Protesters chant slogans as as they demonstrate outside Lebanon’s central bank during ongoing anti-government protests in Beirut, Lebanon November 11, 2019.
Dollar loans have to be repaid in the same currency, which is especially difficult because there is a hard currency squeeze in Lebanon. With big banks’ websites showing the annual interest on some loans is about 27%, any people are in dire straits. But the imposition by banks of controls on dollar withdrawals and transfers overseas has failed to rebuild confidence.
“This, the ad hoc approach to imposing capital controls and the erosion of their capital buffers means banks will not be able to attract deposits or credit lines and therefore will be less and less able to fund the government’s current account deficit, piling pressure on central bank reserves.”The protests that have swept Lebanon for weeks are fueled by anger at the establishment and perceived corruption but lack of faith in the financial system is also an important factor.
Capital inflows have in the past acted as lifeblood to banks and the government. But the funneling of dollar liquidity from banks to the central bank to bridge the government’s funding gap – a process called “financial engineering” – has also broken.