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Lebanon’s c. bank transition: Task cut out for Mansouri after Salameh’s departure
Never has so much ink been spilled on the departure of a high-ranking official than that of the governor of the central bank of Lebanon (Banque du Liban or BDL).
Riad Salameh’s 30-year tenure ended on Monday. With two arrest warrants and a subpoena from Interpol and multiple judges in Lebanon, Salameh is leaving behind a house in serious disarray: The Lebanese pound or lira having lost 98 percent of its value, inflation being in triple-digits, imports now accounting for more than 90 percent of the country’s GDP and the central bank having lost two-thirds of its foreign exchange (FX) reserves.
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According to an IMF statement, inflation in the country accelerated to 270 percent y-o-y in April 2023. The fiscal deficit is estimated to have widened to 5 percent of GDP in 2022 due to collapsing revenues.
Moreover, the current account deficit is estimated to have widened to almost 30 percent of GDP due to surging imports. Meanwhile, foreign direct investment (FDI) has remained depressed, as have been other financial inflows, the IMF statement added.
All eyes on Wassim Mansouri
In Beirut, all eyes are now on Wassim Mansouri, the first vice-governor of the central bank who, by law, has assumed the role of acting governor. The four vice-governors last month announced a transition to a free-floating rate and a decommissioning of the Sayrafa platform, which was criticized for its lack of transparency, unsustainability and the possibilities it left open for arbitrage, mainly as the gap grew between Sayrafa and the parallel market.
Wassim Mansouri, first vice governor of Lebanon's central bank, leaves with two other vice governors, after meeting with Lebanon's caretaker Prime Minister Najib Mikati, in Beirut, Lebanon July 24, 2023. (Reuters)
According to research by BLOMINVEST, Sayrafa transactions reached $1.5 billion over the last two weeks. Given that BDL sold them at the rate of 85,500 Lebanese pound (LBP) per USD, and then re-purchased them from the market at the (average) rate of 91,500, it implies that BDL lost 6,000 LBP per USD transacted or a total of 9 trillion LBP.
In a press conference, Mansouri set the tone for his term, saying there would be no more “free” money for the government. He further said that in the absence of a budget in 2023 and 2024, he would propose a law to the parliament to limit Treasury borrowing, which was draining the BDL reserves.
The BDL balance sheet shows it had lost around $25.5 billion, between a high of $40 billion in October 2019 to a low of $14.5 billion in May 2023.
The latest IMF report on the country’s economy, titled ‘Lebanon: Article 4 Consultation,’ states that the economic and social impact of the crisis has been staggering: Output contracted by an estimated 40 percent over 2019-22, while unemployment and poverty have increased sharply. After three years, the public sector is failing, the provision of public services is almost non-existent, and the banking sector has collapsed. Along with these, the influence of a shadow economy has increased sharply. Moreover, reserves have been draining due to continuous borrowings from the foreign exchange reserves of the central bank.
What are the priorities of the new acting governor?
“I expect the new governor to prioritize the independence of the monetary authorities,” Nassib Ghobril, Chief Economist at the Byblos Bank Group, told AlArabiya English.
To make this happen, the “generous” flow of fuelling through government finances must first stop. Treasury advances amount to some $25 billion for electricity alone, Salameh had disclosed earlier. The vice-governors’ plan says only around $200 million of monthly funding will be allowed, but this ceiling will have to be ratified by the parliament. Ghobril believes this is a tricky question as the law’s ratification will be hard to pass in a divided political scenario.
The ratification of economic reforms has been hanging in the parliament for years. Expecting a new law to curb expenditure to see the light of the day in a divided parliament is a little short of wishful thinking, according to Dr Mounir Rached, a former senior economist with the IMF and a renowned international consultant.
Determining the government’s revenues is easy, but expenditures constitute the biggest mystery of all, Rached told AlArabyia English.
So, where do we go from here?
Like King Louis XV of France, who had left the economy as saying, “After me the Flood,” Salameh neither announced a backup plan to support the IMF guidelines nor initiated any reforms for the banking sector or the recapitalization of Lebanese banks.
“We need to see if the new vice-governor will support the proposed IMF agreement with Lebanon,” Rached said.
According to Dr Marwan Barakat, Group Chief Economist and Head of Research at Bank Audi, the transition of the BDL vice-governor to govern “will be smooth” but with challenges.
“Many experts believed that the transition of the BDL first vice-governor to BDL governor will be smooth, though challenges are significant in the realms of monetary policy, exchange rate management, Sayrafa platform and banking circulars,” Barakat told Al Arabiya English.
As for the country’s general economic outlook, it would depend on the overall politico-economic environment. If the latter improves, monetary and banking conditions will also improve, Barakat added.
“Such a politico-economic breakthrough depends on the finalization of presidential elections quickly, the formation of a credible functional Cabinet, the realization of a final agreement with the IMF and the materialization of international assistance from donor countries and institutions,” he said.
Barakat feels the departure of Salameh will enhance growth to close to double-digits, and a stabilization of the exchange rate will be possible with the containment of inflation.
“The balance of payments will shift to a surplus, and FX reserves will also be on the rise. Otherwise, Lebanon will be heading to a period of macro volatility, hyperinflation and massive socioeconomic pressures on households,” he added.
‘Unravelling the BDL balance sheet riddle’
“Considering this paradox, one hopes the country’s political authorities will rise above their selfish interests, foster common ground, reduce differences and bickering and pursue settlement and reforms,” Barakat concluded.
Mansouri will also have to live with the riddles of the BDL’s balance sheet (published bi-weekly), which has seen notable changes throughout the crisis, especially on the assets front. The item that was most intriguing up to the end of January 2023, when the official exchange rate was still set at 1,507 LBP, was ‘Other Assets’, which, according to BDL, included open market operations and seigniorage. They even included BDL losses from such transactions and FX loans to the government as ‘assets’ on the premise that BDL could recoup them all as revenue in the future. Their value on January 1, 2023, was 142.4 trillion LBP, research in BLOMINVEST Lebanon showed. Mansouri’s challenge will now be to give more credibility to those figures.
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