing Lebanon needs for reconstruction. Paris continues to support Beirut’s efforts and is working towards broader international mobilization around reconstruction and institutional strengthening.

The IMF itself has stressed that reform is essential to restore confidence, revive growth and attract the financing required for reconstruction.

The potential upside

The first major benefit would be the restoration of Lebanon’s financial credibility.

After years of crisis, default and banking paralysis, an IMF-backed program would demonstrate that Beirut is capable of implementing a credible economic framework.

Second, it could unlock additional external financing. The IMF would not be acting alone. A credible program could facilitate support from the World Bank, donor governments, European institutions and private investors.

Third, it could finally force a restructuring of the banking sector.

For depositors, the objective would be to replace the current paralysis with a structured and gradual mechanism for recovering their funds.

Finally, an agreement could help reduce Lebanon’s dependence on cash and gradually restore the banking system’s role in financing economic activity. The IMF has repeatedly stressed that rebuilding confidence in banks is essential to breaking the current cycle.

But the adjustment will come at a cost

An IMF program is not unconditional financing. It requires fiscal, banking and structural reforms that can be painful in the short term. Improved tax collection would raise government revenues, but could also increase pressure on households and businesses. Tight control over public spending could restrict the government’s room for manoeuvre. Banking restructuring, meanwhile, requires the authorities to formally recognize substantial losses.

Above all, the fate of deposits remains politically sensitive.

The IMF has called for small depositors to be protected as far as possible. But the fundamental reality of restructuring is that the losses accumulated across the financial system have to be absorbed somewhere.

The debate, therefore, is not simply about whether Lebanon should accept an IMF program.

It is about a much deeper question: how can the cost of seven years of financial collapse be distributed without placing the bulk of the burden on taxpayers and depositors, while still rebuilding a viable banking system?

An economy running out of time

The economic backdrop makes the need for a deal more urgent.

After estimated real GDP growth of 4.2 per cent in 2025, the World Bank now expects Lebanon’s economy to contract by 6.4 per cent in 2026, following the renewed conflict and further damage to infrastructure, housing, tourism and supply chains.

The IMF also expects a sharp contraction this year and notes that inflation remains in double digits.

Lebanon is therefore being asked to implement difficult reforms at precisely the moment when its financing needs are rising: reconstruction, support for displaced populations, infrastructure, electricity and economic recovery are all demanding additional resources.

That creates the central paradox. Beirut needs reform to unlock the financing required for reconstruction, yet the longer the crisis continues, the more urgent and expensive reconstruction becomes.

Could a deal be reached before the end of the year?

Finance Minister Yassine Jaber said in late September that nothing would be signed immediately, although Beirut was working towards progress in the near future. Sources cited by Reuters suggested at the time that a staff-level agreement could either be reached relatively quickly or slip towards the end of 2026.

Even then, however, an SLA would not mean that IMF money would immediately begin flowing.

The process is longer: a technical agreement must be followed by the adoption of the necessary reforms and legislation, before the program can be reviewed and approved by the IMF’s Executive Board.

Lebanon has come some way since 2022. But the final stretch may prove the hardest.

Behind the technical negotiations lies a fundamentally political question: who is prepared to take responsibility for the cost of Lebanon’s banking collapse?

That is the real test of any IMF deal.