Lebanon’s banking sector deflects criticism of central bank by minister

Country’s regulator has shielded the country during war and the global credit crisis

In Lebanon’s highly fractious political landscape it’s unsurprising to witness accusations like those of Lebanese Economy Minister Mansour Bteich. Bloomberg

Lebanon’s banking sector deflected criticism of the country’s central bank by a Lebanese minister allied with a political party traditionally opposed to Prime Minister Saad Hariri.

In Lebanon’s highly fractious political landscape, which took more than two years to elect a president and about nine months to form a government following elections, it’s unsurprising to witness an exchange of accusations like those of Lebanese Economy Minister Mansour Bteich, who is from a political party that has traditionally been at odds with the incumbent prime minister.

Mr Bteich told The National he wants to see greater transparency from the regulator, referring to "financial engineering" operations led by the central bank, or Banque du Liban (BDL). The operations he referred to involve swaps between the central bank and commercial banks and between the central bank and the ministry of finance, where banks place Lebanese pounds with the BDL at higher than usual rates on condition that they also deposit the equivalent in US dollars, said Marwan Barakat, chief economist at Bank Audi.

The practice is not out of the ordinary and allowed the BDL to increase its foreign exchange reserves, maintain deposit growth and support financial flows to Lebanon, where economic growth has been anaemic since the outbreak of the conflict in neighbouring Syria in 2011. Between 2016 and 2018, the total amount exchanged between the central bank, commercial banks and the ministry of finance reached $23 billion (Dh84.46bn).

Lebanese banks used some of the liquidity placed abroad to finance purchases made from the BDL, so their foreign currency placements fell. The financial engineering also increased the banks’ overall foreign exchange exposure to the Lebanese sovereign. However, Mr Barakat said he believed that the “benefits exceed by far the adverse costs”.

The central bank, run by Riad Salame since the end of the civil war, has been instrumental in protecting the Lebanese banking sector and economy. Mr Salame is credited with shielding the country from the global financial crisis in 2008 because he banned Lebanese banks from buying and selling risky assets such as sub-prime, which led to the collapse of Lehman Brothers and the credit crisis.

Still, Mr Bteich said irrespective of whether financial engineering operations were positive or not, the BDL needs to communicate their implications for the economy.

“What is the economic impact of this financial engineering? What was its cost? I think there are people in the country who do not want transparency,” said Mr Bteich, who headed a local bank until he was appointed minister two months ago.

The BDL, which has consistently stayed outside the political fray, declined to comment.

“The central bank is not obligated to provide calculations about the cost of its operations”, and has provided more information than the government itself, said Mr Barakat. “In terms of disclosure, the central bank is one of the most transparent institutions in Lebanon, whereas we lack macro-economic aggregates that should be provided by the government such as timely national accounts and unemployment figures.”

Charbel Cordahi, an economic adviser to the Free Patriotic Movement, the same political party as Mr Bteich, which is allied with Hezbollah, said: “The information is not complete. We know who benefited but not who bore the cost” of the financial engineering operations.

Public criticism of the BDL and its governor Riad Salame, who was the personal banker of Rafiq Hariri at Merrill Lynch, is rare.

The only newspaper to regularly criticise the BDL is Al Akhbar, which is politically aligned with Hezbollah. In an article published Wednesday, it said that the financial engineering operations raised questions about "illicit enrichment" of the banks involved.

Nassib Ghobril, chief economist at Byblos Bank, also one of the country’s main banks, said he found the economy minister’s statements surprising. “As an ex-banker himself, he knows the economy depends on the central bank.”

When growth has decelerated, the BDL has tried to stimulate the economy through subsidised housing loans. Like most regulators around the world, it operates independently but must submit a financial report to the Ministry of Finance every year, and the nomination of the governor and vice-governor is approved by the government.

The economy minister has also accused the BDL of exaggerating the weight of the public sector in the country’s finances, referring to recent tweets in which the governor criticised the country’s political leadership.

In a tweet last month through the BDL, Mr Salameh said, “Before the Lebanese war [1975-1990], the public sector accounted for 17 per cent of GDP. Today this sector accounts for 35 per cent of GDP which is a high ratio for the size of Lebanon”.

According to Mr Salameh, reducing the government’s budget deficit has not been addressed since the cabinet was formed, even though it is among the required reforms and issues that need to be addressed to unlock $11 billion of aid and subsidised loans pledged to Lebanon at a conference in Paris last year. The pledges were linked to reforms, which include lowering the fiscal deficit by 1 percentage point annually over five years, among other measures.

Lebanon has the third-highest debt to GDP ratio in the world at about 150 per cent. The country is struggling to control its finances as a result of the ballooning public debt which reached $85bn at the end of last year, because of a stagnant economy and the strain from hosting over a million Syrian refugees.