IMF presses Lebanon on banking reform

Lebanon must overhaul its shattered banking system and implement long-delayed structural reforms to restore sustainable growth, the International Monetary Fund has warned, arguing that piecemeal measures will not be enough to stabilise an economy that has endured one of the deepest contractions in modern history.

Following its latest assessment of the country’s economy, the IMF said comprehensive action is required to restructure commercial banks, address large financial sector losses and rebuild confidence in the monetary framework. While parts of the economy have shown signs of resilience, particularly through tourism and remittance inflows, the Fund cautioned that growth will remain fragile without decisive policy changes.

Lebanon’s crisis, which erupted in 2019 after years of fiscal mismanagement and a fixed exchange rate regime that became unsustainable, has seen the local currency lose more than 98 per cent of its value against the US dollar. Gross domestic product has contracted by around 40 per cent since the onset of the turmoil, according to international financial institutions, wiping out savings and pushing a large share of the population into poverty.

The IMF has long linked any financial assistance to reforms, including a comprehensive banking sector restructuring plan, formal capital controls legislation, exchange rate unification and improvements in fiscal governance. A staff-level agreement reached in April 2022 for a $3 billion Extended Fund Facility remains contingent on these measures being enacted by parliament and implemented credibly.

At the core of the IMF’s concerns is the scale of losses in Lebanon’s financial system, stemming from sovereign debt exposure and central bank liabilities. The Fund has repeatedly said that losses must be recognised transparently and allocated in a way that protects small depositors while ensuring that shareholders and large creditors bear an appropriate share. Without such a framework, confidence in banks is unlikely to return, and private investment will remain subdued.

Interim central bank leadership under Wassim Mansouri, who assumed responsibilities after the end of Riad Salameh’s three-decade tenure in July 2023, has sought to maintain relative exchange rate stability and curb excessive monetary financing. However, the IMF maintains that deeper institutional reforms are needed to strengthen central bank governance, enhance transparency and restore credibility. Salameh, who faces multiple investigations at home and abroad over alleged financial crimes, was arrested by Lebanese authorities in 2024, adding to scrutiny of past financial practices.

Despite the depth of the crisis, certain sectors have shown capacity to generate activity. Tourism rebounded strongly during the summer season in 2023, buoyed by visits from the diaspora and Gulf travellers, providing a temporary boost to foreign currency inflows. Restaurants, hotels and retail outlets in Beirut and coastal areas reported higher occupancy rates compared with previous years of economic paralysis. Remittances from expatriates have also remained a critical lifeline, supporting household consumption.

Yet these gains are vulnerable to regional tensions. Cross-border hostilities linked to the conflict between Israel and Hezbollah have weighed on investor sentiment and dampened travel flows to southern areas. The IMF has noted that geopolitical risks add another layer of uncertainty to an already fragile outlook, making structural reform even more urgent.

Fiscal reform remains another pillar of the Fund’s recommendations. Lebanon defaulted on its Eurobond debt in March 2020 and has yet to complete a comprehensive debt restructuring with external creditors. Public finances continue to operate with limited transparency, and revenue collection has been hampered by the collapse of the tax base in real terms. The IMF has called for a credible medium-term fiscal framework, improved tax administration and stronger social safety nets to shield vulnerable households from adjustment costs.

Exchange rate policy has undergone partial changes, with the authorities moving towards greater flexibility and narrowing the gap between official and parallel market rates. However, multiple rates and ad hoc measures have in the past created distortions and opportunities for arbitrage. Full unification under a coherent monetary strategy, the Fund argues, would reduce uncertainty and help anchor inflation expectations, which have been volatile since the crisis began.

Political fragmentation continues to slow legislative progress. Lebanon has faced prolonged institutional deadlock, including a vacancy in the presidency and a caretaker government with limited authority to push through contentious reforms. The IMF has stressed that broad political consensus is essential to enact laws on bank restructuring, capital controls and anti-corruption measures.