Lebanon's cash economy: Challenges and efforts to reform

When was the last time you could move around Lebanon and make purchases with just a debit card? Or seamlessly transfer funds from one bank to another or even pay with checks instead of carrying a stack of money? It has been about four years. 

Before the 2019 crisis, most financial transactions in Lebanon were conducted through banks. 

However, due to the loss of trust in the banking sector and the local currency, cash has taken over, leading to the dominance of the cash economy.

In numbers, according to the World Bank, the size of the dollar-based cash economy reached approximately $9.9 billion in 2022, nearly half the size of Lebanon's economy. This represents a significant increase from 14 percent of the economy in 2020 and 27 percent in 2021. This upward trend poses tremendous risks to citizens, the country, and its economy.

1. Tax evasion becomes easier: With the prevalence of the cash economy, tax evasion becomes more convenient. For example, when companies and merchants conduct transactions in cash, they can underreport their income to the government. Therefore, the state treasury loses its tax revenues. Furthermore, since cash transactions occur outside the banking sector and lack documented records, auditing becomes challenging, increasing border smuggling and customs invoice fraud.

2. Facilitating money laundering: The cash economy facilitates the laundering of corrupt funds. For instance, it is difficult to trace the source of funds for illicit activities when transactions are conducted in cash. In contrast, banks must provide transparent records of the origins of funds for every transaction, complying with international anti-money laundering laws. This issue was one of the reasons Lebanon came close to being placed on the Financial Action Task Force (FATF) gray list before being granted a one-year extension to address its shortcomings.

3. Hindering economic growth: An economy heavily reliant on cash cannot quickly recover, grow, or create job opportunities. For example, obtaining loans for expanding businesses becomes much more challenging without a functioning banking sector.

4. Loss of Central Bank control: The central banks often intervene in markets through banks to regulate interest rates and stabilize exchange rates. However, the BDL has lost much influence due to the weakened banking sector. Worse still, its attempt to control the cash economy through the Sayrafa platform resulted in market chaos, increased speculation, and favored a select few who profited from the price difference between the platform and the parallel market.

As a result, we are witnessing chaos, a lack of transparency, control, and the ability to track dollars. The international community has raised alarm bells about Lebanon's cash economy, leading to reluctance among foreign investors and financial institutions to engage with the country. 

Can the state successfully combat the cash economy through laws and measures subject to international monitoring?