Something has to change in the wonderful world of the Lebanese banking system. The manner in which Lebanon is addressing its financial crisis leaves a lot of room for improvement, with Lebanon’s banking association chief telling the government “keep your hands off the banks”, says Salim Sfeir, chairman and chief executive of Bank of Beirut and chairman of Association of Banks in Lebanon.
Lebanon made a faux pas with its draft plans which is aimed at mitigating issues revolving around its financial crisis wherein it has placed the bulk of the cost on banks which has sent a wrong message to investors. This comes at a time when Beirut desperately needs investors to kickstart its sputtering economy, said the banking association chief to the Lebanese government.
Salim Sfeir’s comments, which were published in a newspaper last week, underscores a growing opposition within the country’s banking sector to the government’s draft plan which was aimed at steering the country out of its financial and economic conundrum.
Lebanon needs to be investor-savvy
Lebanon is one of the world’s most indebted states and has one of the world’s highest debt to GDP ratio. The significance of the issue is underscored by the fact that in March 2020 it was unable to honor its foreign currency debt and defaulted on it.
While calling for restructuring commercial banks, the draft plan also calls for “a transitory exceptional contribution from large depositors” – a polital minefield, among other such politically difficult steps. The country’s banks have a projected $83 billion in losses for this fiscal year.
“Placing the vast majority of the burden and cost on the banking sector raises questions about the government’s commitment to long-awaited public sector reforms, especially when it’s no secret that the root of all problems is corruption and bad governance,” wrote Sfeir in the Daily Star.
Lebanon’s currency has also depreciated since October 2019 by a mind boggling 50% on a a parallel market, unemployment rates have soared, and banks have had to introduce tight capital controls to hold on to scarce dollars. Even depositors have been denied access to their hard earned savings.
Lebanon’s restructuring plans for its commercial banks includes a full bail-in for existing shareholders along with an estimated $20.8 billion in capital write-offs and large depositors are expected to bring in $62.4 billion, a political minefield.
As part of its 2020 Regional Economic Outlook for the Middle East and Central Asia, a report from the IMF states, in 2019 Lebanon’s real GDP had contracted by 6.5% and that inflation is slated to touch 17% for 2020, up from 2.9% from the previous year.
The need for courage to undertake bold economic reforms
Sfeir has squarely placed the root cause for this crisis at successive governments which have squandered state resources and heavily borrowed from the central bank, which was obligated to finance the state.
“By resorting to such borrowing, the government in effect confiscated depositors’ money in banks, and consequently created the current liquidity crisis. Instead of calling for restructuring of the banking sector, the government should focus on reforming the public sector and the balancing its budget,” said Sfeir while adding, “Selling or mortgaging state assets are strategies that other governments around the world adopted in order to restore financial balance.”
Last week, Lebanese Prime Minister Hassan Diab, who has the backing of the powerful Shi’ite group Hezbollah as well as the Christian Free Patriotic Movement founded by President Michel Aoun, stated 98% of depositors will be left unscathed by the draft plan.
Saad al-Hariri, a former prime minister as well as Druze politician Walid Jumblatt have also been critical of the plan, saying it aims to confiscate depositors’ money.
By indirectly stating that the State cannot guarantee the safety of the deposits made by 2% of depositors, Diab was sending the wrong message to investors, said Sfeir.
After the draft plan got leaked to the media, Lebanon’s finance minister took the position that the government has yet to finalise the proposal and that it was still studying options with regard to the proposed restructuring of the banking sector. For now, the government has said, it would hold talks with various stakeholders before finalising any plans.
At the same time, Beirut has also requested IMF technical assistance, but not tied to reforms.
“We know that Lebanon is currently working on a reform plan and we look forward when we receive it officially to review it and give our feedback to the authorities,” said the IMF Middle East and Central Asia Department’s Director Jihad Azour on the draft plan. Backing the need to undertake bold reforms, French Foreign Minister Jean-Yves Le Drian stated, “urgent reforms that the country needs are not happening” and with the coronavirus pandemic ravaging global economies, Lebanon’s economic scenario is “very worrying”. To say the least.
