Lebanon's informal capital controls explained: Why can't Lebanese access their money?

Transferring money abroad from Lebanon has become nearly impossible.

“They have found a way to put obstacles in our path in every way possible,” said a Lebanese final-year medical student while trying to transfer money abroad to cover his tuition and living expenses.

Karim is one of hundreds of students who are pursuing degrees abroad and have hit hurdles while trying to transfer money out of Lebanon. Students aren’t the only people affected. Ad hoc – and illegal – capital controls have made a once mundane task burdensome as banks have put locks on depositors savings. The only people who don’t seem to be affected are politicians and the politically connected.

Capital controls are defined as lawful measures that are implemented to regulate the flow of foreign currency transactions in and out of a country’s domestic economy. They’re typically used during an economic crisis to prevent the extraction of remaining funds from a struggling economy. In 2015, during Greece’s economic crisis, the country implemented capital control measures that were not fully lifted until 2019.

Why does Lebanon need capital controls?

To protect the remaining dwindling foreign currency reserves and avoid further depreciation of the Lebanese lira in the parallel market, lawful capital control measures must be put in place, experts say.

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For many years now, Lebanon has followed a rentier model in which the ruling elite group lives off income from property and investments. The country highly relies on external sources for revenue and thus does not have a strong domestic productive sector. The Lebanese economy has been fueled by unsustainably high interest rates for years and has been boosted with the occasional injection of massive international funds, but this model is no longer feasible according to Finance 4 Lebanon, an expert-led blog on the Lebanese financial crisis.

Where Lebanon imports a lot and exports a little, the country’s foreign reserves have dried up quickly as the main methods of cash flow have stopped.

This imbalance contributed to the current dollar shortage, which triggered a public run on the banks in the last quarter of 2019.

Read more:

Cash-strapped Lebanon to probe ‘suspicious’ capital flight

Rich Lebanese hoarding cash despite capital controls

To regulate this outpour of foreign capital, the Lebanese ruling class should’ve quickly implemented capital control measures, experts say.

Despite a much-awaited draft law for capital controls being presented in June 2020 and later in September 2020, it has yet to be passed. The law, presented by the International Monetary Fund (IMF) as a prerequisite for reform and a condition for aid, is still on the table. But as Lebanon’s economy slides further into the abyss, de facto capital controls are still in place.

Did Lebanon’s ruling class implement capital controls?

Legally, no.

These de facto measures illegally limit the public’s access to their own money and savings, while making exceptions for the powerful and politically connected.

An anti-government protester shouts slogans while wearing a mask with the colors of the Lebanese flag in Beirut, Lebanon, Thursday, July 2, 2020. (AP)

By early September 2019, as Lebanon began to feel the blow of its fast-coming economic downfall, Lebanese depositors were denied access to their dollars through ATMs, and banks had started imposing arbitrary cash withdrawal limits. Informal capital control measures persisted when Lebanese banks closed down mid-October after becoming the target of public rage in nationwide protests. When banks reopened at the beginning of November, depositors were left at the mercy of their discretionary choices in the absence of any parliamentary regulations.

On the other hand, the ruling class and their in-crowd were merely one “wasta” – the Lebanese slang word for nepotism – away from moving their money as they please, said former chairman and CEO of Standard Chartered Bank Dan Azzi.

Read more: Ex-Lebanese president Émile Lahoud decries capital controls, can only withdraw $1,000

According to Azzi, one politically exposed person (PPE) was able to transfer $273 million from one of Lebanon’s top banks in December 2019, i.e. after de facto capital control measures were implemented. He explained that this is equivalent to the tuition of 27,000 students under the new Student Dollar Circular, which allows for a one-time transfer of $10,000 per year at the official exchange rate of 1,515 Lebanese pounds to the dollar; it applies only to students who began their studies abroad before the academic year 2020-2021.

“Every person who blocked this law was on the wrong side of history and criminally negligent,” Azzi continued.

Who blocked the capital control law?

“Kellon ya3ne kellon,” said a confidential source from the Association of Banks in Lebanon in reference to the popular slogan of the October 17 revolution which translates to “all of them means all of them.”

“They all have a shared responsibility,” the source said.

Despite the initial opposition of capital control measures for fear of harming Lebanon’s free economy, central bank Governor Riad Salameh later agreed to the de facto arrangements and tried to standardize them, issuing one central bank circular after the other.

Many of the ruling parties also opposed capital control measures, explained Azzi, and despite a promise made by former Prime Minister Hassan Diab’s government to legally impose capital control, it never happened.

Lebanon’s Central Bank Governor Riad Salameh speaks to a reporter at his office in Beirut on December 15, 2017. (AFP)

But Lebanon never had the luxury of choosing whether or not capital controls would be implemented.

It was inevitable, the ABL source said.

“There’s a reality limitation,” he explained. “People have deposits but banks don’t have enough money to give back these deposits.”

What happens now?

Even if capital control measures are passed now, according to Azzi, it’s not enough. Without financial and economic reforms, capital control laws are not enough.

Read more: Lebanon central bank governor says he hopes depositors will recuperate their money

According to the ABL source, capital control is merely a temporary fix to regulate the distribution of Lebanon’s scarce capital. They work as a “sedative,” rather than a long-term fix. But the source added that they must be in place to help pull Lebanon out of its rut.

If capital controls are put in place, the next step would be to improve the economy and focus on creating a productive and more self-sufficient economy.

However, without capital controls in place, ongoing abuse of the system, and a political class that shows no will to reform, Lebanese people will continue to bear the brunt of the crisis.