Lebanon’s Financial Gap Law is stuck between what the government has drafted and what the IMF will accept. The Fund wants a depositor-recovery framework that operates within the liquidity banks actually have, protects the hierarchy of claims, and doesn’t dump old banking losses onto the sovereign. On all three markers, Beirut’s current draft still falls short.

The gap is first of all a capital gap. According to the government’s current draft of the Financial Stabilization and Deposit Recovery Law (also known as the Financial Gap Law), deposits of up to USD 100k in cash would be repaid over four years. But simulations put the total cash requirement at about USD 22 bn, far more than the Central Bank and commercial banks currently have available, Nassib Ghobril, chief economist at Byblos Bank, tells EnterpriseAM.

The Fund made its position clear after a four-day mission in September, telling Beirut it needs a deposit-recovery framework that can operate within liquidity available to the banking system, preserve viable banks, respect the hierarchy of claims and avoid an unsustainable burden on the state. “Essentially, the IMF is saying you have to have a law that is applicable, not just to have a law. And therefore, it needs to be consistent with the liquidity available in the central bank or in the banking sector,” Ghobril says.

The burden-sharing in the draft tilts toward the central bank. Under the current draft, Ghobril explains, Banque du Liban would assume 60% of the cash component for deposits up to USD 100k over four years, while commercial banks would cover the remaining 40%. For deposits above USD 100k, the central bank would issue asset-backed securities backed by its revenues. “The central bank said publicly through its governor that it’s ready to divest all the assets under its control in order to generate the liquidity it needs to meet its obligations under the law,” Ghobril says.

Commercial banks would have to do their own selling to meet their side of the bill by offloading foreign-currency assets, overseas branches, and affiliates abroad. If a bank lacks the resources to meet its obligations, it could be taken over by the Central Bank of Lebanon, which would then assume the payments, according to Ghobril.

The real argument is over how much the state itself has to put in. The central bank wants the state to take on substantially more of the recapitalization burden, while the IMF wants the state’s obligations clearly defined in the law, Ali Noureddeen, a senior associate at the Tahrir Institute for Middle East Policy (TIMEP) focused on Lebanon’s fiscal and socioeconomic policy, tells EnterpriseAM. “The Financial Gap Law in its current form does not specify a specific value. It says the state has an obligation regarding recapitalization and left things open, under the ceiling of debt sustainability,” Noureddeen said.

The IMF is warning Lebanon against piling old banking losses onto the sovereign for practical reasons, because an IMF loan would itself create obligations that the state must eventually repay. “If Lebanon reaches an agreement with the IMF, the Fund will lend Lebanon USD 3-4 bn. That will open the door to additional concessionary lending in total about USD 8-10 bn. So, in the view of the IMF, Lebanon needs to be able to repay these loans, especially the loan to the IMF, and cannot assume previous old liabilities,” Ghobril says.

Lebanon’s room to absorb those liabilities has narrowed further due to the war burden. The World Bank expects the economy to contract 6.4% in 2026 after expanding 4.2% in 2025, with inflation at 17.5%. It also said renewed conflict reduced its 2026 growth projection by 10.4 percentage points compared with a no-conflict scenario. “War reduces the future debt capacity of the state because the state will have to spend money on recovery and reconstruction. So, basically, the capacity of the state to recapitalize Banque du Liban has decreased after the war,” Noureddeen says.

Then there’s the question of who takes the losses first. The IMF wants the hierarchy of claims applied clearly: Bank capital and shareholders take losses first, followed by other lower-ranking claims, with deposits protected up to a defined limit. In practice, that is a wipeout for existing bank equity — and shareholders would have to inject new capital if they want to retain control of viable banks.

That would essentially do a full restructuring of the banking sector. “If the law passes, each bank will absorb what they consider losses, which are the deposits of banks in the Central Bank. And they will then see how much these losses are. That will wipe out the capital of all the banks to begin with, assess what banks can survive this exercise, which banks have shareholders who are ready to recapitalize, what the recapitalization needs of each bank are, and how much liquidity each bank has or can source,” Ghobril explains to us.

