Is the cabinet trying to sneak formal capital controls in through the back door?

Through its recent Circular No. 165, Banque du Liban explicitly recognized the distinction between fresh funds and those trapped in banks.

Is the cabinet trying to sneak formal capital controls in through the back door?

A bank branch closed on Sunday in Hazmieh. (Credit: Philippe Hage Boutros/L'Orient-Le Jour)

Is Najib Mikati’s cabinet, which formally resigned in May 2022 and now operates in a caretaker capacity, sneakily trying to regularize the restrictions that the Lebanese banking sector imposed illegally on depositors’ accounts?

This is what one cabinet decision suggests.

Approved on April 18, the decision’s introduction may seem surreal to anyone who has been following Lebanon’s nearly 4-year-old financial crisis.

The cabinet stated that it had “heard caretaker Finance Minister Youssef Khalil’s presentation on the financial crisis that Lebanon is going through” and the “chaos” linked to banking restrictions.

It then recalled that the draft law, which it prepared to introduce formal capital controls as a starting point for resolving the crisis, is still blocked in Parliament.

The cabinet concluded by asking Banque du Liban (BDL) to “take mandatory and appropriate measures” to have commercial banks uniformly cap withdrawals as well as transfers for all depositors, “in accordance with the related circulars” — in other words, the cabinet asked the central bank to impose institutional capital control rules.

At the same time, the cabinet called on BDL to ensure that banks continue to guarantee the full availability of “fresh funds” — i.e., foreign currency funds introduced into the banking system in November 2019.

The significance of this decision

In legal terms, the cabinet indirectly recognized the distinction between “old deposits” in foreign currency — also known as “bank dollars” or “lollars” — and “fresh dollars,” which are not subject to any restrictions. Lebanese lira deposited in bank accounts and in cash have also been treated differently for over a year.

The distinction between “bank” and “fresh” funds is not enshrined in law or in any precedent-setting court decision.

But BDL’s circulars, issued since 2020, have created such a distinction. Circular No. 150 guarantees the free availability of fresh dollars while circulars No. 151, 158 and, to some extent, 161 force depositors to withdraw their bank dollars at a rate below their actual market value.

It doesn’t stop there. The cabinet’s April 18 decision also explicitly asked BDL to take capital control-linked measures, namely to limit the circulation of foreign currency funds within the country as well as abroad.

This is the same as limiting depositors’ ability to use their funds in accordance with the deposit contract they initially signed with their bank.

The central bank has still not responded to the cabinet’s request, said a bank manager who asked not to be named due to the sensitivity of the topic.

“There is still nothing for the moment and the central council seems very divided on the issue,” the bank manager told L’Orient-Le Jour.

Lebanon’s finance minister did not respond to requests for comment.

What is the legal value of this decision?

Not much for the moment, said Karim Daher, a lawyer and member of the Beirut Bar Association’s Committee for the Protection of Depositors’ Rights.

“The cabinet has no authority to establish formal capital controls and the conditions are not available for BDL to exercise the temporary prerogative that the Code of Money and Credit grants it in special circumstances,” Daher said.

This prerogative emanates from at least two articles in the Code of Money and Credit, which is key for the existence and independence of BDL as a central bank.

Article 70 specifies BDL’s main mandates: safeguarding the lira, maintaining economic stability, safeguarding the basic structure of the banking sector and developing the financial market.

Article 174 enshrines its power to regulate the banking sector while recognizing the ability of the Association of Banks in Lebanon to give its opinion on any matter. This same article gives it the right to change the rules governing the relationship between banks and their customers when needed.

These two articles are cited in the cabinet’s decision, alongside Article 71, which states that there shall be cooperation between BDL and the cabinet.

“While the cited articles allow BDL to take certain decisions limiting the movement of capital, it cannot do so alone and without a time limit, since they [the decisions] impact rights protected by the constitution, including those of free enterprise and private property,” said Daher.

“BDL’s exceptional power must be exercised only in a very limited time, that is to say, as soon as the objectives assigned to it are at risk and only for a short period, allowing the Parliament to enact laws,” he added.

“This cannot be pulled out of a hat after a four-year crisis.”

Why worry?

In principle, the cabinet’s decision has no legal value. It will likely remain a dead letter or be annulled by the State Shura Council.

This is all the more true because the decision was made by a caretaker cabinet, the remit of which is limited to running the country’s day-to-day affairs. This type of decision, if it were to be validated, is entirely beyond the competences of a cabinet with reduced powers.

The problem is that similar decisions were made before, and the ruling political class mastered the art of hijacking the constitution and laws by twisting some levers.

A similar scenario arose with the provisional twelfth rule, which has been abused for more than 12 years to allow the state to finance itself in the absence of a budget law.

It is also at the expense of constitutional rules that Mikati’s cabinet adopted decrees that are not within the scope of its competence, since former president Michel Aoun stepped down on Oct. 31, leaving the presidential seat vacant.

It is therefore legitimate to ask about the risks of the cabinet’s recent request that BDL organize what is similar to a formal capital control rule, especially since it has not done so earlier.

So far, Parliament has not seemed ready to enact a law in this regard, despite MP Michel Daher submission of the first draft law on this topic at the end of 2019.

Why is timing important?

There is the question, for two main reasons.

The first is the growing pressure from depositors who filed cases against their banks to have their funds released.

“More and more actions are being filed for fraudulent bankruptcy or breach of trust against bank executives,” said Daher. “The targeted institutions find themselves obliged to negotiate, but it is clear that their capacity to do so may eventually dry up if the flow of plaintiffs does not stop.”

In this tug of war, time is against the banks— many of which are virtually bankrupt and whose sources of income are limited by their halt in granting loans since the beginning of the crisis. In terms of liability, the banking sector is expected to return nearly $100 billion in foreign currency deposits to its clients.

The second reason is related to the fate of BDL’s governor, Riad Salameh, whose term in office expires at the end of July and who is under investigation in several European countries in relation to financial wrongdoing.

In office since 1994, Salameh is the cornerstone of the Lebanese political and financial system. While Salameh himself said in an early 2023 interview that his departure is inevitable, the possibility that the ruling class extends his term is far from fanciful.

One major indicator seems to support this scenario: the day after the cabinet meeting, BDL issued Circular No. 165, which it enshrined the distinction between old and new funds. This time, it used Nov. 18, 2019, as the pivotal date— the moment when ABL publicly acknowledged the banking restrictions that its members had begun to apply randomly since the summer of that year.

The new circular goes even further by setting up new clearing systems for fresh dollars and fresh lira.

A second banker, who also requested anonymity, told L’Orient-Le Jour that Circular No. 165 “is no more and no less than a step aimed at restarting the banking sector without going through the International Monetary Fund.”

It is not certain that the international community, which is quick to call on the country to launch reforms, will have anything to say about this.

In the extended absence of a banking sector that works, the cash economy prevails, along with all the problems it poses in terms of traceability and tax collection.

This article was originally published in French in L'Orient-Le Jour. Translation by Joelle El Khoury.

Is Najib Mikati’s cabinet, which formally resigned in May 2022 and now operates in a caretaker capacity, sneakily trying to regularize the restrictions that the Lebanese banking sector imposed illegally on depositors’ accounts? This is what one cabinet decision suggests.Approved on April 18, the decision’s introduction may seem surreal to anyone who has been following Lebanon’s nearly...