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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is governor of the central bank of Lebanon
Lebanon’s economic crisis is often described as complex. It is not. It is the predictable result of fiscal indiscipline by dilettante governments, monetary mismanagement by the central bank and the concentrated misallocation of private savings by the banking sector.
Recent policy adjustments by the government are moving the country in the right direction. Fiscal balances have improved, largely through higher tax collection and constrained spending. This is key, but not enough to resolve all impediments towards recovery.Â
The central bank’s proposed banking restructuring framework acknowledges an essential truth: losses must be allocated between principal stakeholders — the state, the central bank and the commercial banks — before a turnaround can take shape. The prioritisation of smaller depositors — the overwhelming majority of accounts at almost 90 per cent — is both economically rational and socially necessary.
A banking system cannot be rebuilt on impaired assets and inadequate capital. It must be recapitalised with fresh equity or seriously downsized, to reflect economic reality. Anything in between merely prolongs stagnation.
It is not surprising that a large share of economic activity has migrated to cash. When confidence in institutions declines, people revert to instruments they control directly. But a cash-based economy weakens tax collection, damages growth and facilitates illicit financial activity. Reversing this trend requires restoring trust in the formal banking system.
The central bank is supporting criminal and civil actions, at home and abroad, against former officials and banking principals implicated in systemic, sophisticated fraud. The objective is clear — reclaim this misappropriated money and uphold the rights of depositors whose funds have long borne the cost of such abuses.
Lebanon’s potential is not speculative. Its role as a regional hub for services — education, healthcare, finance — and trade is well documented. The question is not whether that role can be restored, but whether the conditions for its return will be allowed to re-emerge.
There is still one factor that no economic model can easily absorb: armed conflict. War brings uncertainty that deters investment, accelerates capital flight and erodes gains from policy reforms. Under such conditions, even sound economic measures yield diminished returns.
The central bank’s priorities — preserving our currency, maintaining basic state functions and providing phased repayments to depositors — are appropriate. But they operate within tight constraints. Without external support, adjustment will proceed, but more slowly and at greater social cost. The IMF is deeply engaged with the government in negotiations that aim towards a constructive resolution plan — arguably the last credible pathway to anchor reforms and a sustainable recovery. Lebanon has little room to impose any counter-conditions so the chance of an accord is rather positive.
International actors have provided sound advice in abundance. Friends and neighbours have offered support, in principle. However, financial support has been more limited. This reflects a familiar hesitation: a preference for policy correction before capital commitment. Yet stabilisation often requires both to proceed. Without a bridge, even well-designed reforms risk exhaustion before they take hold.
The choice facing the international community is clear: support a reform-driven government now or defer assistance and risk a far more destabilised reality, after conflict has taken its toll and without the assurance of the institutional capacity needed to implement it.
Economic outcomes are not determined by intentions. They are determined by constraints. Lebanon has reached the point where those constraints can no longer be ignored.
