A legal approach to the current monetary crisis


As such, the question that arises is whether BDL had the power to set the exchange rate of the Lira or it overstepped the limits set out in the Law in its decision of 1997?

by Antoine Merheb and Jacques Noun -Source: Annahar

FILE – This Tuesday, Jan. 22, 2019 file photo, a man heads to the Lebanese central bank, in Beirut, Lebanon. (AP Photo).

On 24 May 1949, the first Monetary Law of the independence era was issued. This Law provided in Article 1 that: “The monetary unit is the Lebanese Lira, amount of which is set at 512.405 milligrams of pure gold, which is the price declared to the International Monetary Fund in 1947”, thus insisting on the intrinsic connection between the currency and its value.

The Monetary Law of 1949 remained in force until the issuance of the Code of Money and Credit (the “CMC”) in 1963, article 2 of which provides that: “The value of the Lebanese Lira in pure gold shall be determined by the law”.

Nonetheless, and as clarified by the deceased Joseph Oughourlian,1 who prepared the draft of the CMC, it was difficult in 1963 to determine the value of the Lira against gold and against the Dollar because the price of the Dollar on the free market was around 320 Piastres, whereas the value declared to the International Monetary Fund (the “IMF”) was 219 Piastres.

In order to avoid having two rates for the Lira against the Dollar, the legislator determined in Article 229 CMC the ‘provisional legal rate’ of the Lira to be the closest possible rate to the free market rate.2


In 1971, the United States of America decided to abolish the convertibility of the Dollar into gold, and in 1976 the gold standard was abandoned by the Jamaica Accords, which amended the Articles of Agreement of the IMF.

Seeing that Article 229 CMC had adopted the free market rate as the legal rate of the Lira, the system established under the CMC was able to endure several decades, until Banque du Liban (“BDL” or “the Bank”) decided towards the end of 1997 to adopt a fixed exchange rate for the Lebanese Lira against the Dollar, and this was termed the “official rate” of the Lebanese Lira.

As such, the question that arises is whether BDL – whose Central Council (composed of the Governor, his four Vice-Governors as well as the Directors-General of the Ministry of Finance and the Ministry of Economy) was granted the responsibility of determining the national monetary policy – had the power to set the exchange rate of the Lira or it overstepped the limits set out in the Law in its decision of 1997?

Indeed, the CMC conceded the mission of issuing the national currency to BDL (Article 10). As for the power to determine its price, it remained with the legislator and him alone, as can be clearly understood from Articles 2 and 229 CMC.

This has been confirmed by several legal studies, of which the most important is the consultation of the Committee of Consultations & Legislation at the Ministry of Justice issued under No. 881/1985 dated 09/10/1985 (published in the Committee’s Collection of Consultations, p. 11,252), which explicitly stated that: “It should be noted here that the determination of a new legal rate for the Lira necessitates the intervention of the legislator as provided for in Articles 2 and 229 of the Code of Money and Credit.”3

In fact, the mission assigned to BDL in relation to the currency is limited to issuing and safeguarding it, as provided for in Article 70 CMC, which adds that: “The Bank exercises to that end the powers conferred to it by this Law.”

The powers conferred to the Bank are determined in Article 75(1) CMC, which provides that: “The Bank resorts to the means it deems necessary to ensure the stability of the currency. To that end, it may particularly intervene on the market in agreement with the Minister of Finance in order to buy or sell gold and foreign currencies without prejudice to the provisions of Article 69.” Article 75(2) continues to state that: “The operations of the Bank concerning foreign currencies are recorded in a special account called the ‘Currency Stability Fund’.” As such, the assets of the Currency Stability Fund form the reserves for ensuring the stability of the currency.

Therefore, the means provided for in the CMC to stabilise the exchange rate of the Lira are limited to BDL intervening on the exchange market using the foreign currencies it possesses in the ‘Currency Stability Fund’ on one hand, and BDL working on affecting the liquidity of the banks on the other, pursuant to the provisions of Article 76 CMC to which the Central Bank resorted to after the mid-eighties.