One main contested issue is the roughly USD 20-25 bn of deposits converted from LBP to USD after October 2019. Some parties have argued these should be treated as “irregular deposits” and excluded from the normal hierarchy, but the IMF has rejected that approach, according to Ghobril, arguing that exceptions would undermine the principle that shareholders absorb losses first before depositors. “The IMF wants a very clear hierarchy of claims,” Noureddeen says. “So we start by striking off the capital of the banks, the rights of bank shareholders, and they are asked to secure additional capital, and all deposits are guaranteed up to a maximum limit.”

The Financial Gap Law follows that hierarchy, but Banque du Liban is seeking exceptions that the IMF is wary of, Noureddeen says. These include treating capital injected by bank owners after 1 October, 2019 as new capital that would not be written off, as well as removing deposits considered “irregular assets” before applying the hierarchy.

The companion reform is now wobbling, too. The Bank Resolution Law, which the IMF had welcomed as a major step forward, was thrown back into question right after Prime Minister Nawaf Salam and Finance Minister Yassine Jaber met IMF Chief Kristalina Georgieva in Washington. President Joseph Aoun has appealed Article 3 to the Constitutional Council, objecting to the provision’s treatment of the Code of Money and Credit and its implications for the central bank’s future powers and independence.

A reform welcomed abroad is being contested at home. “This creates an unusual situation. One of the main reforms that Lebanon’s international partners had just welcomed as an important achievement is once again being challenged domestically. Depending on the Constitutional Council’s decision, parts of the framework may have to be revisited,” Sibylle Rizk, Director of Public Policies at Kulluna Irada advocacy group, tells EnterpriseAM. That adds a layer of uncertainty before the Financial Gap Law even reaches Parliament, and underlines continuing institutional disagreements over the architecture and governance of bank restructuring, Rizk says.

Bank owners have the most to lose from a clean hierarchy, Noureddeen says. “The hierarchy of claims means writing off the contributions of bank owners, their capital, and if they want to retain ownership of their banks, they have to provide new equity; they have to re-inject new contributions into the bank. It is a big cost,” he adds.

But the delays are not good politics. The law will determine how quickly depositors recover their money and how much they can realistically expect to receive, which creates pushback on some aspects of reforms because “people just want their money back,” Noureddeen tells us.

And the state is already paying into the system, just not on the books. “Taxpayers are indirectly financing BDL’s circulars that determine payouts to depositors, which should amount to around USD 8 bn cumulatively by the end of the year,” Rizk says. “But this contribution is taking place in a very opaque manner: there is no explicit budget line identifying this fiscal contribution.”

The process so far has worked for the banks. Rizk says the policymaking process remains weighted toward banks and other private financial interests, while depositors and the wider public have had far less influence over decisions. “Delaying restructuring has allowed existing bank shareholders to remain in control while banks gradually cleaned up their balance sheets, and it has shifted an increasing share of the losses onto depositors and the wider public,” Rizk says.

The next procedural step is clear; the timing is not. The government committee is expected to send amendments to Parliament, after which the bill would go to the Budget and Finance Committee, Ghobril says, but the timeline on that step is still unclear. The bigger risk, Ghobril adds, is Parliament picking up the law before the executive and the central bank have squared off their own differences. “If there is agreement between the monetary authority and the executive authority, the higher executive, on this issue, there won’t be too much debate. But if we enter the debate while they are still disagreeing, it will be chaos,” Noureddeen said.

That’s why Parliament is now squeezed from both sides — bank owners on one, international partners demanding a financially credible restructuring on the other. “In Parliament, of course there is influence by the banking lobby, but there is also influence from external pressure. Foreign countries, the international community, the IMF, and the World Bank have influence as well in Parliament,” Noureddeen says.