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Frozen deposits in Lebanese banks could haveÌýdrastic ramifications across the region, asÌýcalls mountÌýfrom foreign governments, businesses, and individuals for the return ofÌýÌý²¹²õÌýÌýexperiences an unprecedented .

An official Yemeni banking delegation is currently visiting Ìýto discuss theÌýsuspended funds, which are having a devastating effect on Yemen's banks,Ìýon top of which has ravaged the country for nearly six years.

The Yemeni delegation met with the Governor of the Central Bank of Lebanon, , to discuss the return of around $200m, according to Yemeni sources in the banking sector.

Throughout the war, Yemen's banking sector has relied on Lebanon's banksÌýwhich have providedÌýaccess to regional and international finance and enabled Yemen to conduct private banking transactions over imports and other business deals.

Al-Araby Al-Jadeed, °®Âþµº's sister publication, spoke to one of the Yemeni delegates who said that the discussions had given some grounds for optimism.

"We were promised that withheld balances will be released and special obligations to Yemeni banks will be paid, protecting the deep and longstanding relationship between the Yemeni and Lebanese banking sectors," they said.

Another official from the Central Bank of Yemen stressed that the withheld funds are damagingÌýfinancial markets in Yemen and drastically destabilising the national currency.

For almost two years, Lebanon has been facing the worst economic crisis in its modern history.ÌýThe value of itsÌýnational currency has collapsed and tight restrictions have been placed on financial transactions which prohibit bank transfers to foreign accounts.

Since 18 October 2019, Lebanese banks have frozen accounts with dollar deposits, and have limited withdrawals from accounts containing Lebanese pounds. Local economists sayÌýthatÌýbanks owe more than $90bn.

It is not only Yemen’s banks that are affected.ÌýAlthough exact numbers are unavailable, many Yemeni citizens have Lebanese bank accounts.

The Yemeni government also holds foreign exchange reserves in Lebanon.ÌýIn 2020, a study carried out by the revealed that as much as 20% of Yemen's foreign currency reserves, estimated at around $240m, were frozen in Lebanese banks. Ìý

"The value of the national currency has collapsed and tight restrictions have been placed on financial transactions which prohibit bank transfers to foreign accounts"

Yemeni banking expertÌýAhmad al-Sahmi toldÌýAl-Araby Al-Jadeed that Yemen's ability to conduct international banking transactions and trade deals via Lebanon's banks has come to a complete standstill, leading to a rise in foreign import costs.

ThisÌýis especially concerning as Yemen is almost completely reliant on imports to meet itsÌýbasic commodity needs.

According to the Yemen Bank Association, urgent action must be taken concerning the withheld deposits in Lebanese banks in order to fund the import of necessary goods into Yemen and reduce civilian suffering.

Mahmoud Naji, head of the Yemen Bank Association, said that the association had explained these issues to the regional director of the International Monetary Fund (IMF). The IMF then promised to try to convince the Lebanese authorities of the urgency of Yemen's financialÌýsituationÌýand the need for their deposits to be released.

Financial and commercial paralysis in Yemen

The crisis not only affects Yemeni banks dealing with the government (temporarily situated in Aden) andÌýthe Houthis who control Sana'a.ÌýThe situation has also led to strict restrictions on money transfers between the areas controlled by both sides.

MostÌýbanks have also stopped allowing dollar transfers or credit letter transactions with Yemeni banks, which has adversely affected banking services such as international electronic transfers, commercial financing operations, and remittances which are considered vital to the economy.

While many Yemeni bank officials and traders are focused on their frozen assets in Lebanon's banks,ÌýYemeni financial analyst Muhammed Al-Amrani emphasised that the suspended deposits were only one financial consequence of the war in Yemen.

He added, "some members of the [Saudi-Arabian led] Arab coalition worked in a dubious fashion to undermine public financial institutions, dismantle the government's revenue channels, and push the Yemeni currency towards collapse. The Yemeni banking sector is now confronting a severe liquidity crisis, withÌýaround 78% of the banks'Ìýtotal assetsÌýinaccessible: these assets include government securities, balances (deposits and reserves) in the central bank,Ìýand loans for the private sector that are at risk of default.