Also, and in order to strengthen the role of BDL in suppressing speculation on the Lebanese Lira, the legislator issued Law No. 42 of 1987 that was replaced by Law No. 47 of 2001 which assigned to BDL the task of organizing and monitoring the profession of Money Changers instead of the Beirut Stock Exchange. However, BDL did not issue any decision to organize the rate of currencies on the free market until 10 June 2020.

In sum, Article 70(1) CMC, which grants BDL the right to use the means it deems appropriate to ensure the stability of the currency, does not grant it the power to determine the exchange rate of the Lebanese Lira because such determination is already provided for in Article 229 CMC.

BDL ignored Article 229 CMC, and in order to defend what it called the ‘official rate’ of the Lebanese Lira, it resorted to unfamiliar methods to attract deposits in US Dollars, notably through the financial engineerings described by the IMF as “unconventional”.

What is more dangerous is that BDL considered that the US Dollar deposits of the banks held with it are a part of its reserves for ensuring the stability of the currency, and which it has the right to use to uphold the official exchange rate, whereas the “reserves for ensuring the stability of the currency” are composed by law of the foreign currencies and the gold4  owned by the Central Bank, of the reserves of the State or of the Central Bank in foreign currencies held at the IMF and of the Drawing Rights on the IMF.

As for the deposits, even if their ownership is transferred to the Bank pursuant to the provisions of Article 307 of the Code of Commerce together with Article 691 of the Code of Obligations and Contracts, they are considered as loans which the Bank is obliged to return to the depositors upon demand or on due date.

What is even worse is that in order to attract deposits from the banks in US Dollars – which are the deposits of the people – the Central Bank paid the concerned banks very attractive interest rates, thus violating the provision of Article 98(2) CMC, which states that: “These accounts [that is, the accounts of the banks held with the Central Bank] do not generate interest.”

The only situation in which BDL is entitled to pay interest on the deposits of the banks held with it is the one mentioned in Article 76(f) CMC as one of the means that the Central Bank may resort to in order to “maintain the harmony between the banking liquidity and the volume of credit, and between its general mandate provided for in Article 70 [CMC]”.

Therefore, does BDL’s absorption of the bulk of the banks’ assets in Dollars, by granting interest at rates that by far exceed the average of international interest rates for the Dollar in order to uphold its ‘official rate’ for the Lira or in order to finance the deficit of the Treasur, has contributed to maintaining the harmony between the banking liquidity and the volume of credit on one hand and its general mandate (which includes, in addition to safeguarding the Lebanese currency, the mission of safeguarding the economic stability of the country and the well-being of the banking system) on the other?

The collapse in the exchange rate of the Lira, the collapse of the economy and the shaking of the banking sector are the answer.

Furthermore, if we were to consider that the purpose behind paying interest on the deposits of the banks to attract them was in conformity with Article 76 CMC, what then justifies the acceptance from the banks of long-term deposits that sometimes reached up to 9 years?

By accepting long-term deposits, the Central Bank has joined the banks in violating the provisions of Article 156 CMC, which requires the banks: “to respect in their use of the money that they receive from the people the rules that ensure the preservation of the people’s rights. In particular, they have to reconcile the duration of the investment with the nature of their resources.” This is because the Central Bank knew perfectly well that the average term of the deposits received by the banks from the people was 4 months.

In fact, the rule provided for in Article 156 is a mandatory rule. If the Courts recognise this, the long-term deposit contracts between the banks and BDL would be prone to being declared null and void.

It has been reported by some that sustaining the ‘official rate’ of the Lira has cost BDL around forty-four billion US Dollars taken from the money of depositors, but where did the balance of the deposits of the banks disappear?

The Governor of BDL declared on several occasions that BDL was obliged to lend money to the State to pay the chronic deficit in the budgets.

There is no doubt that these statements of the Governor regarding BDL lending money to the State, whether directly or by buying Treasury Bonds, are true.

However, was BDL obliged to lend money to the State, particularly when that money came from the depositors?

By consulting the CMC, particularly Articles 88 and the articles that follow, it becomes clear that, with the exception of “credit facilities that do not exceed 10 percent of the average of the revenue in the ordinary budget of the State over the last three closed financial years”, “the principle is that the Central Bank does not grant loans to the public sector”, as provided for in Article 90 CMC.

