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Proposed Capital Controls Law Under Fire in Lebanon

Ponzi Scheme

Proposed Capital Controls Law Under Fire in Lebanon

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In recent weeks, Lebanese citizens have held growing demonstrations against a proposed law that would institute further capital controls in the country, placing new restrictions on Lebanese citizens’ ability to withdraw money from their bank accounts.

The capital controls law comes nearly three years after the country’s devastating financial meltdown, which wiped out billions of dollars in Lebanese banks and plunged three-fourths of Lebanon into poverty. In the aftermath of the collapse, the country’s banks moved to impose their own internal capital controls by limiting the amount of money that could be withdrawn per day and restricting exchanges from Lebanese pounds to dollars to the country’s official exchange rate, well below its real exchange rate.

Before the financial collapse, the Banque du Liban, Lebanon’s central bank, had sought to stimulate the country’s financial sector by guaranteeing exceptionally high-interest rates to Lebanese commercial banks. In turn, the commercial banks offered similarly high-interest rates to depositors, lending their deposits to the central bank and making Lebanon one of the wealthiest countries in the Middle East. However, in the years leading up to the financial collapse, the high-interest rates had increasingly been paid for by the investments of new depositors—an arrangement that many observers compared to a Ponzi scheme. After the collapse, officials estimated that around $70 billion in Lebanese deposits had…

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