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ViewpointAugust 27 2012

Moving Lebanon from stability to growth

Having protected the country's economic stability throughout a period of intense economic and political turmoil, the Lebanese central bank is now tasked with boosting job creation and lowering the country's growing budget deficit.
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Moving Lebanon from stability to growth

The Lebanese financial model has managed to maintain a remarkable resilience, defying all odds against severe internal and external shocks, whether political, financial or security-based. This marked resilience, which has won the appreciation and confidence of the international markets, is based on sound and stable monetary and financial policies.

At the monetary policy level, Banque du Liban's (BDL) continuous commitment to exchange rate stability has been the cornerstone of our financial stability. We were able to ensure price stability, target low inflation, wipe out the risk of speculation and consequently boost confidence in the national currency, as evidenced by persistent conversions from the US dollar into the Lebanese pound.

BDL’s strategy of accumulating a high stock of assets in foreign currencies over the years has proven to be a buffer against any crisis that hit the economy. The bank is currently holding a record level of more than $35bn in foreign currency assets, in addition to gold reserves worth about $15bn at current prices. Lebanon is the second largest holder of gold in the Middle East and north Africa region.

Counter-cyclical reaction

In order to preserve monetary stability and contain financial market pressures, we have resorted to several financial engineering tools such as swap operations on treasury bills and the issuance of European certificates of deposit (CDs). Liquidity in the Lebanese pound has been managed through the issuance of local currency CDs in order to prevent speculation and keep inflation under control. While complying with market tendencies, interest rates were maintained at appropriate levels to spur capital inflows and strengthen the external position.

Over the past few years, we have succeeded in building confidence in our economy and financial sector. We have weathered numerous internal and external storms, ranging from the 2006 Israeli-Lebanon war to the 2008 global financial crisis and subsequent eurozone debt crisis to the recent Arab Spring uprisings.

To shield the banking sector and deepen its resilience, BDL has implemented prudent regulatory measures by imposing strict limits on lending and cautious investment rules. Banks were required to avoid excessive leveraging, to maintain high levels of liquidity, to build adequate provisions against doubtful operations, and to abide by international standards on good governance, risk management, transparency and capitalisation requirements. These measures served the Lebanese financial sector well in escaping the devastating effects of the worst global financial crisis to hit the world economies in 2008.

Lebanon had a counter-cyclical reaction as deposit inflows to the country increased strongly. Deposits grew substantially to currently reach more than three times Lebanon's gross domestic product. The economy has achieved an average growth rate of 8% between 2008 and 2010, whereas the US and European economies have struggled against the recession during the same period.

Safeguarding stability

BDL has also strived to preserve the high standing of the country's banking sector and defend the interests of depositors by encouraging bank mergers, except between Lebanon’s alpha banks, which are the 12 banks with deposits in excess of $2bn. We have set a clear distinction between the role of commercial banks and investment banks, imposed academic, technical and ethical requirements for staff in key banking and financial positions, and promoted the export of our banking services by supporting the regional expansion of leading Lebanese banks.

We are also working to strengthen banks’ capital funds in order to attain a capital adequacy ratio of 12% by 2015. Banks in Lebanon are strictly committed to the implementation of Lebanese laws and international regulations on banking transparency and combating money laundering while maintaining confidentiality, and are careful to defend their good reputation and preserve their transparent relationships with their correspondent banks.

BDL has not only set out rules to safeguard financial stability, but has also created an incentive loan programme by backing credits that spur economic activity and job creation, as well as those that are socially beneficial. This programme has proved to be successful, as the level of credit to the private sector has surpassed that to the public sector, reaching historic levels of about $43bn in June 2012.

Recently, Lebanon has faced some political turbulence in addition to the surrounding turmoil and unrest in Syria. Despite these challenges, we have succeeded in preserving confidence in our banking sector, with deposits expected to increase by 8% in 2012. In light of the recent regional uprisings and in order to monitor the performance of the Lebanese banks that are present in those areas affected by turmoil, we stipulated banks must have sufficient capital allocated and take the necessary provisions ahead of time, as well as to conduct stress-tests and scenario analysis on a regular basis.

As for the current year, we expect economic growth to be in line with the International Monetary Fund’s forecast of 3% – a rate well above that of similar non-oil-producing Arab countries. However, the Lebanese economy is highly volatile with political and security factors playing important roles in this respect. BDL will maintain its stabilising financial and monetary policy as a solid pillar of economic growth. The sooner a proper political and security climate is restored, the sooner we will see an uplift in economic activity. All elements for steady growth are present; a well-capitalised and profitable banking sector, a high level of liquidity, a dynamic private sector and exceptional human capital resources. The main pitfall to tackle, however, is the implementation of the major structural reforms to reduce the size of the growing annual budget deficit.

Riad Salameh is Lebanon's central bank governor.

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