In post-Riad Salameh Lebanon, a tug of war is unfolding between the new leadership of the country's central bank and the state.
Wassim Mansouri, who took on the role of interim head of the Banque du Liban after Mr Salameh's 30-year tenure came to an end on July 31, said the institution “must completely stop financing the government outside of a legal framework”.
This new policy is set to begin on Monday, as reported by the Lebanese press and confirmed to The National by a banking source.
It falls within Lebanon's Code of Money and Credit, which states “the principle is that the central bank does not grant credits to the public sector”, unless in cases of “absolute necessity”.
However, even in such circumstances, a central bank loan is regarded as a last resort and all alternative options should be thoroughly explored to safeguard the currency.
According to Lebanese law, the central bank may not lend to the state unless a comprehensive study demonstrates there are no circumstances that would prevent repayment.
Yet, the bank's new leadership has made it clear there are several factors to consider.
The central bank has asked the Lebanese government to introduce a list of reforms within the six month-time frame outlined in its comprehensive plan, “to rebuild trust and secure additional revenue, from its budgetary framework to repay the newly outstanding loan”, wrote Mr Mansouri and the three vice-governors in a document seen by The National.
Mr Mansouri said any government financing requests “outside the legal framework” would be turned down.
The central bank’s ultimatum marks a significant shift from a 30-year policy, during which the central bank generously financed the budget deficit without imposing conditions.
This led to one of Lebanon’s worst financial crises and financial losses amounting to about $70 billion and locking depositors out of their savings.
Instead of investing in development projects to strengthen the economy, which would have facilitated repayment, the borrowed funds were used to cover the state's current expenses and import bill.
This included sustaining Lebanon's inflated public sector, often exploited for client recruitment, servicing debt interest and addressing the financial abyss of Electricity du Liban, the state-owned power company.
However, analysts doubt the extent to which Mr Mansouri can change policies with the same political forces in power.
“You don't overhaul a system in place for 30 years in a few weeks,” an anonymous source familiar with the matter told The National.
The decision to turn off the tap could potentially trigger a budget crisis, leading to threats and pressure from all parties against the central bank.
This raises the question of whether the acting chief and his vice governors are prepared to go into direct conflict with politicians.
Mr Mansouri is a distant cousin of Parliament Speaker Nabih Berri, the leader of Shiite party the Amal Movement, which has controlled the Ministry of Finance for almost 10 years.
Mr Berri appointed him as the most senior of the four vice governors in 2020.
“The risk is that they end up succumbing to the pressures of the ruling class and funding the state anyway, leading to a loss of their credibility”, the source said.
List of reforms
Legislation asking parliament to set the conditions is still being discussed and has yet to be proposed, though its initiation would have to come from parliament, as caretaker prime minister Najib Mikati has said he will not send the draft law to the assembly.
It would allow the central bank to lend up to $200 million a month over a period of six months subject to conditional reforms.
But the bank would retain an option to retract the loan if reforms were not introduced as intended.
The plan includes a budget review to be approved by parliament before the end of this month with a target for tax revenue of at least $3 billion. It also includes the approval of a capital control law under the same deadline and a capital restructuring law by the end of next month.
Such laws would ensure a fair distribution of foreign currency assets within the economy, and could revitalise struggling banks while eliminating insolvent ones, all in efforts to restore confidence in the sector.
These reforms have been part of International Monetary Funds requirements since 2020 but their implementation has consistently been delayed due to political blockades.
In the midst of a deeply divided parliament, the prospect of ratifying such a law, if it is ever proposed, appears slim.
A dangerous precedent?
Experts have raised concerns that such a law could set a dangerous precedent.
Siham Rizkallah, professor of economics at Saint Joseph University in Beirut, told The National the central bank does not require a new law to lend to the state. It can also legally refuse to do so.
She said introducing a new law would serve as a “cover” for the bank's new leadership, shifting “responsibility on to the political class while pressuring them to implement the necessary reforms”.
“But it risks compromising BDL's independence,” she added, “as it will [override] the Code of Money and Credit, which ensures the autonomy of the central bank's monetary policy from budgetary concerns, the government and the Ministry of Finance”, she said.
“The ability to carry out monetary policy independent of political considerations is a cornerstone of effective central banking,” wrote financial expert Mike Azar on X, formerly known as Twitter.
“I’ve never seen a central bank wilfully undermine its own independence by asking for political interference in its fundamental prerogatives. If we set this precedent today, who is to say the parliament won’t pass a second law down the line to force the bank to keep lending to the [government]?”
This dynamic between the new central bank leadership and the state to deflect responsibility is a common recurrence in Lebanese politics.
The central bank had provided the political class with time to delay reforms by massively subsidising its expenditure, while allowing the economic elite to earn attractive returns on their deposits and banks to make comfortable profit, pushing the entire system into full collapse in 2019.