Article 91 CMC, which allows the Central Bank to lend money to the State “in exceptionally dangerous circumstances or in cases of absolute necessity”, requires that the principles determined in Articles 92 to 95 CMC be followed. These start with the examination of the request of the State and end with the referral of the request and of the loan agreement along with all the study files to the Parliament.

As for the indirect financing operations via the “open market”, they are regulated in Articles 100, 101 and 102 CMC which determine the prerequisites and the amounts of these operations.

Moreover, as long as the financial statements published by BDL are opaque and do not permit one to verify whether the Bank has abided by the provisions of the CMC or not, we must wait for the report of the financial and legal audit which is being spoken of.

Nonetheless – and irrespective of the results of this audit – if the Courts take up as theirs the position of the Committee of Legislation & Consultations at the Ministry of Justice and consider that setting an official rate for the Lira was in breach of the law, and that upholding this rate resulted in losses, the Courts will then have to determine the responsibilities, whether at the level of the Central Bank itself or at the level of the successive Councils of Ministers which should have supervised the Central Bank through the Government Commissariat at the Central Bank.

Indeed, Articles 41 to 46 inclusive CMC provide for the creation of a Government Commissariat to the Central Bank at the Ministry of Finance. According to Decree No. 16400 of 22 May 1964 and its amendments, the Commissariat is composed of a Council, a Monitoring and Supervision Department and a Research Department on matters related to money and credit. This Commissariat is assigned the mission of overseeing that the CMC is implemented, monitoring the accounts of the Central Bank and ensuring that the Bank respects the provisions of the CMC. It should also make sure that the Bank keeps among its assets a sufficient amount of gold and foreign currency whose percentage should not be less than the percentage required by Article 69 CMC.

Had the Commissariat been effectively present and active, had it not been transferred in such a dubious manner from the Ministry of Finance to the Central Bank itself (in such a way that its members now earn their salaries from the Central Bank) and had its members been well-qualified, the Government would not have needed today to resort to a financial and legal audit company.

Finally, and now that the catastrophe is upon us, the question remains to know who should bear the losses?

In a legal approach, one should rely on Article 113 CMC when it comes to the losses of BDL, and on the Code of Commerce and the other laws that pertain to banks when it comes to commercial banks.

Regarding BDL, Article 113 CMC expressly provides that any deficit in its budget shall be covered by the general reserves of the Bank, and if they do not exist or are insufficient, the loss shall be covered by the Treasury. However, the text does not mention what happens if the Treasury itself is unable to cover the deficit.

As for the commercial banks, one should examine the legal provisions which govern this matter. According to Law No. 2 of 1967 concerning the insolvency of banks, in the first place, the owners of the ordinary shares and of the preferential shares (if any) bear the loss suffered by their bank within the limits of the value of their shares. Then, these losses are born by the creditors and finally, by the depositors, on a pro-rated basis to their deposits. All of that takes place after the concerned bank collects its debts held against its clients and after it liquidates all its assets in Lebanon and abroad.

Nevertheless, Law No. 2 of 1967 – which was enacted following the bankruptcy of Intra Bank – is a Law that deals with cases of individual bank insolvencies and not with a collective insolvency of the Lebanese banks which results primarily from the insolvency of the State and of the Central Bank.

This is why we hear more and more about draft Laws that would distribute the losses of the banks pursuant to a new mechanism.


  1. Joseph Oughourlian was advisor to the President Bechara El Khoury, Government Representative at the Beirut Stock Exchange, Vice-President of the “Council of Money and Credit”, Vice-Governor of Banque du Liban as well as acting Governor of Banque du Liban.
  2. We can immediately ask ourselves today: Whatever happened to this golden rule?
  3. It should be noted that the Consultation – which addresses a number of monetary issues – refers on several occasions to the writings of Joseph Oughourlian who is mentioned above.
  4. Up until 1976, that is until the end of the Bretton Woods system.

This article is a summary of a study that will be published in French in the Journal ‘Proche-Orient Etudes Juridiques’.

Lawyer Antoine Merheb is the legal advisor on banking law matters and former board member of Lebanese banks.

Jacques Noun is a trainee lawyer and Senior Legal Analyst at Bablex Ltd.



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