Although Lebanon has the highest debt in the Arab World, with its debt-to-GDP ratio currently around 140 percent, the banking sector has long represented a pillar of stability in Lebanon. The Lebanese Central Bank (BDL), in addition to issuing and regulating currency, exercises considerable clout over domestic investors and the domestic banking market, which held 56 percent of all outstanding treasury bills by value at the end of April. This position is strongly reliant on remittances from abroad and confidence in the Lebanese lira to boost deposits. Yet in December 2015, the U.S. Congress passed the “Hezbollah International Financing Prevention Act” (HIFPA), the latest of a series of measures to reduce the influence of the organization by isolating it from the international finance system. Unlike past acts, HIFPA applies to individuals and institutions not under U.S. jurisdiction, and the BDL has now come under pressure to close all bank accounts of Hezbollah members, affiliates, and intermediaries. This could create volatility in the banking sector and have negative effects on the economy at large.

A key objective of the act is to prevent Hezbollah from reaping any financial benefit following Iran’s nuclear accord last year—the fear being that lifting the sanctions on Iran may allow it to provide additional aid to its proxies in the region. Under HIFPA, all Lebanese and international banks are obliged to freeze or suspend the accounts of all the individuals listed by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) as affiliated with Hezbollah. If they refuse, they face sanctions and may ultimately be excluded from the international banking financial market. The banks are also responsible for having their own financial intelligence units (FIUs) in place to monitor and conduct due diligence on the accounts—banks that do not already have their own FIUs set up have one year to put this system in place. Before taking any other measures, the banks are to signal suspicious operations to the BDL’s Special Investigation Commission, authorized to lift the bank secrecy off the concerned accounts according to Law 44 of 2015.

Following meetings in Washington, DC in February, Alain Aoun—a member of the Lebanese Parliament for the Free Patriotic Movement, a Hezbollah ally—suggested Lebanon would negotiate the terms, stating it was unclear how aggressive the implementation of the act was going to be. Then on May 3, 2016, the Lebanese Central Bank issued Circular 137 (a legally binding memo) enforcing the U.S. act in the Lebanese banking system after months of pressure from the United States and prompting local authorities to begin closing 99 accounts held by individuals listed by OFAC. These included those held by four Hezbollah MPs, in addition to those related to the pro-Hezbollah television station Al-Manar and Al-Nour radio—though one report suggests the BDL has asked for the MPs’ accounts to be reopened following negotiations with Hezbollah. Unofficial sources close to the U.S. Treasury Department have indicated that only the 99 accounts on the OFAC list are being affected for now, and there is still confusion regarding the exact procedures to be followed. However, the BDL has indicated nearly 3000 additional Lebanese bank accounts may be closed in the near future.

Hezbollah has spoken out against the act, demanding Lebanon exercise its sovereign right to protect its citizens, especially the Shia population. According to Minister of Finance Ali Hassan Khalil, Daniel Glaser, the U.S. Assistant Secretary for Terrorism Financing at the Department of the Treasury, confirmed regulations will not target the Shia community, though this reassurance has not quenched local uncertainty. While speeches made by Hassan Nasrallah on December 21—and more recently on June 24—deny that the law will affect its community and party, this appears to be to reassure his base.

The act will also have a number of negative financial effects on Hezbollah’s intermediaries. Hezbollah’s popular social services will likely be cut back, as doctors, nurses, teachers, and administrators who work in Hezbollah-run private welfare services become unable to process their salaries through the banking system. Some of these institutions had to switch to cash payments for salaries as early as March. Given Hezbollah’s integration into Lebanese society at multiple political, economic, and social levels, such “intermediaries” are many. Institutions such as hospitals and media companies will also have trouble staying afloat, including the Rassoul Al-Aazam Hospital in Bourj Al-Barajneh, a southern suburb of Beirut controlled by Hezbollah.

This could have a cascading effect on the entire Lebanese economic system through declining capital deposits. Informal banking is likely to increase, remittances may suffer, and worries over financial stability could slow investment. Lebanon has a highly dollarized economy, and most transactions are in dollars and involve U.S. intermediary banks. Restricted access to these banks will likely affect the ease of everyday transactions, especially for those employed by Hezbollah-run services.

In past times of unrest, such as the assassination of Prime Minister Rafik Hariri in 2005 and the war with Israel in 2006, Lebanon experienced an outflow of deposits, (5 percent and 3 percent respectively), and HIFPA may have the same effect. For a remittance-dependent economy such as Lebanon, which relies on roughly 7.2 billion dollars per year from Lebanese working abroad, a decline in such deposits could have a significant impact on the value of the Lebanese lira, and currency markets are already more volatile. The BDL maintains a de facto peg to the dollar and allows trading within a narrow band. According to Bloomberg, however, the USD to lira rate has been trading at the top of this narrow trading band (indicating a weaker lira) since February 2016, a month after HIFPA passed. Though the rate has not yet gone over the allowed range, this reflects not stability but increased intervention by the BDL to prevent devaluation. The BDL has been selling off more than $400 million in foreign assets a month since March, reversing a trend of accumulation that began in February 2008. Foreign reserves, which have been on a downward trend over the past year, jumped slightly in April—but at the same time, government holdings in foreign securities dropped, resulting in a continued net loss of foreign assets (excluding gold). If the flow of remittances declines, which currently amounts to over 10 percent of the Lebanese GDP per year, the BDL will have even fewer foreign reserves with which to revalue the lira.

Moreover, economic uncertainty is making it more difficult for the BDL to maintain economic stability by adjusting borrowing rates. Lebanon’s credit rating is a B- with a negative long-term outlook, according to Standard & Poor’s. With the government heavily financed by the domestic banking system, this means fewer resources for official institutions which are already strained by the two-year political stalemate that has left Lebanon without a president while it hosts over one million Syrian refugees. While the U.S. Embassy in Beirut has reiterated that the US will protect the Lebanese economy and financial institutions from potential side-effects of HIFPA “as much as possible,” Lebanese are doubtful.

Resistance to HIFPA has already taken form. An explosion in Beirut on June 12 targeted Blom bank, which had implemented the Lebanese law enacted in accordance with the U.S. act, in a clear warning to the Lebanese government not to yield to U.S. pressure. Though it remains unknown who was responsible for the blast, two days earlier, on June 10, the Lebanese newspaper Al-Akhbar published an article in which Hezbollah warned Blom bank and other banks that had implemented the May 3 law. Following the blast, the Association of Lebanese Banks declared, in an emergency meeting, that the explosion could “rattle economic stability.”

In the weeks following the Blom blast, the BDL has effectively stopped communicating with media, signaling how politically sensitive HIFPA and its implementation has become. How far the United States will go in pushing for full implementation remains to be seen and may depend on domestic U.S. politics. Until then, the BDL is trying to find an effective way to comply with HIFPA in a way that does not shake the Lebanese banking system or present further security risks. Yet the business community and Lebanese public continue to believe that uncertainty, always present in Lebanon, is growing.

This article is reprinted with permission from Sada. It can be accessed online here.

Gaja Pellegrini-Bettoli is a Beirut-based Italian journalist who publishes with Corriere della Sera and Italy’s premier geopolitical magazine LIMES.