• Fiscal & Budget
    Sep 01, 2021

    The Government Monitor No. 21 | The Central Bank’s Circulars Regulating Depositors’ Accounts

    • Ali Taha
    Following the popular uprising that erupted mid-October 2019, Lebanon’s banks closed their doors, fearing a rush by depositors to withdraw their savings or transfer them abroad. A week later, they reopened, imposing restrictions on deposits in United States dollars (USD) and limiting withdrawals and transfers to foreign accounts. The lack of immediate government intervention to regulate the financial sector prompted the banks to implement their own policies, either unilaterally, or through the Association of Banks in Lebanon (ABL), which announced on 17 November 2019  that it will limit cash withdrawals to USD 1,000 a week, in addition to restricting transfers abroad.
    As confidence in the Lebanese banking sector plummeted at the outset of the popular protests, depositors rushed to withdraw foreign currency—mostly US dollars—from their bank accounts (in October and November 2019, around USD 3.8 billion were withdrawn from Lebanese banks). By the end of the year, the banks began taking the additional step of further limiting cash withdrawals to a few hundred dollars per week before freezing them altogether. Since then, the Banque du Liban (BDL - Lebanon’s central bank) has stepped in with a series of circulars aimed at controlling the movement of capital, slowing down the financial collapse, and mitigating its impact on the different sectors of the economy and various segments of the population.
    BDL circulars regulating bank deposits
    On 3 April 2020, BDL Circular  No. 148  was published, allowing small Lebanese depositors, whose accounts do not exceed 5 million Lebanese pounds (LBP) or USD 3,000, to perform withdrawal and/or other cash transactions. They were also given the option to convert their savings into USD at the “official rate,”[1] but they can only withdraw them in LBP at the “market rate.” This was an attempt by the BDL to manage the monetary situation in light of parliament’s failure to pass a capital control law in response to the crisis. Through this circular, the BDL aimed to release around USD 800 million owed to small depositors.
    Circular  No. 148 was seen by many as unfair, as it left ineligible depositors with the bitter option of withdrawing their savings in US dollars at the official rate of LBP 1,507, thus incurring a significant loss. This led the central bank to issue Circular No. 151 on 24 April 2020—arguably BDL’s most consequential decision since the beginning of the crisis. The circular allows each depositor with a foreign currency account exceeding USD 3,000 in value to withdraw cash in Lebanese lira at an LBP 3,900 per one US dollar exchange rate, on the condition that the withdrawals do not exceed USD 5,000 per month, and only at the client’s request. This was considered by many financial experts as an undeclared haircut, whereby withdrawals would entail the loss of more than 70% of their market value at the time of the circular’s issuance.
    On 2 June 2021, the BDL suspended its decision after the State Council ruled against Circular No. 151, following an appeal filed three months earlier by Lebanese lawyers. This meant that banks would settle dollar reimbursements at the official rate of LBP 1,507, leaving depositors with an 88% haircut on their deposits, in light of the continued and rapid devaluation of the Lebanese pound. The ruling sparked anger and protests across the country, leading the central bank to reverse its decision. BDL claimed that it was not officially notified of the State Council’s ruling, therefore Circular No. 151 would remain in force.
    On 27 August 2020, Circular No. 154 was issued by the BDL. According to this measure, banks are required to conduct a fair assessment of their assets and liabilities and develop a plan to assure compliance with all applicable regulations, particularly those related to liquidity and capital adequacy. The circular mandates banks to urge clients who have moved funds above USD 500,000 overseas (after 1 July 2017) to deposit 15% of their transactions in a “special account” for five years, in order to shore up international liquidity, particularly with correspondent banks (for bank chairpersons, boards of directors, large shareholders and top management, and Politically Exposed Persons (PEPs), the required deposit is 30%). The circular further stipulates that banks have to submit a request to BDL to reconstitute/raise their capital to the required levels by the end of the first quarter of 2021, and must accordingly provide their depositors with the option of converting their deposits into shares or into redeemable, tradable, and convertible perpetual bonds, granting them priority to subscribe in any future capital increase.[2]
    In its latest and most controversial decision, the BDL issued Circular No. 158 (on 8 June 2021), granting depositors exceptional measures concerning foreign currency cash withdrawals. The circular aims to partially compensate depositors for their dollar deposits by allowing them to withdraw the equivalent of USD 800 on a monthly basis: USD 400 in “fresh dollars” (cash) and USD 400 in the national currency at an exchange rate fixed by BDL at LBP 12,000 (the USD 400 in “fresh dollars” payment is divided evenly between BDL and the banks). The circular applies to all foreign currency accounts opened before 31 October 2019, and covers savings preceding that date. Moreover, it sets a cap on the amount of funds redeemable under its terms to USD 50,000, and stipulates that the total annual withdrawal limit in US dollars from across all banks must not surpass USD 4,800 per depositor.
    Circular No. 158 took effect on July 1, but was met with a lot of skepticism and reluctance by depositors for lack of clarity in many of its terms.[3] In addition, many economists and financial experts raised concerns about the potentially damaging impact of such a decision on inflation and the overall economy. The fear is that the payment of USD 400 in Lebanese pounds will increase the money supply in pounds by approximately LBP 27 trillion over a one-year period, causing hyperinflation and the weakening of the national currency against the dollar.

