LEBANON: An Introduction to Corporate & Finance

Lebanon: Overview Amid the Economic Crisis 

Status Report at a Glance 

Since 17 October 2019, Lebanon has been facing an unprecedented economic, monetary, financial, and banking crisis, in addition to the COVID-19 pandemic that emerged in the country in February 2020, and the decision of the Government in March 2020 to suspend the payment of its foreign currency-denominated sovereign bonds (Eurobonds) and seek the restructuring of its debt according to the national interest and in consideration of the aforementioned crisis.

The Beirut Port explosion of August 2020 also worsened the already deep crisis by causing damages valued in billions of US dollars.

Since then, many attempts have been made and discussed between the Lebanese Government and international financial organizations such as the International Monetary Fund and the World Bank, in order to ensure a rescue plan for Lebanon.

The crisis has primarily affected the banking sector; the inability of Lebanese banks - since 17 October 2019 - to honour their obligations in foreign currencies, has led to the creation of a parallel exchange market piloted by moneychangers, where all foreign currencies and mainly US dollars are being sold depending on a daily fluctuating rate, which has often exceeded 20 times the exchange rate adopted by the Lebanese Central Bank (BDL) (the “official rate”). Additionally, the banking sector has ceased its lending activity and hardly accepts new deposits.

BDL has been trying since to manage this situation and contain the parallel exchange market by issuing several circulars and decisions with the aim to organize the withdrawal by depositors of funds in foreign currencies, which has taken the form of a de facto capital control, and has created many forms of locally used currencies and rates, including (a) real US dollars, (b) the Lebanese pound (at the Official Rate), (c) the bank dollar also known as 'lollar' and (d) the “Sayrafa” rate which is the daily exchange rate of US dollars v Lebanese pounds published on a platform created by BDL.

On the social level, Lebanese people have been suffering from the soaring prices of certain products on the market, the unavailability of other products and more importantly the impossibility of full and free access to their deposits in Lebanese banks, which has caused poverty and social instability.

De facto Capital Control: The Main Hurdle 

The biggest hurdle that Lebanese residents have faced and are still facing is the de facto capital control that has severely limited withdrawals of cash in foreign currency, and sometimes in Lebanese currency, and has hindered Lebanese and foreign entities from undertaking cross-border money transfers from their bank accounts.

In fact, without publicly naming it as capital control or voting a proper law in this respect, and since the beginning of the economic crisis, BDL has issued many decisions and circulars, under the provisions of which it has adopted certain measures in relation to the withdrawal of deposits in foreign currency or the cross-border transfer of such deposits.

The latest decision issued by BDL in this respect was Basic Circular No. 161 which entered into force on 16 December 2021 and remains in full force and effect until 28 February 2022. Under the provisions of the above-mentioned circular, BDL has granted Lebanese banks US dollars in cash, according to the daily exchange rate published on Sayrafa. In return, banks are obliged to allow their clients withdrawals of limited amounts in US-dollar banknotes, however leaving to each bank the freedom to set its own limits regarding such withdrawals.

Also, and as part of BDL’s attempt to fight the established parallel exchange market, it has issued on 28 April 2021 Basic Circular No. 157 under the provisions of which, banks can undertake exchange operations according to the free market rate, in order to ensure the commercial and personal needs of their clients of all categories, through inter alia the purchase of banknotes in Lebanese pounds from their clients against foreign currencies to be paid cross-border or deposited in “fresh accounts” opened in Lebanon, computed according to Sayrafa daily rate. This has allowed mainly companies and businesses working in the retail sector to have access to foreign currencies and transfer such amounts abroad in order to secure the import of merchandise.

Numerous Opportunities Against all Odds 

The economic crisis described above had heavy consequences for some foreign companies due to the impossibility of any, or at least a highly restricted cross-border transfer of funds from Lebanon, leading to the shutting down of their businesses in the country. Many other foreign and local companies, having access to real US dollars, have succeeded in negotiating debt restructurings and/or early settlement under favourable financial terms (i.e. totally or partially settling their debts in lollars, Lebanese pounds or at a favourable multiplier, depending on the negotiations with each concerned bank).

Companies have also benefited from the fact that all taxes and other impositions, and in general any and all amounts that are due to public administrations (i.e. the Ministry of Finance, National Social Security Fund, Real Estate Registry, Commercial Registry, etc.) are still, at the time of writing, calculated on the basis of the official rate.

In addition, Law No. 160 dated 8 May 2020 has suspended the exercise of rights in contractual and judicial deadlines at the level of the public and the private sectors, including all administrative deadlines. This law was extended many times, the last extension being through Law No. 257 dated 5 January 2022, whereby inter alia, all bank loan terms and related penalties, as well as all taxes and fees, were suspended until 31 March 2022, and consequently no penalties apply during this period.

This has created opportunities for businesses to settle their outstanding dues towards Lebanese administrations, at a fraction of the cost originally owing, and without incurring any penalties in the event of late settlement.

This period has also witnessed a surge in the number of court claims and cases against Lebanese banks for repatriation and/or transfer of funds outside Lebanon, mainly by large depositors. The latest trend in jurisprudence has been inclined to confirm the duty of banks to transfer funds in foreign currencies in accordance with depositors’ instructions.

On the corporate level, the market has witnessed a number of high-profile restructurings including mergers, acquisitions and exits whereby buyers were able to negotiate favourable deals in terms of purchase price and control.

By way of example, a major acquisition was recently completed for the purchase of a majority stake in the largest Lebanese brewery from a foreign group which has retained a minority ownership in the target company.

Also, depositors having funds trapped in Lebanese banks have been seeking to invest in many types of distressed businesses as well as in real estate properties - the sector remaining a safe haven for investors.

Awaited Legislation 

In late 2021, a draft capital control law was submitted to the parliament and is still under discussion awaiting to be voted. There were also talks of a draft legislation tackling bank deposit discounts or what is commonly referred to as a “haircut law”.

Finally, at the time of writing, the public budget for 2022 is yet to be voted and is expected to have incidences on taxes, fees and outstanding dues to the public administrations, which will surely affect clients.