How to Restore Trust in Lebanon’s Financial Institutions

Whilst a virus-induced global recession has damaged even the strongest of economies, Lebanon’s case stands out amongst them all. The Lebanese pound has lost more than 60 percent of its value over the past year, and national debt currently accounts for nearly 170 percent of GDP. Moreover, an explosion last month in the port of Beirut destroyed the country’s maritime trading centre. The country seems to be on the brink of financial collapse.

 

In April, the then Prime Minister Hassan Diab’s economic plan received unanimous government approval and was submitted to the International Monetary Fund (IMF), with the objective of obtaining IMF funding over the next 5 years.  That plan came in the wake of increasing unrest surrounding perceived mismanagement of the nation by the political class.  Diab intended to use the rescue plan to help “build the Lebanon of tomorrow”.  The IMF received the plan in May but have yet to be in a position to provide the support that Lebanon has sought.  There remain two clear economic issues that Lebanon needs to address in this plan: centralised control of monetary policy and the banking sector’s debt crisis.

 

Lebanon is the third most indebted country in the world.  Its economy has been declining for years. Recently, the government failed to make a 1.2 billion USD payment for foreign bonds, the first such default in Lebanon’s history. Many attribute this to the country’s monetary policy which is orchestrated by the central bank.  The central bank has been hiking its interest rate in order to cover the government’s spiralling debt problem. In addition, maintaining a regular flow of imports will allow for the Lebanese pound to maintain its status as a pegged currency to the US dollar.  However, as Sibylle Rizk, the public policy director at lobby group Kulluna Irada, declared in an attack on the central bank, the influx of dollars from the hiked interest rates was ‘burnt to defend the peg.’ This ultimately resulted in higher Lebanese pound lending rates and a massive decrease in deposits at commercial banks in Lebanon. The response by the government so far has been to put in place four government allies as Deputy Governors, meaning that Governor Salameh is guided and constrained by the fiscal policy.

 

In turn, many believe that to survive, the Lebanese banking sector will be forced to restructure and consolidate. The banking sector must deal with an increasing amount of bad debts:  20% of private sector loans are considered non-repayable, according to Finance Minister Ghazi Wazni.  The banking sector could therefore be faced with losses representing more than half of its own capitalization of 22 billion USD, which could bankrupt the sector. Hence many believe that the only way for the sector to recover is for banks to consolidate and pick up the bill together.

 

Ultimately, the economic crisis in Lebanon is caused by the lack of coherent and coordinated public policy. This can only be brought under control by a centralised effort to communicate with the central bank as well as the restoration of trust in Lebanon’s financial institutions. The former is being achieved with increased government presence in the hierarchy of the central bank, whilst for the latter a clear plan is now emerging to resolve the issue.

 

By Stefan van Niekerk

Senior Editor: Aaron Hobb

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