    Students abroad
    The economic collapse and the strict limits on dollar withdrawals and transfers abroad were especially hard on the families of Lebanese studying abroad, who had to pay their fees and expenses in foreign currency. Soon after the implementation of restrictions on foreign currency transfers abroad, the BDL issued Circular No. 153 (on 19 August 2020), which allows depositors to transfer up to USD 10,000—or its equivalent in other currencies—to students abroad, provided they are enrolled in an educational institution and have been living abroad before the end of 2019.
    The decision came under criticism for having excluded those who were enrolled after 2019, and as a result of mounting public pressure, the parliament passed Law No. 193, which obliges banks to make a one-time financial transfer of no more than USD 10,000 for all Lebanese university students registered with universities or higher technical institutes abroad before 2020-2021. The law was signed by the president and came into force on 16 October 2020. In line with this law, the central bank issued Basic Circular No. 155 (on 9 December 2020) requiring banks to comply with eligible applications by the parents of Lebanese students, and safeguard transfers via their liquidity with correspondent banks.
    Furthermore, the circular called on banks to guarantee that its terms are not abused by centralizing records at the Association of Banks in Lebanon, which can then exclusively verify for duplicate transfer applications. Applicants wishing to benefit from the provisions of the circular must waive their banking secrecy. The Association of Banks in Lebanon claims that this arrangement allowed parents to transfer a total of USD 240 million to around 30,000 Lebanese students studying abroad during the 2019-2020 and 2020-2021 academic years.
    The collapse of the banking sector had a detrimental effect on the 1,451,829 depositors owning USD 107.28 billion in Lebanese banks as of the end of March 2021. Inaction at the governmental and legislative levels left the central bank in complete control of financial and monetary policies, which it failed to strictly enforce. In the absence of a comprehensive reform plan, these measures fall short of meeting the urgency of the financial and economic situation, with many experts arguing that they have had the very opposite effect of eroding whatever remaining trust the market had in the Lebanese banking sector.
    As a result of decades of mismanagement and systemic corruption, Lebanon is undergoing the worst economic crisis in its history. The inability of the Lebanese government to implement the necessary reforms has exacerbated the crisis, which has now spread to all sectors of the economy and threatens the operations of critical government agencies. In 2019, Lebanon’s GDP contracted by 6.7 percent, shrinking a further 20.3% in 2020! Over the past two years, the Lebanese pound lost over 80% of its value, with inflation reaching triple digits. The banking sector seized up completely, imposing strict limits on foreign currency withdrawals. And for the first time in its history, Lebanon defaulted on a USD 1.2 billion Eurobonds issuance that was due on 9 March 2020.
    Association of Banks in Lebanon. (15 April 2021). Press Release - Financial transfers to students abroad.
    Banque du Liban. (n.d.). Laws and Circulars - Basic Circulars. Retrieved 10 August 2021
    BDL Circular on the gradual withdrawal of deposits in foreign currency. (11 June 2021). Melki Law Firm.
    BDL rescinds the suspension of a decision permitting US dollar deposit withdrawals at LPB 3,900 rate. (3 June 2021). L’Orient Today. 
    Dadouch, S.A.K. (22 November 2019). With dollars running low in Lebanon, ATMs are spitting back bank cards, and locals are panicking. The Washington Post. 
    BDL Circular on the “Sayrafa” Platform. (8 June 2021 ). Melki Law Firm. 
    The World Bank. (2021). Lebanon Economic Monitor - Lebanon Sinking to the Top 3. Beirut: The World Bank.
    مودعو المصارف بالدولار كم عددهم؟ ما قيمة ودائعهم؟ Al-Akhbar. (5 July 2021)
    [1] The BDL pegged the Lebanese pound to the dollar at the rate of LPB 1,507 per USD 1, and the two were used interchangeably until October 2019.
    [2] These terms are subject to the following conditions:

     Providing a detailed and clear explanation to the concerned depositor of the terms of the operation.

     Providing customers who are planning to convert their deposits into shares with an updated report showing the fair value of the shares (these reports must be approved by the Central Council at BDL).

     Listing all of the bank’s shares on the Beirut Bourse.

     Separating the chairperson of the board of directors’ function from the bank’s management, as per Article 153 of the code of commerce. 

    [3] Each bank drafted its own contract and rules, as there was no standard contract template from the BDL to ensure fairness for the depositors.
    Ali Taha is a political scientist and researcher at LCPS. His research focuses on public policy, governance, and energy. He is also involved in writing “The Government Monitor” series, organizing educational webinars, and supervising the LCPS Legislative Tracker, an interactive online tool that allows users to analyze the policy-making agenda of the Lebanese government. Prior to LCPS, Ali worked as a program director at Delegations for Dialogue, facilitating research in conflict zones. He holds an MSc in International Relations from the University of Amsterdam, specializing in energy politics, and a BA in Political Science/International Affairs from the Lebanese American University.  
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