Lebanese banks will impose new caps on interest rates on deposits and pay savers half the interest due on foreign currency holdings in Lebanese pounds, the central bank said on Wednesday, noting these moves were aimed at protecting deposits.

In a circular noting “exceptional circumstances” in Lebanon, which is in a deep economic crisis, the central bank also said it would be using local currency to pay half the interest due on United States dollars deposited with it by Lebanese banks.


Economists said the decisions are aimed at easing pressure on foreign currency reserves and helping the economy by lowering borrowers’ interest rates, which have crept higher as Lebanon sought to revive capital flows from abroad.

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Banks have been imposing tight controls on access to hard currency and transfers abroad for more than a month, fearing capital flight as Lebanon wrestles with the worst economic crisis since its 1975-90 civil war.

“Since you have capital controls, why not reduce the interest rates so the economy can benefit because the rates on loans from banks have increased to very high levels?” asked Marwan Mikhael, head of research at Blominvest Bank.

The central bank circular said the decisions aimed to “preserve the public interest amid the exceptional circumstances that the country is presently going through and to safeguard the interests of depositors by not decreasing their bank deposits”.

It said interest rates on deposits in foreign currencies should be capped at five percent and the rate on Lebanese pound deposits capped at 8.5 percent.

Interest due on US dollars deposited with the central bank by Lebanese banks would be paid half in US dollars and half in Lebanese pounds as an exceptional measure, the central bank said. The same applied to US dollar certificates of deposit issued by the central bank.

The cap on interest rates would apply to all new deposits and those renewed from December 4 onward.

The central bank said banks should pay interest on foreign currency deposits half in the currency of the account and half in Lebanese pounds.

The measures would be valid for six months, the central bank added.

All deposits made before December 5 would remain subject to the agreement between the bank and the customer, it said.

The International Monetary Fund said in a report issued in October that the US dollar reference lending rates in Lebanon had risen from around seven percent in early 2018 to 9.7 percent in June 2019, which had in turn translated into higher Lebanese pound lending rates.

SOURCE: aljazeera.com