Governor of Banque du Liban: A banking system cannot be rebuilt on distressed assets and insufficient capital

Banque du Liban Governor Karim Souaid said that Lebanon’s economic crisis is not as complex as it is the result of accumulated imbalances caused by the absence of fiscal discipline and poor monetary management, noting that recent government policies represent a step in the right direction but remain insufficient to achieve a full recovery.

He explained that “Lebanon’s economic crisis is often described as complex, but it is not. Rather, it is the expected outcome of the lack of fiscal discipline by inept governments, poor monetary management by the central bank, and the concentrated misallocation of private sector savings into the banking sector.”

He said that “the recent adjustments in government policies are moving the country in the right direction. Public finances have improved significantly as a result of increased tax collection and spending restraint, and this is essential, but it is not enough to address the obstacles to recovery.”

He continued: “Losses must be distributed among the main stakeholders — the state, the central bank, and commercial banks — before a recovery path can take shape.”

He pointed out that “prioritizing small depositors, who make up the overwhelming majority of accounts — around 90 percent — is an economically rational choice and a social necessity.”

He stressed that “a banking system cannot be rebuilt on distressed assets and insufficient capital. It must be recapitalized through the injection of fresh capital or downsized radically to reflect economic reality. Any middle-ground option would only prolong the recession.”

He added that “the International Monetary Fund is conducting intensive negotiations with the government aimed at reaching a constructive resolution plan, and this may be the last credible path to entrench reforms and achieve sustainable recovery. Lebanon does not have much room to impose counter-conditions.”

He said: “The choice facing the international community is clear: either support a reformist government now, or delay assistance and risk a more fragile and turbulent reality after the repercussions of the conflict have worsened. Without bridge financing, even good reforms may be drained before they bear fruit.”