Lebanon’s Cabinet Approves ‘Gap Law’ to Address Financial Crisis

Lebanon’s cabinet has taken a significant step in response to the ongoing financial crisis by approving a draft law aimed at facilitating the reimbursement of depositors. This initiative follows six harrowing years during which the Lebanese economy has faced one of the worst financial crises globally. The crisis began in 2019 when the Lebanese Lira started to plummet, leading banks to restrict access to funds. Many depositors, desperate to retrieve their money, resorted to extreme measures, including holding up bank branches.

Under the proposed “gap law,” which is expected to be signed by Prime Minister Nawaf Salam and the president before being sent to parliament for deliberation, depositors who have up to $100,000 in their accounts will receive their funds back within four years. This represents a marked improvement over previous proposals, which had suggested a repayment period of more than a decade. Notably, earlier plans from 2020 under former Prime Minister Hassan Diab included provisions for depositors to recover up to $500,000.

Fouad Debs, a lawyer and member of the Depositors Union, expressed disappointment over the current proposal, stating, “This was probably the biggest lost opportunity, and it was done to protect the banks.” The draft law also includes provisions for a comprehensive financial audit of banking operations, which Debs emphasized is necessary to ensure transparency.

While the draft law offers a pathway for some depositors to reclaim a portion of their assets, it has also drawn criticism for its limitations. The $100,000 cap applies per depositor rather than per account. This means that individuals with multiple accounts exceeding this threshold will still receive only $100,000 in cash, with any excess being compensated through bonds backed by the Central Bank of Lebanon.

The implications of the law raise questions about fairness and accountability. Although the draft law holds banks responsible for only 40 percent of withdrawals, many believe this does not adequately reflect their involvement in the financial crisis. Critics point out that during the crisis, banks continued to pay dividends to shareholders and bonuses to executives while depositors were denied access to their funds for everyday expenses.

The state is expected to cover the remaining “gap” between what banks owe depositors and what the financial system can deliver. Currently, estimates indicate this gap could be as much as $70 billion. The banks argue that the state should bear the financial burden, claiming they had entrusted their funds to the Central Bank of Lebanon, which subsequently mismanaged them. Debs contested this notion, stating that banks willingly placed depositors’ money with the central bank without consulting them.

To fund these repayments, the state will likely utilize public resources, with any remaining amounts being repaid through bonds linked to state assets, including Lebanon’s gold reserves. Critics have raised concerns that these state assets could be used to settle debts with vulture funds, thereby impacting the broader Lebanese population.

In an unusual alignment, the International Monetary Fund (IMF) has echoed the concerns of civil society, questioning the fairness of requiring depositors to bear the financial burden before addressing the obligations of bankers. Debs remarked, “The IMF is saying… ‘how can you make depositors pay before bankers?’” This statement highlights the ongoing tension between the ruling elite and the interests of ordinary citizens in Lebanon.

As Lebanon navigates this complex legislative landscape, the proposed “gap law” stands as a critical juncture in determining the future of its financial recovery and the potential restitution for millions of affected depositors.