Banque du Liban and the Desired Change

It is no minor detail that the parties holding sway over political and economic decision-making in Lebanon have proved unable to renew or extend the terms of their key figures in decision-making posts, as what is happening today is an indicator of shifts and changes in the rules governing public affairs. These changes have imposed themselves on the monetary and economic scene with the departure of the former governor from the governorship of Banque du Liban, after their contours had first crystallized on the security and political scene with the departure of the former director general from the General Directorate of General Security, and the wager today is that change will encompass every position of responsibility in the state and its agencies. The assumption of responsibility at the head of the monetary authority by the first vice-governor of Banque du Liban, in implementation of Article 25 of the Code of Money and Credit, serves as a prelude to an indispensable change in the monetary policy pursued by the former governor for thirty-odd years, dating back to his ascension to the governorship of Banque du Liban. This is particularly true given that the "new governor", together with the rest of the vice-governors, had previously shown disapproval of past monetary policies, announcing their intention to halt state financing in addition to halting operations on the Sayrafa platform. While the contours of the monetary policy that the "new governor" intends to implement have yet to crystallize, especially since what matters is implementation rather than glittering headlines and broad, ambiguous texts, voices are rising to question the soundness of the choices he has put forward and to regard his role as an extension of previous monetary policies. Yet the declared stances of the vice-governors point to a fundamental distinction in their approach to the monetary policy that ought to be pursued, and demonstrate their adherence to enforcing the provisions of the Code of Money and Credit. Throughout his tenure, the monetary policy adopted by the former governor of Banque du Liban acted as an incentive for successive governments to expand their public expenditures. Those expenditures were financed primarily through Treasury bills issued by Banque du Liban, in its capacity as the state's bank, and subscribed to by individuals and institutions locally and even internationally. This occurred without those concerned paying heed to the high cost entailed by the public debt, which left the state unable to service a debt that grew year after year like a snowball. Banque du Liban went to excess in using interest rates to attract deposits to finance the public sector at the expense of productive investments, encouraging banks to persist in risk-taking, which in turn placed pressure on the stability of the national currency. At the same time, the exchange rate of the Lebanese pound was pegged exclusively to the US dollar rather than other hard currencies, increasing the Lebanese pound's exposure against other major currencies. This culminated in the financial engineering operations through which Banque du Liban sought to acquire US dollars from local markets, and which in turn saddled Banque du Liban with massive liabilities toward the banks. Nor was the experience of the Sayrafa platform, devised by the outgoing governor, any less costly than his earlier monetary policies, as it drained what remained of Banque du Liban's foreign-currency reserves on the one hand, and caused an increase in the state's public debt, particularly the portion denominated in foreign currencies, on the other. Conversely, putting an end to previous monetary policies is the gateway to any desired change, especially since the crux of the crisis lies in the growing role of Banque du Liban's monetary policies at the expense of fiscal policies; indeed, the latter became subordinate to monetary policies rather than guiding them. Failure by the fiscal authority to set appropriate fiscal policies cannot be offset by monetary policies, for cooperation and complementarity between authorities begin only after each authority fulfills its own responsibilities. Proceeding from the above, the headlines set out by the "new governor" at his press conference on the eve of the expiration of the former governor's term constitute a suitable starting point for reconsidering previous monetary policy, particularly floating, liberalizing and unifying the exchange rate. The cost of maintaining the stability of the pound's exchange rate since its appreciation in 1992 outweighed its economic return, because it lacked the flexibility required by the dynamism of monetary and financial markets amid growing deficits in the state budget and the balance of payments. Instead of pegging the Lebanese pound to a basket of major foreign currencies, it was linked to the US dollar and fixed against it. This exposed the pound to the inflationary pressures faced by the US dollar and eroded the competitiveness of Lebanese goods destined for export. Because the exchange rate acted as an impediment to the growth of economic sectors, especially productive ones, liberalizing the pound's exchange rate is an indispensable measure that contributes to strengthening the resilience of the national currency and economy. Unifying the pound's exchange rate, meanwhile, is unavoidable now that the multiplicity of exchange rates is no longer confined to the official rate and the rate prevailing on the parallel market, having been compounded by several Banque du Liban circulars, each of which adopted