BDL deputy governors' priority: Will capital controls be successfully adopted and effective when enacted?

The concept of "capital controls" is linked to measures taken by a state, central bank, or other economic and financial regulatory bodies to control bank withdrawals and overseas transfers during times of crisis.

In other words, these measures aim to limit the flow of foreign capital in and out of the local economy.

This article was originally published in and translated from the Lebanese newspaper Nidaa Al-Watan.

Since the onset of the economic and financial crisis in 2019, Lebanon has witnessed a significant outflow of funds and bank deposits abroad, leading to a depletion of the central bank's foreign currency reserves and exacerbating the crisis.

After years of crisis, the four deputy governors of the Central Bank of Lebanon have called for implementing "capital controls" to initiate the necessary reforms. Will this law be successfully adopted and effective when enacted?

Following the end of the term of Central Bank Governor Riad Salameh, the deputies of the governor laid out conditions for lending to the Lebanese state. These conditions include implementing financial reforms within a specified timeframe of six months. This includes passing the "capital controls" bill and the 2023 budget, followed by projects to rebalance the financial sector and restructure the banking sector.

The International Monetary Fund (IMF) has consistently advocated for implementing "capital controls" since the early days of the crisis to prevent further financial and monetary collapse.

After a portion of funds and deposits were smuggled abroad at the start of the crisis, Lebanon's "capital controls" law's primary goal was preserving the remaining funds and deposits within the country. This aims to protect what is left of the central bank's foreign currency reserves, restore liquidity to the banking sector, and safeguard depositors.

However, the IMF's stance has been clear that implementing this law after all this time without a comprehensive economic reform plan would render it ineffective. They suggest it should only be adopted within a complete, gradually applied reform package.

The approval of the "capital controls" bill is still subject to repeated delays due to its postponement for voting in the parliament's general assembly. Supporters of the bill claim that it is essential to safeguard depositors' rights and shield banks from lawsuits, especially those filed abroad.

On the other hand, opponents cite specific observations and evidence that make these measures potentially ineffective, particularly in the Lebanese context.

According to financial sources, adopting the "capital controls" law after four years of money smuggling abroad enables banks to restructure their deposits. It also aims to reduce legal risks for the banking sector.

The proposed "capital controls" project in Lebanon applies to all accounts created before November 17, 2019. Accounts created after this date would not be affected. In this case, passing the law wouldn't make sense as it does not include dollar accounts as well, according to financial sources.

The significance of "capital controls" lies in allowing the remaining dollars in the Lebanese financial system to be utilized according to priority directly related to the crisis for one year, as stipulated in the bill.

This project proposes exceptional and temporary solutions to introduce gradual controls to restrict the use of dollars and direct them toward urgent priorities. However, the question remains whether these restrictions can be borne effectively.