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Central banksJuly 27 2022

Lebanese central bank governor defends economic record

Banque du Liban governor Riad Salamé tells John Everington that the bank's controversial engineering scheme is not responsible for the country’s economic meltdown. 
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Lebanese central bank governor defends economic record

As governor of the Banque du Liban (BdL) since 1993, Riad Salamé has been one of the most influential figures in Lebanese public life in recent decades. Yet the country’s economic collapse — virtually unparalleled in recent history — has severely tarnished his reputation.

Many blame the failure of BdL’s ‘financial engineering’ programme — which saw the central bank offer unsustainably high interest rates to attract US dollars — on the collapse of the Lebanese pound, which has lost around 80% of its value since 2019.

Mr Salamé’s personal finances have come under increased scrutiny, both at home and abroad. France, Germany and Luxembourg have seized properties and frozen assets in his name, worth €120m in March, as part of a French investigation into his finances.

That same month, a judge in Lebanon’s district court charged Mr Salamé and his brother Raja (who was subsequently taken into custody) with money laundering via several companies that they own.

Mr Salamé spoke to The Banker about the charges against him and his brother, prospective reforms to the banking sector as part of a preliminary agreement between the government and the International Monetary Fund (IMF), and his future at the BdL.

Q: The preliminary agreement signed between Lebanon and the IMF in April mandates an audit of BdL assets. Is this process underway?

A: The financial audit mandated by the IMF has been completed and the audit on [BdL’s] gold has started.

What has also begun is a forensic audit that was mandated by the Lebanese government. It is for local purposes and nothing to do with the IMF agreement. According to the contract between auditors Alvarez and Marsal and the Ministry of Finance, the timeframe for the audit report is about three months from the end of June.

Q: The IMF agreement also envisages the auditing of the country’s largest banks as well. Has this process begun yet?

A: This is part of bank resolution legislation, which is one of the conditions that has been asked for by the IMF. The bank resolution requires parliamentary approval and once that is achieved the restructuring of the banks will start.

Q: Do you think it’s inevitable that some of the largest banks are going to have to cease operating as part of the restructuring?

A: Yes — those banks that cannot meet the new requirements will be closed.

Q: While the Lebanese pound remains pegged at L£1507.5 to the US dollar, the current rate on the street has fallen to more than L£29,000 to the dollar. What more needs to be done to stabilise the value of the currency?

A: As you know, one of the prior actions required by the IMF is the issue of the unification of exchange rates, which will eliminate the differences in rates that exist today. This unification should happen once parliament approves the 2022 budget.

The government is still cashing its revenues using the pegged exchange rate… this gives an advantage to arbitrageurs who can pay their dues to the government at a de facto reduction of almost 80%. So, you need to fix the policy of the exchange rate in the budget and then from there on all the transactions will happen at a floating rate, after which the central bank will only intervene in cases of excessive volatility.

Q: To be clear, this means that the Lebanese pound will no longer be pegged to the dollar at L£1507.5?

A: Yes.

Q: There has been criticism internationally about the reporting standards used by the BdL. Do you accept that this is the case?

A: Whatever is needed to improve reporting systems, we will encourage. The bank resolution legislation allows external experts to assess banks operations and advise them in how to operate. So, any improvement is welcome.

Nevertheless, the existing reporting systems are compliant with what is happening worldwide. Before the crisis, Lebanon implemented IFRS9 and International Accounting Standards, which, after the crisis of 2019, became more difficult to work accordingly. With the restructuring of the banking sector, we will be back to the international norms and improve wherever there is need for improvement.

With the restructuring of the banking sector, we will be back to the international norms and improve wherever there is need for improvement

Yet our accounts are transparent and our balance sheet is published twice a month.

Q: Your current term as governor of the BdL comes to an end in summer 2023. Are you planning to continue as governor after that?

A: No.

Q: So, you intend to stand down at the end of your current term?

A: Yes.

Q: The BdL’s programme of financial engineering has been blamed for triggering the current economic crisis in 2019. How valid is this criticism?

A: The financial engineering programme consisted of transactions between the BdL and the banks, and funds that were either with the central bank or the banks themselves. The financial gap that was created was due essentially to imports.

Between 2017 and 2019, Lebanon had imports of almost $65bn. If funds left the system, they left because of the funding of these imports, which were essentially related to the energy sector and a pattern of high consumption in the country.

The government itself had drawn on BdL in the period between 2010 and 2020 via a series of loans, drawing a total of $62bn in 10 years. If you consider that these imports for the energy sector and the private sector were made in foreign currency and then sold on the market in Lebanese pounds, you can see the reason behind the gap in the BdL’s external accounts.

So, if you put together the part that was dedicated for imports for the energy sector and the imports to the private sector, and consider that these imports were in foreign currency while they were sold in the market in Lebanese currency, you’ll see that the reasons behind the gap in BdL’s external accounts is due to these two factors, which is the imports and the government spending. It’s not really due to the financial engineering programme.

The country’s default on its debts in March 2022 created a big confidence shock and triggered the decline of the Lebanese pound in a massive way. Despite this, the country is still providing for its needs because of the funds that were gathered from the financial engineering programme to finance the needs of the public and private sector. The government has no income now in foreign currency and an insignificant amount in Lebanese pounds.

Q: What is the level of BdL’s foreign currency reserves as of the end of June? Do you have any projections for where the reserves are likely to be by the end of the year?

A: We don’t make such projections. But as of late June — and without taking into consideration the value of BdL’s holdings in gold — we are at over $11bn. From the end of 2021 to June 15th, the decline in foreign reserves was $2.2bn.

Q: There are several allegations that you have laundered significant amounts of money and that BdL charged Lebanese banks commissions on government bond purchases that were then paid to Forry Associates — a company controlled by your brother Raja. What is your response to these allegations?

A: I have presented documents that prove that these allegations are not true. I have presented a statement of accounts that show that I had $23m in 1993, and that my monthly income when I was working as a private banker was $165,000 per month. 

I have also presented documents that show that whatever my brother was involved with did not have any income from the central bank, from its balance sheet or its funds.

And I have presented an audit report of my own accounts, on the topics of controversy. The audit report, which was done by a reputable firm [BDO Semaan Gholam], showed that I had no income in my private account from the central bank, and that Forry Associates, where my brother was involved, never received funds from the central bank.

I have also documented the evolution of my net worth for the past 30 years and more.  The audit report also contained a tracing of the origin of a few investments I have abroad. The judiciary here has required a declaration of wealth done in 1999, as is required under Lebanese law, which was delivered by the office of the prime minister (as it was by law under its custody) prior to all the contracts related to Forry. At that time, it was written in the declaration, of which I kept a copy, that I had around $43m in cash and $11m in assets. I have also presented bank statements that show the interest income from 1993 to 2020, showing that no money was credited to my accounts except the interest rate yield, and that was the only income in these accounts.

So, I have been transparent in everything. We will see how things will develop; but, as you can see, it was a misrepresentation to say that funds from the central bank were used in all these operations.

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John Everington is the Middle East and Africa editor. Prior to joining The Banker, John was the deputy business editor of The National in the UAE, and has also worked for Dealreporter, Arab News and The Telegraph. He has also covered the telecom sector in Africa and the Middle East, living and working in Qatar and the UK. John has a BA in Arabic and History and an MA in Middle Eastern Studies from the School of Oriental and African Studies (SOAS) in London.
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