"Frozen deposits in Lebanese banks could haveÌýdrastic ramifications across the region, asÌýcalls mountÌýfrom foreign governments, businesses, and individuals for the return ofÌýwithheld funds"

"Yemen's banks have become incapable of meeting their business clients'Ìýdemands in a reasonable time, which has then damaged these clients’ business operations and has shaken their trust in the banking sector. They now prefer to keep their money in a state of liquidity, outside the banks. The liquidation crisis has also brought other challenges like vast differences between cash and cheque payments, as well as the rejection of cheques."

The high-interest trap

Yemen is by no means the only state to be affected by the Lebanese economic crisis and its frozen assets – Iraq and Syria are among othersÌýsuffering the fallout from the country's financial collapse.

Throughout the Arab region, governments and corporations had deposited funds into Lebanese banks for many reasons. These included the strict banking secrecy laws in the country, tax exemptions, and the fact that Lebanese banks had, for years, offered massively inflated interest rates on dollar deposits to attract more customers, according to the finance magazine International Banker.

Lebanon offered uniquely attractive return rates to investors, turningÌýthis small country into a magnet forÌýrich investors from all over the world - at least, until the financial crisis.

SignificantÌýIraqi deposits

An Iraqi government official revealed that hundreds of millions of dollars belonging to Iraqis are currently frozen in Lebanese banks. Some clientsÌýhave been given the option of accessing their money, but onlyÌýinÌýinstalments of Lebanese currency.

The official (who preferred to remain anonymous) stated that "most of the funds deposited in Lebanon from Iraq were a product of corrupt activities going on in the country: Lebanese banks have facilitated depositing and transfer processes to Iraqis over the last 15 years, so Lebanon became a financial centre for businesses, officials, politicians, and leaders of armed factions - and all this increased after the sanctions on Iran. These funds are deposited explicitly in the names of politicians, leaders of parties and factions, and even securityÌýofficers and government officials, or in the names of family members."

"Lebanon offered uniquely attractive return rates to investors, turningÌýthis small country into aÌýmagnet forÌýrich investors from all over the world - at least, until the financial crisis"

Syrian deposits estimated to be $45 billion

At the end of last year, Syrian President Bashar al-Assad the ongoing economic problems in Syria on the $20bn to $42bn in Syrian fundsÌýcurrently trappedÌýin Lebanon. Syrian businessmen have historicallyÌýused Lebanese banks to avoid international sanctions and other restrictions.

A study by the Damascus-based Labour Observatory for Studies and Research,ÌýestimatedÌýSyrian deposits in Lebanon to be valued around $45bn. Dr Ali Kanaan, Head of the Department of Banking in the Faculty of Economics at Damascus University, who prepared the study, stated that Syrian deposits exceed 25.4% of the total deposits held in Lebanese banks, which come to $177bn. ÌýÌýÌýÌý

When asked for details on these estimates inÌýa press interview, Kanaan confirmedÌýthat these numbers were limited to the deposits of Syrian individuals and investors, and do not take into account those of banks and insurance companies subject to rules governing correspondent accounts.ÌýIf these funds were added,Ìýthe total amount of Syrian deposits would exceed $50bn.

The situation in Lebanon

Meanwhile, even as the knock-on effects of Lebanon's crisis trigger destabilisation acrossÌýthe region, the Lebanese population itself is still suffering as their funds are also frozen. This is despite overÌýrapidly declining living standards and the , which has plunged a huge section of the population into poverty and unemployment.

Things have only worsened since the Covid-19 pandemic hit the countryÌýat the beginning of last year.

"The World Bank stated that 'Lebanon is sinking'"

The rate of poverty increased in 2020 to 55% of the population, according to a report from the UN Economic and Social Commission for Western Asia (ESCWA), with indicators suggesting this will rise further in 2021.

International warnings about the seriousness of the crisis are increasing. The World Bank stated that "Lebanon is sinking,"Ìýin a published in early June, predicting that the economic crisis rocking the country will rank among the top three most serious crises globally in the past 70 years.

Last month, Riad SalamehÌýof the Central Bank of Lebanon stated that "the foreign reserves being used for support have almost run out, and using necessary reserves to import basic goods will be difficult from a legal perspective."

This is an edited translation from our Arabic edition. To read theÌýoriginal click

Original report by Mohammed Rajih (Aden), Adel Al-Nuwab (Baghdad), and Adnan Abdul Razzaq.

Translated by Rose Chacko