Lebanon's government could act against central bank if audit stalls, says minister

An extraordinary session of cabinet would be needed to ‘weigh up all options’, the justice minister said

Lebanon's Minister of Justice Marie-Claude Najm in Beirut on January 22, 2020. AFP

Lebanon's caretaker cabinet should weigh up all options at an extraordinary session if the central bank refuses to hand over documents for a critical audit, the country's justice minister told The National on Wednesday.

An audit of the central bank is a prerequisite to securing financial support from the IMF, as the country convulses from a devastating financial crisis that has pushed over half the country into poverty, erased decades of savings and seen the currency lose much of its value.

The caretaker cabinet could meet under exceptional circumstances if the central bank continues to refuse to hand over its books

Yet the government has been paralysed since prime minister Hassan Diab resigned on August 10 in the aftermath of the explosion at Beirut port. No new Cabinet line-up has yet been announced despite the dire state of affairs.

Caretaker justice minister Marie-Claude Najm said that, in her opinion, the caretaker cabinet could meet under “exceptional circumstances” if the central bank continues to refuse to hand over its books.

When a government resigns in Lebanon it remains in place as a caretaker until the next government is formed. Caretaker governments could only meet to address specific urgent matters and don’t usually propose new business.

Under Lebanon’s Monetary and Credit Law, the cabinet theoretically has the power to dismiss the governor of the central bank for violating laws, though such a power has never been exercised in Lebanon’s history.

Despite mounting pressure from both within and without, the central bank’s governor Riyadh Salameh has said he is unable to comply with the directive due to Lebanon’s banking secrecy laws.

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He has offered to provide auditors with information only regarding government accounts, saying that any information relating to private banks or financial institutions would breach banking laws.

Alvarez & Marsal, who were initially contracted to carry out the forensic audit, withdrew in late November citing the “insufficient provision of information”.

A senior official at Beirut’s Ministry of Finance confirmed that Oliver Wyman and KPMG, who were tasked with a financial audit of the Central Bank, have yet to receive all the documents needed.

Caretaker finance minister Ghazi Wazni said he was planning to invite Alvarez & Marsal to restart their audit and failing that, new firms would be asked to step in.

The operations of Bank du Liban have long been shrouded in secrecy, prompting claims that the institution is facilitating corruption and cronyism in the country. The delay in conducting an audit puts the finance rescue talks with the international community in jeopardy.

As Lebanon reels from its worst financial crisis since the civil war ended in 1990, foreign donors have demanded transparency of BDL’s activities before coughing up funds for a rescue.

Hyperinflation has soared in recent months, and this week the World Bank warned Lebanon had fallen into a "deliberate depression".

Pressure has piled on the bank to comply with the audits from all corners, including the country’s usually tight-knit political class. In a memo on Tuesday to the bank governor, Mr Wazni urged BDL to comply with the audit, pointing to a recent recommendation of parliament to do so.

Politicians’ failure to take serious action on reforms and the central bank’s stubbornness in offering transparency has frustrated Lebanon’s traditional foreign supporters.

On Wednesday, France said none of the reforms laid out by President Emmanuel Macron to Lebanese politicians after the port explosion have been made. While President Michel Aoun said last week that the audit was a prerequisite for talks on desperately needed financial assistance from the IMF.

Pressure from across the Atlantic also appeared to be reaching new levels this week, as The Wall Street Journal reported that the US was considering sanctioning the bank in its entirety over suspected links to Hezbollah.

Experts warn that US sanctions were a worst-case scenario that could completely isolate Lebanon from the international economy. Even if sanctions are not forthcoming, they said, the mere threat could see foreign banks cut ties with Lebanon’s once-flourishing finance sector.

“The threat of sanctions will prompt correspondent banks to examine the custodial account of both the Central Bank and Lebanese commercial banks,” Dan Azzi, a financial expert and former chairman of Standard Chartered Lebanon, told The National.

“If the threat materialises, Lebanon will be cut off from the global financial system, which will cause a disruption in terms of basic supplies,” he said. “This would be the Armageddon scenario, possibly fast-forwarding us to a Mogadishu in the 1990s scenario. So, we hope they play ball and allow the forensic audit and not test the patience and resolve of the international community, as they’ve been doing recently.”