New regulations to protect bank solvency during Lebanon’s street protests are already impacting medical supplies and could soon create shortages of food and other essentials, according to business owners.
The highly indebted country was already in a precarious financial position before the protests shut down banks for several weeks, prompting many Lebanese businesses and individuals to try to withdraw their deposits and draw down credit lines on fears of future shortages.
In response, banks have imposed withdrawal limits, reduced credit lines and there is a growing shortage of hard currency needed for imports.
“I have a hospital now. Their CT scanner broke down and they needed a part. I couldn’t supply the part,” said Wassim Boustany, the owner of General Medical Equipment (GME), a distributor of medical equipment in Lebanon, at the time of the interview.
Businesses are now struggling to get hold of dollars for imports as the central bank restricts supply, so businesses have to resort to the black market where dollars cost 20-25 percent more than the official currency peg bracket of 1,507.5-1515 pounds to the dollar.
“I can’t afford to pay the loss of 25 percent, so the CT scanner is down now. [The hospital] is trying to get dollars from the bank, but I don’t know if they will succeed,” he explained.
Salma Assi, the business unit director at medical supplies importer Benta Trading, said spare parts for medical equipment were in short supply. “No one has spare parts in stock … there is equipment in the hospitals that are stopping because we don’t have parts to replace the old parts,” he said.
Businesses also report that their credit facilities have been drastically reduced and restrictions on transfers.
“Effectively we’re not able to operate, we’re not able to pay money abroad practically,” said Jeanine Ghosn, managing director of Gabriel Bocti, an independent food and beverage distributor.
Lebanon’s central bank governor Riad Salameh told reporters last week that authorities have “no desire” to impose capital controls – a phrase used to refer to a set of measures to limit the flow of foreign capital in and out of an economy.
Although authorities have yet to institute a formal system of capital controls, banks have been imposing de facto controls on customers as a way to preserve solvency. Last week the rating agency Standard & Poor’s noted that, “Notwithstanding unofficial capital controls imposed by banks, we expect deposit outflows to accelerate during the rest of the year … The recent imposition of restrictions on foreign-currency deposit withdrawals by banks raises questions about the monetary and banking regime.”
The Association of Banks in Lebanon on Sunday said that the transfer of hard currency abroad should be only to cover “urgent personal expenses,” while banks were also told to limit weekly withdrawals from US dollar accounts to $1,000.
Businesses have been unable to pay their overseas suppliers and have had orders stuck at the border, as it now appears cash is now required to pay for customs. One importer reported being able to use a cashier check.
Credit facilities – a crucial cog in the trade finance machine – have been cut or halted completely by banks, often without warning.
“The cancelation of overdraft facilities and credit lines has resulted in a halt of transfer of funds. We cannot transfer funds,” Boustany explained.
The situation has been further exacerbated by banks restricting access to cash – regardless of client deposits. “We have euros, dollars, and lira in the account, and they’re not sending our transfers,” said Joe Abdallah, the chairman of food distributor Moussallem & Partners.
“There’s no capital controls officially, but this will make us lose credibility with our suppliers eventually because the official line is something, but the reality is completely different,” Ghosn said.
Many importers believe that serious food and medical supply shortages could emerge within a few weeks as imports begin to dry up. The country relies heavily on imports – the UN Food and Agriculture Organization estimates Lebanon needs to import 80 percent of its cereal grain crop consumption.
This system of ad hoc banking policies, similar to formal capital controls, disproportionately affect regular banking clientele, according to Jamil Chaya, assistant professor in finance at Rafik Hariri University. Bigger and better-connected clients have more access to circumnavigate these controls and access financial instruments, with small and medium-sized businesses and lower and middle-income households hit worst.
Several businesses report their relationships with banks have come under strain. “The banks in Lebanon used to help us, and now everything has suddenly stopped,” Boustany said.
Despite the harmful effects of the restrictions, Lebanese banks are in a difficult position. In his televised address last week, Salameh noted that people have withdrawn $3 billion from banks due to economic fears. Financial institutions do not maintain a supply of cash for all of the deposits on their books, meaning that a bank faces serious risk should an escalating situation of withdrawals ensue, as customers demand more cash than the bank has on hand – which could force it to collapse.
“Banks do need some form of capital controls, because it is true that there are a lot of withdrawals … Unusual times call for unusual measures, and countries have used capital controls to get out of hard times,” noted Chaya.
This will come, however, as little comfort to those businesses and individuals that are suffering serious financial burden.
“I’m from the generation of the war, and we faced a lot of war and crisis, and I’ve never seen anything like this. Even under the bombs, the banks would open one to two hours a day,” added Salma Assi.