IMF: No to Capital Controls
without a broader reform plan

Central Bank directive allowing

withdrawals in dollar and lira may stoke inflation

The International Monetary Fund (IMF) said it does not see the need for Lebanon to implement a capital control law without subsidy or appropriate fiscal and exchange rate policies.

Gerry Rice, spokesperson for the IMF, said a capital control law that Parliament is nearly done drafting should be part of a broader package of reforms and appropriate fiscal monetary measures. “We don’t see the need to implement a capital control law. No, especially without the support of appropriate fiscal monetary and exchange rate policies,” he said.

The IMF said that the Central Bank’s (BDL) decision allowing depositors to withdraw funds partly in dollars risks causing further inflation.

Rice said it is not clear how the withdrawals would be financed given the scarcity of foreign currency amid the country’s economic crisis, and the need to continue financing imports of goods and services. “There is also a serious risk that the amount of liras in circulation would increase further from already very high growth rates, thus adding both to inflationary pressures, and to the depreciation of the lira, which would be highly detrimental to standards of living,” he said. BDL has required banks to allow their clients to withdraw a maximum amount from their deposits half in dollars and half in liras, based on an exchange rate set by Sayrafa, BDL’s currency exchange platform, currently at LL12,000 to the dollar.

Lebanon must learn the lessons of the past in developing a comprehensive reform program, said Jihad Azour, Middle East and Central Asia Director at IMF, and former Minister of Finance. “Unfortunately after the explosion last year, the government resigned and we are waiting for a new one to be formed,” he said. “We look forward as soon as the government is formed to re-engage to see how we could help address a challenging situation and also build on the capacity of Lebanon to bounce back. What Lebanon needs is a comprehensive reform program. It requires a different kind of policy mix both on the fiscal and monetary front. There are a certain amount of lessons from the past that need to be taken into consideration going forward. This cannot be done without strong support from the international community,” Azour said.

Members of Parliament are awaiting recommendations from the IMF to include in a draft law which blocks capital transfers from Lebanon for all but limited cases. The restrictions would not apply to funds transferred into Lebanon since Oct. 17, 2019. “The draft capital law aims to protect what is left of Lebanon’s hard currency reserves,” said MP Alain Aoun. The draft law allows annual transfers of up to $50,000 for such purposes as paying medical bills, loans, foreign taxes and the purchase of essential goods. It would be in place for one year and could be extended. “We have to integrate many remarks, including from the IMF,” Aoun said. “We were informed by the government’s negotiation team that the IMF has some input,” he said. “We will be working on it in the coming two weeks, maybe more.” The government discussed the law during talks with the IMF on Wednesday, according to the Ministry of Finance.