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Impoverish and Conquer: How has the Lebanese state responded to the financial crisis?

Wassim Maktabi,
Sami Zoughaib,
Sami Atallah

When armed hostilities came to a halt in the early 1990s, fifteen years of civil war had left Lebanon decayed and broken on all levels, a shell of its former self. Despite grand reconstruction and development plans peddled by the post-war political elites, the subsequent decades proved to be no more than a race to the bottom. The false promises essentially transmogrified the shattered Lebanese state into a corrupt parasitic vehicle for self-enrichment by the post-war sectarian elites and their foreign patrons, while countless citizens emigrated permanently in search of dignity and opportunities.

Yet, the anchor that supposedly kept the country going was its esteemed banking sector and the infallible governor of the central bank, long venerated as the only adult in the room ostensibly keeping the country and its economy on its feet. Alas, this confidence in the financial sector turned out to be mere hubris, as Lebanon is currently facing one of the world’s most severe financial crises of the past century and a half, triggered by the collapse of a Ponzi scheme run by the state and the banking sector.[1]

Since 2019, the local currency—the Lebanese Lira—sharply depreciated, the size of the economy halved, and inflation skyrocketed.[2] While moments of crisis can be drivers of policy change, Lebanon has strongly challenged this once conventional wisdom,[3] as three years into the crisis, none of the crucial structural economic, monetary, judicial, and administrative reforms have been enacted. Instead, the country’s political and economic elites have responded to the crisis by sabotaging reforms and delaying any socioeconomic stabilization, effectively impoverishing society. Indeed, while the state failed to endorse a financial recovery plan, the implicit shadow plan adopted by elites shifts the burden of the crisis from commercial banks, their shareholders and large depositors, onto ordinary citizens through the costs of inflation, currency depreciation, and de facto ‘lirafication’ of dollar deposits.[4]

To achieve this, each political and economic institution of the state played an indispensable part in the roll-out of the shadow plan.[5] The central bank—Banque du Liban (BdL)—orchestrated the response to the crisis through nefarious monetary interventions that reduced the liabilities of commercial banks while turning a blind eye to large transfers of wealth abroad. The government, largely paralyzed throughout the crisis period, was politically constrained by the ruling elites and only sought to buy time for the shadow plan to take shape. The parliament functioned as the legislative anchor protecting elite interests, sabotaging any reformist law proposals that could disrupt the status quo. Finally, the politicized judiciary paved a line of legal defense for commercial banks, their owners, and the central bank governor against any form of accountability over their actions.

The Conductor: Banque du Liban orchestrating the response to the crisis
Entrusted by Lebanon’s traditional political parties since 1993, central bank governor Riad Salameh dictated the response to the crisis in a discretionary manner, favoring his political protégés and commercial banks. At the institutional level, BdL’s issuance of circulars increased twofold in volume and rate during the crisis compared to pre-crisis times (figure 1).[6]

First, as of April 2020, BdL mandated banks to perform a de facto haircut on dollar-denominated deposits, forcing depositors to withdraw Lebanese liras from their dollar accounts at a disadvantageous rate.[7] This gradually allowed commercial banks to reduce their liabilities, while small depositors saw the value of their hard-earned money erode rapidly.

Second, as of January 2022, BdL aggressively intervened in the currency market to temporarily stabilize the local currency at LBP 20,000 to the dollar, providing a veneer of monetary stability ahead of the May 2022 parliamentary elections. This politically-motivated measure wasted more than $2 billion of the central bank’s foreign currency reserves, as by July 2022, the Lebanese lira had again lost the marginal value it had artificially gained.

Third, with BdL effectively neutralizing its Banking Control Commission and Special Investigation Commission, it enabled the wealth transfers abroad of political and economic elites, while everyday depositors suffered from unregulated capital controls during the same period. In fact, a former director-general of the Ministry of Finance estimated that $6 billion were “smuggled” outside Lebanon.[8]

Between August 2019 and May 2022, these three major operations directly reduced BdL’s foreign currencies by more than $18 billion (60%) and commercial banks’ deposits by $45 billion (25%), all in the absence of an overarching financial recovery plan.

