Lebanon’s bank distrust persists

The World Bank has issued a warning regarding the cash-based economy in crisis-hit Lebanon, stating that almost half of the country’s economy operates on cash due to the erosion of trust in banks. This has resulted in increased risks of money laundering and has diminished prospects for economic recovery. Lebanon has been grappling with an ongoing economic crisis since 2019, which the World Bank has labeled one of the worst in recent history, as the value of its currency has plummeted by over 98% against the US dollar.

According to a report released by the World Bank on Tuesday, the cash economy has expanded significantly, accounting for nearly half of Lebanon’s gross domestic product (GDP) last year, compared to 26.2% in 2021. The report cautioned that this pervasive reliance on cash impedes the country’s economic recovery and has negative implications for fiscal and monetary policies, contributing to increased informality, tax evasion, and the heightened risk of money laundering.

The World Bank estimated the size of Lebanon’s cash economy to be approximately $9.9 billion, equivalent to 45.7% of GDP in 2022. The prevalence of cash transactions makes it easier to conceal the origins of funds for illicit activities, the report highlighted. Lebanon has experienced skyrocketing prices, particularly for fuel, food, and other essential goods, as the currency devaluation continues. Banks have implemented strict withdrawal restrictions, effectively preventing depositors from accessing their savings and further eroding trust in the banking sector.

The report emphasized that the loss of confidence in the insolvent banking sector is the root cause behind the rise of the cash economy, noting that a reliance on cash transactions threatens Lebanon’s previous progress in enhancing financial integrity. Despite the severity of the crisis, Lebanon’s political leaders, widely blamed for the country’s financial collapse, have failed to take effective action. Lebanon has been without a president since last year and is currently governed by a caretaker government due to ongoing political deadlock between rival factions. In a related development, a French judge investigating the wealth of Lebanon’s central bank chief, Riad Salameh, has issued an international arrest warrant for him.