Parliament pushes for capital controls law as Lebanese protest
Protesters gather in front of the Lebanese parliament on a weekly basis as it moves to pass a capital controls law.
Beirut, Lebanon – Almost three years after banks in Lebanon began preventing the withdrawal of US dollars from bank accounts, families in the country are now fearful a proposed capital controls law will make things worse, as they continue to struggle with the country’s spiralling economy.
Lebanon’s array of commercial banks imposed their own capital controls after the country’s financial system crashed in late 2019, by setting withdrawal and transfer limits.
Depositors could only withdraw their trapped United States dollars in the local currency at an inflated rate, meaning that they would lose money to the bank.
Since then, 75 percent of the population has slipped into poverty, while the Lebanese pound has lost 90 percent of its value. Power cuts and skyrocketing fuel prices have crippled much of public life, while food inflation in the troubled country is among the highest worldwide.
The planned capital controls law, which is being discussed in parliament, has led to weekly protests outside the building, which started on April 19.
“The banks held our deposits for almost three years, and they will now try to put capital controls just to protect them,” Crystelle, an unemployed mother, told Al Jazeera at one such protest on Tuesday.
Crystelle said that the government should have implemented capital controls back in late 2019 when the Lebanese pound started to lose its value and the banks faced dollar shortages.
The International Monetary Fund (IMF), which has been negotiating with Lebanon over economic reforms since May 2020, has recommended capital controls.
Hanin, a 38-year-old yoga instructor and mother, said the government could not be trusted, as many lawmakers and senior officials were shareholders and board members of the country’s commercial banks.
“We lost 70 percent or so of our savings when we withdrew our money, and they’re just marked as ‘losses’,” she told Al Jazeera. “Why is that? I didn’t choose to partner up with them on an investment. I’m a depositor, not an investor.”
Banque du Liban, the Lebanese central bank, has for years bolstered its foreign currency reserves – and enabled the government to spend well beyond its means – by paying out exorbitant interest rates to entice commercial banks to lend it US dollars. Commercial banks would in turn offer their depositors even higher interest rates, in order to have an abundance of dollars.
The process has been likened to a Ponzi scheme, and Lebanese officials estimate the total losses of the country’s pulverised banking sector to be about $69bn.
Alain Aoun, a member of parliament representing the Free Patriotic Movement, told Al Jazeera that protesters and concerned families had misunderstood the proposed law.
“People are mistaken about the role of the capital controls law,” Aoun said. “Its role is not to define the fate of the deposits.”
Protestors numbering in the hundreds have successfully obstructed parliamentarians from taking the law forward several times over the past few weeks. However, lawmakers will still most likely pass the capital controls legislation, as the IMF has made it a prerequisite of a bailout plan.
The international community and economic experts have for years pressed Lebanon to pass a capital controls law, but most of Lebanon’s political leadership rejected the suggestion at the time.
In the meantime, the finance ministry’s former director general, Alain Bifani, estimated up to $6bn was “smuggled” out of Lebanon between late 2019 and the summer of 2020.
The capital controls law in its current form will also protect the country’s rulers, activist lawyer Dina Abu Zor told Al Jazeera. She noted the law would establish a committee that includes the finance minister, the central bank governor, and experts approved by the country’s commercial banking lobby all working together to vet financial transfers.
“The fate of depositors rests on the same circles of the rulers that caused this crisis,” Abu Zor said. “And this includes the central bank governor who is being probed locally and internationally for illicit enrichment and money laundering.”
Abu Zor, who provides legal support for people with money trapped in bank accounts with the Depositors’ Union, a volunteer group, said the capital controls law would override the judiciary’s role in the country.
Banks have already threatened to shut down the accounts of Lebanese nationals abroad unless they forfeit their right to withdraw foreign currency.
For Lebanon’s disgruntled depositors, it is unclear whether or not they will be permitted to withdraw their money in US dollars or Lebanese pounds.
“The law is unfair and unclear, and cannot be passed as it is,” Abu Zor said.
‘No clear exit strategy’
Lebanon reached a staff-level agreement with the IMF for a bailout programme in early April, but must enact a series of reforms to finalise its programme.
Among them is a capital controls law, but it should be in tandem with restructuring and auditing the banking sector, as well as unifying the country’s multiple exchange rates.
However, that might all be in vain, as the country’s commercial banks lobby rejected the IMF-approved recovery plan two weeks after the early-April agreement, and slammed both the government and central bank.
Experts have argued the capital controls law alone will not make sound policy, unless it is introduced as part of a series of measures in a wider economic recovery framework.
Aoun admitted the proposed law should be passed alongside other reforms.
“It is normal that the capital control law should be as a result of the [economic recovery] plan and not a separate independent act,” Aoun said.
However, he also added if the law is passed without any accompanying economic framework, it should still go ahead.
Sami Zoughaib, a Lebanese economic analyst at Beirut-based think tank The Policy Initiative, said he feared passing the capital controls law in its current form would set a precedent for the Lebanese authorities, and may lead to more “reforms” that negatively impact the country’s people.
“The people negotiating with the IMF are those with clear entrenched interests that have sabotaged any recovery framework, with clear considerations for their personal wealth, protection, and impunity,” Zoughaib said.
“So you can rest assured that the IMF programme will either fail miserably or have adverse social and political implications.”