The Pretender: Government mired in caretaker role and political constraints
Since the onset of the crisis in August 2019, Lebanon’s executive branch was restricted to a caretaker duty for 16 months—equivalent to more than one-third of the crisis period. The country saw three different cabinets and two designated prime ministers who failed to form one. Compared to pre-crisis times, the activity of the government exhibited a decreased degree of political collaboration, as the issuance of decrees declined by one-third (figure 2).[9] The first cabinet that governed during the crisis period was forced to resign amidst mass protests in 2019. The second cabinet, headed by Hassan Diab and composed of several technocratic figures, defaulted on the sovereign debt, albeit in a disorderly manner, and drafted a financial recovery plan that espoused the bail-in of large depositors and restructuring the banking sector, among other reform prescriptions, only in its first 100 days in office. The plan, however, was quickly made obsolete after it was abandoned by the cabinet itself and challenged by the Association of Lebanese Banks (ABL) and traditional parties in parliament. The Diab cabinet was also responsible for designing a regressive subsidy scheme that exhausted an average of $287 million per month from the country’s foreign reserves and generally benefitted the country’s politically-affiliated oligopolistic importers.[10]

Note: Gray areas indicate periods under caretaker government; Green area indicates period in which cabinet sessions were boycotted.

The third cabinet, headed by Najib Mikati—a former prime minister with corruption allegations— comprised of most traditional political parties. Its primary objective was to render the country’s political and economic environment fertile for the same parties to regain legitimacy in the May 2022 elections—which they did. The Mikati government brokered a Staff-Level Agreement with the International Monetary Fund (IMF) one month prior to the elections, and approved a new financial recovery plan on its last day in office.

The anchor of elite interests: Parliament sabotages the reforms needed for recovery
Throughout the period of the crisis, parliament preserved the interests of those who captured it. To claim that it only exhibited a low-rate legislative productivity would be incomplete,[11] as parliament was on high alert to sabotage any reform that could disrupt elites’ shadow plan. This took two forms: undermining the government’s financial recovery plan and rejecting capital controls.

First, after the Diab government had projected that the size of the financial losses would entail the bail-in of bank shareholders and large depositors, parliament formed a fact-finding committee of members from across the spectrum of political parties to underestimate the losses and thus mitigate the banks’ burden.[12] Second, parliament’s Budget and Finance Committee dragged the capital control draft law to a point where its intended objectives have become largely futile as billions of dollars have already been transferred out of the country since October 2019.[13] The draft only reached the general assembly for vote in October 2021, when it was sent back to the committee, languishing in deliberations ever since.

Protection of Last Resort: Judiciary provides banks with legal defense
Impunity is not new in Lebanon, yet it reached unchartered territories during the financial crisis. The judiciary—from the public prosecutor at the Court of Cassation and the financial public prosecutor, down to the lowest-ranking judge—failed to hold any banks to account while the latter bluntly violated Lebanese laws, leaving ordinary citizens at the mercy of banks’ discretions.

Banks set illegal limits on withdrawals and did not settle people’s money in the currency originally deposited, in violation of the Code of Commerce.[14] Moreover, Law 2/1967 indicates that banks must enter an insolvency process if they are ever unable to settle deposits—a process that can expose bank owners to personal liabilities and suspend them from their roles.[15] Yet, this law has remained unapplied and no Lebanese bank has been declared bankrupt.

Rather than being the norm, only a few legal cases successfully obliged banks to transfer the deposits they owe to their rightful owners, but most of the judicial orders that materialized were made in foreign courts,[16] while those that failed were domestic.[17] Yet even foreign judicial orders failed to deter some of the banks’ egregious behavior, with one bank closing the accounts of several British depositors after a London court ruled in favor of one of the depositors.[18]

What is the cost of this response?
Lebanon’s political and economic elites adopted a self-serving response to the financial crisis. This directly protracted the crisis and morphed it into a socioeconomic collapse whose effects will reverberate for generations. In September 2021, almost 82% of the population was estimated to be living in multidimensional poverty, struggling to access basic healthcare, education, and nutrition.[19] In November-December 2021, the unemployment rate stood at 40%,[20] with the majority of workers receiving wages in depreciated Lebanese liras