a different official rate from one circular to the next. On the one hand, this facilitated speculation against the national currency through the spread between the Sayrafa rate and the parallel market rate, and on the other, it resulted in unfairness in dealing with depositors and economic actors, who suffered heavy losses in exchange for obtaining a tiny fraction of their foreign-currency deposits. This requires working to unify an exchange rate whose fragmentation has hindered economic activity, disrupted financial transactions, thrown the door wide open for a tiny minority to engage in manipulation and illicit enrichment at the expense of national currency stability, and inflicted heavy losses across various economic sectors. As a prelude to unifying the exchange rate, Banque du Liban must abandon the multiple rates it created through its circulars, so that at a subsequent stage the currency can be floated to reflect the real market rate. The rate that must be adopted is the one formed through the interplay of supply and demand for foreign currencies in the real market, where those in need of foreign exchange meet "spontaneously" with those demanding the national currency. Those in charge of the Sayrafa platform failed to achieve this or to liberalize transactions on it, turning it into an artificial market in which Banque du Liban set the exchange rate without being able to transmit it to the real market. Alongside liberalizing, floating and unifying the exchange rate, which the "new governor" announced he would work to achieve, he also declared his intention to halt financing of the state except under a law passed by Parliament to fund or lend the government the US dollars it needs to pay the salaries of public-sector employees, military agencies and retirees, as well as to secure medications for intractable illnesses and meet other state obligations, especially since such financing had been conducted using mandatory reserves, meaning depositors' funds. Financing the state out of mandatory reserves is problematic whether it is carried out under a law legitimizing Banque du Liban's dipping into what remains of depositors' funds, or continues as was happening right up to the eve of the end of the former governor's term without any legal text. The problem lies in the fact that financing the state will lead to the dissipation of depositors' money, whether done pursuant to a statutory provision or through a discretionary interpretation of the provisions of the Code of Money and Credit. This obliges the caretaker government to abandon the use of mandatory reserves and seek alternative, sustainable sources of financing. Moreover, the fears voiced by the caretaker government that it will be unable to secure public-sector and retirees' salaries, as well as medications for intractable illnesses, if Banque du Liban halts state financing run counter to what the "new governor" announced at his press conference, namely that the state's monthly revenues from fees and taxes exceed 20 trillion Lebanese pounds, roughly equal to what it needs to finance these expenditures. This offers those in charge of public finances an opportunity to change their approach to state financing by activating the collection of due revenues and simplifying and modernizing payment procedures. For Banque du Liban to stop financing the state except in accordance with the provisions of the Code of Money and Credit, or pursuant to a law enacted by Parliament for that purpose, relieves those running Banque du Liban of legal liability for drawing on mandatory reserves, yet it does not absolve them of moral responsibility toward depositors and their deposits. It would have been preferable had the "new governor" sufficed with announcing a halt to state financing, rather than inviting the government to secure a law from Parliament allowing it to borrow from Banque du Liban. The "new governor" is also faulted for failing to touch, even remotely, upon the issue of depositors' funds in the banking sector and his vision for reconstituting deposits, especially as state financing has been channeled through Banque du Liban, which attracted those deposits by means of interest rates, discounting and rediscounting. After the former governor succeeded in keeping banks afloat and preventing their bankruptcy, the time has come to safeguard depositors' rights and enable them to recover them within a realistic timeframe and at fair rates. On the other hand, Lebanon's exit from its economic and financial crisis requires efforts from the relevant authorities, foremost among them the fiscal and monetary authorities, to stem a slide into further deterioration and work to achieve the aforementioned reforms. The timing is particularly opportune to embark upon these efforts given the hard-currency inflows provided by the return of Lebanese expatriates to Lebanon, which contribute substantially to balancing supply and demand for hard currency and, consequently, to economic stability in general and exchange-rate stability in particular. Despite the condition to which Banque du Liban has been reduced, it remains the state's bank and the bankers' bank, with all the responsibilities those attributes entail, called upon to fulfill its duties and bear their consequences. The independence enjoyed by Banque du Liban, its possession of monetary tools to steer the money market, and its material and moral authority to regulate and guide the banking sector give the "new governor" wide latitude to act in contributing to resolving the crisis and its repercussions.

Translated from Arabic with AI. Read it in Arabic