The Financial Gap: A Settlement Tailored to the IMF... Objections from Banks and Depositors... and the 'Central Bank' Stuck Between the State and Losses

There is no doubt that the draft law is not perfect and will not be able to satisfy all parties.

For the first time since the outbreak of the financial crisis in Lebanon, a comprehensive draft law addressing the financial gap is being proposed to tackle the collapse. It largely aligns with the International Monetary Fund's requirements and represents the clearest legislative framework so far for attempting loss distribution and restructuring the financial sector.

However, despite the positives on which it is based, the draft still lacks essential elements that would make it more feasible and fairer, opening the door to widespread objections from depositors and banks, and clear reservations from the Central Bank of Lebanon.

There is no doubt the draft law is not perfect and will not satisfy all parties. Depositors' associations have expressed their rejection of the proposed version, and they are justified in several of their demands, especially regarding the protection of acquired rights and ensuring fairness in loss distribution.

Conversely, banks strongly oppose the draft, considering that it unfairly places the heaviest burden of the crisis losses on them and the depositors, violating internationally accepted legal and financial standards.

Banks see the draft as suffering from fundamental flaws, most notably the lack of transparent identification of the financial gap at the Central Bank of Lebanon, ignoring the state's direct and indirect responsibility for the crisis, as well as not taking into account the central bank's ability to contribute by liquidating part of its assets.

They warn that this approach threatens depositors' rights, undermines confidence in the banking sector, and exposes financial stability to additional risks, proposing the use of part of the gold reserves to secure the necessary liquidity.

As for the Central Bank of Lebanon, which participated in the deliberations and acted as an advisor to the government, providing it with the available figures, it is also not fully satisfied with the draft law in its current form. Informed sources indicate that "the Central Bank considers that the draft contains many positive points, but its implementation remains impossible without a clear and explicit contribution from the state, especially since fiscal policies, chronic budget deficits, Lebanon's electricity file, and subsidy policies make the state a key partner in causing the financial and banking crisis."

Official records at the Central Bank show that the state owes it no less than $16.5 billion, an amount the state acknowledged spending to repay Eurobond bonds and their interest, among other obligations. Additionally, new debts have accrued to the state after 2019, exceeding $13 billion in "fresh" funds.

The majority of these debts, about $10 billion, relate to fuel subsidies and others approved by Prime Minister Hassan Diab's government during former President Michel Aoun's tenure. The remaining amount, estimated at about $3 billion, consists of payments made by the Central Bank on behalf of the state to repay loans to institutions and international funds, and to purchase fuel oil for the Electricité du Liban between 2020 and 2023.

Sources confirm that "the Central Bank does not print US dollars, and it erred when it used, under pressure and coercively, the banks' deposited funds, i.e., depositors' money, to cover state expenses, whether under laws that obligated it or government decisions. Since 2020, every dollar the Central Bank paid on behalf of the state was a 'fresh dollar.'"

Thus, the state owes the Central Bank, directly or indirectly, about $30 billion. While it has become known that the state cannot fully repay these debts, the success of the draft law requires, at a minimum, a clear agreement between the state and the Central Bank on a timeline and mechanism to repay part of these obligations, or at least repay the equivalent of a quarter, about $8 billion, in installments over 8 years. This step by the state would allow the Central Bank to meet its commitments, while its absence would render the law practically unenforceable.

In conclusion, there is consensus that responsibility is shared among the state, banks, and the Central Bank. Hence, introducing a single fundamental amendment to the draft law could make it fairer and more implementable. According to its sources, the Central Bank cannot bear more than $9 billion, spread over 5 years, most of which are depositors' funds that will be reinjected to them. Banks, as responsible parties, must bear no less than $6 billion in cash during the same period.

If the state fulfills its responsibilities and contributes about $6 billion over 5 years, the law's implementation becomes possible. Moreover, this balance allows raising the guaranteed deposit ceiling to between $115,000 and $120,000, instead of the current $100,000. The cost of guaranteeing $100,000 is estimated at about $18 billion (a preliminary estimate), while raising the ceiling to $115,000 reaches approximately $21 billion.

Other observations on the draft law, despite their importance, remain open for discussion and quick resolution. However, the real solution begins with an explicit acknowledgment by all parties of their responsibilities, clearly embedding these responsibilities in the law's text, with defined mechanisms to secure liquidity and each party's share (state, banks, and Central Bank), within a precise, clear, and binding timetable for all.