Lebanese banks playing pivotal role for economic stability

The Lebanese Central bank’s policy of offering high interest rates on dollars was leading to “mounting losses” and “negative net reserves”. © Barthelemy Leyconie

Lebanese banks are doing all that they can to pump in more dollars to the economy. In a move in that direction, customers willing to exchange hard currency into long term deposits for the Lebanese pound are being offered higher returns.

This is one of the latest moves Lebanon has undertaken to maintain stability for its currency as the country faces more warnings of an impending economic crisis. So as to bring a sense of control and stability, Lebanon’s central bank has had to repeatedly issue assurances regarding the soundness of the peg.

With the central bank focused on keeping the money flowing in and out of Lebanese banks, its high interest rates regime is increasing the financial risks within the system and is strangling an already weak economy. It has been almost 3 months that Lebanon is without a government.

The lack of government formation has led to lower growth rates of sectors which traditionally have acted as the country’s cash cows, including tourism, real estate, and foreign exchange. As a result the country is now more dependent than ever on deposits made by expatriate to Lebanese banks.

The cry for stability

With Lebanon being the world’s third most indebted state, there is an broad agreement that the country needs urgent financial reforms so as to place the economy back on track. Although parliamentary elections were held in May 2018, a government formation has yet to take place. As a result there has not been a formal body to tackle the deficit, reinforce confidence in Lebanon’s financial system and unlock billions in donor financing.

As a result Lebanese banks are playing a more pivotal role, which has been described by the International Monetary Fund (IMF) as unconventional.

“The priority today for the central bank is to raise rates to attract capital and preserve capital in foreign currency in Lebanon so we can continue with the policy of stabilizing the pound, which is the top priority,” said Raed Khoury, Lebanon’s caretaker economy minister. “It is the reason for Lebanon’s political and monetary stability and confidence in Lebanon. Of course these factors don’t come at a low cost. The cost is high for our economy.”

The effects of Lebanon’s weak economy are now being felt by the Lebanese. Business activity is in the doldrums, lending by Lebanese banks is down, and the country’s real estate sector which was once the pillar of the economy is falling.

Lebanon’s growth rates which were between 8% to 10% before the Syrian war, have now fallen to 1% to 2%. The country’s debt-to-GDP ratio was more than 150% at the end of 2017, said the IMF.

Reliance on Bank Deposits

As per Marwan Mikhael, head of research at BlomInvest Bank, “There is now a lot of competition between banks to attract deposits. The central bank is trying to suck all the dollars in the market.”

Lebanese banks convert customers’ cash into local currency and deposit the dollars in the central bank which after a series of complex operations gives them even more attractive returns.

The increasing reliance on bank deposits has resulted in them being subject to higher exposure to sovereign debt thus making them more susceptible to political shocks.

“The situation of banks has become fragile, vulnerable to the situation of the public sector,” said Toufic Gaspard, an economist who was a former adviser to IMF. He went on to add, the bulk of the balance sheet of Lebanese banks are deposits with the central banks.

“Two thirds of their balance sheets are loans to the public sector, defined as the central bank and government, as illustrated by treasury bills,” said Gaspard.

He went on to explain, the central bank’s policy of offering high interest rates on dollars was leading to “mounting losses” and “negative net reserves”. The scale of these losses is yet to be made public since “the central bank hasn’t published its profit and loss statements since 2002”, explained Gaspard. Since the bulk of the balance sheet of Lebanese banks are deposits with the central banks, the health of the central bank will significantly impact the health of the country’s banks.

As a counter to Gaspard’s report, the central bank stated, its interest rate policies were in line with Lebanon’s risk profile. As for the non-publication of its annual reports, it responded by saying it is required to report its profit and loss accounts and balance sheet annually to the finance minister and that it “continues to generate sustained and substantial profits”.

It is high time that Lebanese politicians put aside their differences and place the country’s health and economy on a sounder footing.

“If we continue like this, eventually we are bound to have a financial crisis,” said Gaspard.