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Lebanon needs swift action to restore confidence in its economy as an ongoing popular uprising risks plunging the country further into a financial crisis.

Banks have remained closed for eleven working days, paralysing the financial infrastructure and exacerbating pre-existing economic issues.

The Association of Banks announced on Wednesday that financial institutions will be reopening on Friday. Despite calls for Lebanon to impose formal restrictions on the movement of capital to defend the country's dollar peg and prevent a run on the banks, no exceptional measures have so far been announced.

Local media quoted sources familiar with the matter saying that talks of capital controls to limit transfers out of the country were "nonsense."

Read more: Five things you need to know about the protests in Lebanon

As Lebanese citizens await to know the effect of the protests on their wallets, local analysts and international observers warned that exceptional economic measures that go hand in hand with rapid political solutions must be put in place in order to avoid the worst-case scenarios.

Lebanon needs a quick and big step to restore confidence... This requires economic and fiscal measures that are clear and comprehensive - IMF

The International Monetary Fund told °®Âþµº in a statement that "Lebanon needs a quick and big step to restore confidence... This requires economic and fiscal measures that are clear and comprehensive."

Central Bank Governor Riad Salame also warned on Monday that Lebanon would be heading towards economic collapse unless an "immediate solution" could be found.

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The main concern as banks reopen will be a depreciation of the Lebanese pound spiralling out of control and shredding savings.

This could be triggered by panic-driven attempts to exchange damaged currency – in this case the Lebanese pound – for a stronger one – in this case the dollar, to which the local currency is pegged.

Those who hold dollar accounts could also try to move their capital assets abroad en masse, causing the country's dollars reserves – which are already dwindling – to tank.

Mohammad al-Akkaoui, economist at Kulluna Irada, a civic organisation for political reform in Lebanon, said capital controls must be set in place to avert this scenario and guarantee liquidity.

The greater the panic, the greater the potential losses to remaining depositors, creditors or taxpayers. Capital controls – meaning limiting financial flows in and out of the country – could slow or halt the depreciation of the pound and reduce the impact on salaries and pensions, al-Akkaoui told °®Âþµº.

We have been living above our means for the past 30 years, so there is no immediate bright future [for Lebanon] - Sibylle Rizk

Markets were negative on Wednesday following prime minister Saad Hariri's resignation the day before. While politically the move has been hailed as a step out of the current impasse, from the economic point of view it was no fix.

"The market doesn't like uncertainty," al-Akkaoui said, adding that a statement by president Michel Aoun was needed to calm the waters.

Sibylle Rizk, Kulluna Irada's director of public policies, said political reform will be crucial in stabilising the markets on the long term, but on the short-term the economic repercussions are bound to be felt.

"We have been living above our means for the past 30 years, so there is no immediate bright future [for Lebanon]," she said.

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From the economic perspective, the choice is now between a well-managed and a badly managed crisis. Should banks reopen with insufficient measures in place, Rizk did not exclude the possibility of the country plunging into chaos.

Putting in place the necessary measures aimed at restructuring Lebanon's debt and controlling capital flows would instead avert some of the direst effects.

This, however, needs fertile ground to be implemented. The new technocratic government will need the consensus of political parties and the politicians targeted by protesters – including prime minister Saad Hariri – might continue to serve in it.

Should its appointment be held up, or should it lack the legitimacy to pass major legislation, it risks being unable to approve the badly-needed reforms to quench the fiscal crisis.

Meanwhile, observers abroad are looking at Lebanon's internal developments with concern. Pascal Devaux, Senior Economist and MENA expert at BNP Paribas, said "The effect of reforms will not solve the short-term problems. The short-term issue of confidence must be solved with big measures like foreign capital [inflow]."

According to Devaux, the current political situation is not favourable to strong financial support on the part of western countries, but support could come from GCC states who have an interest in maintaining Lebanon's stability.



"The relationship between Saudi Arabia and Lebanon is not as it used to be, but Lebanon is a small economy and support would not be very costly," he said. 

Lebanon was pledged over $11 billion last year at a Paris conference aimed at rallying international support for an investment programme to boost its economy. The capital was not disbursed as Lebanon failed to undertake structural reform to reduce its debt, which is the sixth highest in the world. 

The relationship between Saudi Arabia and Lebanon is not as it used to be, but Lebanon is a small economy and support would not be very costly - Pascal Devaux

While the funds could be disbursed on the long-term should Lebanon comply, the emergency funds necessary to give back confidence to foreign investors will likely have to be found elsewhere, according to Devaux.

"Foreign investors are less and less ready to finance the fiscal deficit," he said. "We are quite pessimistic about Lebanon's economic outlook."

Many protesters gathered at Central Bank buildings as part of the protests calling for Salameh's resignation and the "fall of the [Central] Bank" due to what they perceive to be decades of mismanagement that led to this situation.

Read also: Comment: Hariri resigns, but the start of the revolution is not its end

Last Monday, Hariri released an ambitious 17-point action plan to tackle the country's economic crisis, but the move failed to appease protesters.

Lebanon's central bank has notoriously been averse to capital control, making free capital flows a trademark of the country's banking system.

Salameh told Reuters on Monday that there would be no capital controls. But days of popular uprisings, which culminated the resignation of Prime Minister Saad Hariri on Tuesday, have shown that the Lebanese population will no longer tolerate the mistakes of a political class they say has pillaged state coffers to the verge of bankruptcy.

Federica Marsi is a journalist based in Beirut, Lebanon.

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