For Lebanon to recover from its deep and existential malaise, a break with the past is necessary. The post-war political-economy model—a system that rested on pervasive elite capture—has rapidly crumbled in an ignominious fashion. Any financial recovery plan must not only tackle the economic, judicial, and administrative failings that have brought about the current state of affairs, but also introduce an equally vital social protection policy that addresses acute vulnerabilities and paves the way for a new social contract that subscribes citizens back to the state.

The authors would like to thank Karim Merhej for his valuable input and for editing this article.



1 Halabi, S. and J. Boswell. November 2019. “Extend and Pretend: Lebanon’s Financial House of Cards.” Triangle.

2 World Bank. 2021. “Lebanon Sinking (To The Top 3).” Lebanon Economic Monitor.

3 Drazen, A. and W. Easterly. 2001. “Do Crises Induce Reform? Simple Empirical Tests of Conventional Wisdom.” Economics and Politics.; Mahmalat, M. and S. Atallah. 2021. “Crises, Uncertainty, and Reform – Disentangling the Mechanisms of a Conventional Wisdom in Fractionalized Countries.” Economic Research Forum (working paper).

4 Lirafication entails withdrawing dollar-denominated deposits in Lebanese lira at a discounted rate.

5 The term ‘shadow plan’ was used in Lebanon’s context here: Brophy, Z. and A. Noureddeen. June 2021. “Driving Disaster: Lebanon’s Shadow Financial Plan.” Triangle.

6 For systematic comparison, we delimit the crisis period between August 1, 2019, and July 31, 2020, and the pre-crisis period between August 1, 2018, and July 31, 2019. We choose August 1, 2019, as the cutoff because it represents the day on which the peg was lost at exchange shops.

7 Banque du Liban. April 2020. Basic Circular #151; Banque du Liban. December 2021. Intermediate Circular #601.

8 Cornish, C. July 2020. “Bankers ‘smuggled’ $6bn out of Lebanon, says ex-finance chief.” Financial Times.

9 For systematic comparison, we delimit the crisis period between August 1, 2019, and July 31, 2020, and the pre-crisis period between August 1, 2018, and July 31, 2019. We choose August 1, 2019, as the cutoff because it represents the day on which the peg was lost at exchange shops.

10 World Bank. December 2020. “Subsidy Reform Note.” World Bank Group.

11  Legal Agenda. February 2021. “Lebanon’s Parliament During a Year of Collapses and Crises: Lack of Vision, Populism, Inertia, and Buying Time for a Crumbling House of Cards.” Al Rawiya.

12 Atallah, S., M. Mahmalat. And S. Zoughaib. September 2020. “Hiding Behind Disaster: How International Assistance Risks Helping Elites, Not Citizens.” Lebanese Center for Policy Studies.

13 Noe, N. June 2022. “The Great Sell-Off: How Lebanon’s Banking Sector Sold Off the Country’s Financial Future to Foreign Interests.” Triangle.

14 Legislative Decree 304. December 1942. “Lebanon Code of Commerce.”

15 Law 2/67. January 1967. “اخضاع المصارف التي تتوقف عن الدفع لأحكام خاصة.”

16 Azhari, T. December 2021. “French court orders Lebanese bank to pay $2.8 mln to locked-out depositor.” Reuters.; March 2022. “UK court orders Lebanese banks to pay $4 mln to saver.” Reuters.

17 Blom Bank Press Release. April 2020. “Clarification statement – client withdrew all legal actions.”

18 Azhari, T. And T.Perry. March 2022. “Lebanese bank closes over 30 British-held accounts after UK ruling-depositors’ group.” Reuters.

19 ESCWA. September 2021. “Multidimensional poverty in Lebanon (2019-2021) – Painful reality and uncertain prospects.”

20 World Bank. 2021. “Lebanon Sinking (To the Top 3).” Lebanon Economic Monitor.

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