Banque du Liban's Measures and Circulars and the Lost Confidence

After the US firm "Alvarez & Marsal" had been expected to issue its preliminary report on the outcome of the accounting audit into Banque du Liban's activities from 2015 through 2021 before the end of 2022, the fate of the report remains unknown despite the passage of nearly eight months. Meanwhile, sources following the auditing firm's work confirm that the company submitted the preliminary report to the Ministry of Finance within the agreed deadline, raising questions about the fate of this audit at a time when Banque du Liban continues to issue circulars regulating banking and monetary operations. At the same time, Banque du Liban's measures and circulars are met with a wave of skepticism regarding their credibility and effectiveness in confronting the monetary and financial crisis sweeping Lebanon since the end of 2019, especially as they are issued by the very monetary authority that brought the financial and monetary situation to collapse. What has further complicated the monetary situation is the skepticism with which Banque du Liban's circulars have been and continue to be met, along with the lack of confidence in the competence of its measures, even when they rest on sufficient grounds to justify adopting them. This is particularly true given that, at the onset of the crisis, Banque du Liban refrained from defending the pound against the US dollar and other foreign currencies on the pretext of preserving its foreign currency reserves, while it did not hesitate to meet the government's request to subsidize a long list of imported goods, including many nonessential items, continuing to squander these reserves until they touched the mandatory reserve, whose ratio was lowered to match the depths to which these reserves had sunk. The financial engineering operations initiated by Banque du Liban starting in 2016 highlighted its floundering in managing its reserves and its exhaustion of available monetary policies, saddling it with heavy liabilities toward the banks and causing a shortage of US dollars in local money markets. Notably, Banque du Liban's floundering had begun before the financial engineering operations, when it maintained the policy of pegging the national currency's rate without adjustment starting in 1997, and especially with excessively high interest rates on both the Lebanese pound and the US dollar. What further complicated the financial and monetary situation was, on the one hand, the inability of Hassan Diab's government to set appropriate financial and monetary directions during the crisis, and, on the other hand, Parliament's stalling on passing a law regulating capital movements, or the capital control law. This allowed Banque du Liban to manage the state's fiscal policy to suit its own monetary policies through its circulars and related measures, without taking into account the repercussions of these policies on the national economy. Circular 148, issued on April 3, 2020, marked the first of Banque du Liban's fallacies and contradictions in differentiating between foreign currency deposits based on whether they were deposited before or after October 31, 2019, and discriminated among depositors and their right to withdraw according to the value of their deposits. The circular created multiple officially adopted exchange rates that varied across different banking operations, leading to the flourishing of the parallel exchange market and the expansion of its role. The circular also allowed depositors' savings in pounds to be converted into US dollars at the "official rate," provided that they were withdrawn in Lebanese pounds and at the "market rate." As for Circular 157, issued by Banque du Liban on May 10, 2021, under the title "Exceptional Measures Concerning Foreign Currency Operations," its aim was to establish the "Sayrafa" platform to curb the repercussions of the exceptional circumstances that heavily affected the exchange rate of foreign currencies. While some observers saw the circular as a good start toward curbing the rise in the exchange rate and unifying it, this rate on Sayrafa reached nearly 86,300 pounds over the course of more than 24 months, after having stood at 12,000 pounds, whereas the rate on the parallel market stabilized at 93,500 pounds after reaching more than 140,000 pounds. By contrast, Circular No. 158, issued on June 8, 2021, allowed depositors to withdraw from their foreign currency deposits an amount of 800 dollars per month, half of it in cash in US dollars and the other half in Lebanese pounds (initially at a rate of 12,000 pounds and subsequently at a rate of 15,000 pounds), half of that in cash and the other half in the account to be spent on purchases via a bank card. This entailed a direct haircut on these deposits ranging between 76% and 92% of the value of the deposits withdrawn under the circular. Notably, Circular 158 set an amount of 50,000 US dollars as the maximum that could be withdrawn under the provisions of this circular over ten years, provided that total annual cash withdrawals in US dollars from all of a depositor's accounts across banks did not exceed 4,800 US dollars per depositor. In turn, Banque du Liban Circular No. 165, issued this past April 19, sparked widespread debate in economic and banking circles, with some arguing that it facilitates money laundering operations, others contending that it threatens to write off old deposits, and still others viewing it as paving the way for the creation of a new banking entity. The new circular concerns electronic settlement operations for cash funds and external transfers, and aims to open new accounts in US dollars and Lebanese pounds and regulate the use of cash checks so that they may be used to settle bank and electronic transfers of cash funds and to settle check clearing. The latest circular comes at a time when confidence in Banque du Liban's measures and circulars has vanished, after it failed to safeguard depositors' right to access their deposits, whose value has been eroded by the collapse of the national currency, unfair restrictions on withdrawals, and their linkage to an arbitrary rate for the US dollar. Lack of confidence in Banque du Liban has not been confined to depositors alone, but has also included bank owners, who hold it responsible for withholding their funds (depositors' funds) and lending them to the Lebanese state. The circular aims to revive the role of the banks after their role today has been reduced to liquidating what remains of the deposits of depositors whose numbers are shrinking day by day, executing Sayrafa operations that have become the exclusive preserve of major merchants, in addition to receiving external transfers. This has led to a decline in the banks' revenues from their various operations, leaving them limited to modest commissions charged for their services mentioned above, at a time when their operating costs remain high despite closing most of their branches and laying off a large number of their employees. What makes restoring activity to the banking sector imperative is that the entire sector is on the verge of closing its doors after the banks chose to protect their own funds, forfeited depositors' rights, and breached the trust placed in them. This led the banks to lose their ability to attract deposits on the one hand, and their role in lending to economic activities and individuals on the other, making cash circulation and the cash economy virtually the only available solution for settling payments among various economic actors. National responsibility demands engaging objectively with the circulars and measures taken by Banque du Liban, regardless of the many criticisms of the monetary policies it has adopted to date. Indeed, the public interest requires making use of any circular that could contribute to finding suitable solutions to the banking sector's distress, especially since restoring economic activity to its former vitality depends on the banking sector fulfilling its role in attracting deposits, financing investments, and settling payments. The impasse in which the Lebanese economy across all its sectors remains mired requires diligent work for years to come to recover from its slump, and restoring confidence in the capacity to recover must be accompanied by practical measures from the banking sector to open a breach in the wall the banks have erected around themselves and return to the fold of the national economy before foreign banks infiltrate it. After all, nature abhors a vacuum, and the failure of national banks to fulfill their role invites the emergence of alternatives, whether local or foreign; as for Banque du Liban, perhaps the latest circular will open the door to further circulars that restore confidence in the role of this national institution and secure a safe transition of its governorship to the first deputy governor pending the appointment of a new governor.

Translated from Arabic with AI. Read it in Arabic