Lebanon has no haircut or capital control plans, central bank governor says
The regulator's governor Riad Salameh said the bank can immediately deploy $30bn if required
Lebanon’s central bank governor Riad Salameh said there are no plans to impose capital controls or a haircut on depositors as the country faces its largest economic crisis in three decades.
The central bank will look “to protect depositors,” Riad Salameh said in a televised press conference at the regulator’s headquarters in Beirut as citizens protested outside. “We have taken enough measures so that depositors don’t lose money, there won’t be a haircut, and the central bank doesn’t support this.”
A haircut is a financial term used to describe a devaluation of an asset to provide a cushion to lenders. In 2011 depositors of banks in Cyprus, exposed to the Greek debt crisis, lost as much as 60 per cent of their uninsured deposits on balances of more than €100,000. The measure was a requirement at the time for Cyprus to secure a €10 billion bailout from the EU. In recent weeks some in Lebanon have touted the idea as the only way out of the current impasse, as the country faces debt obligations maturing this month as well as next year, and its currency, pegged to the dollar since 1997, is under pressure and has lost more than 19 per cent of its value in the black market.
“The central bank is not authorised to do a haircut and it doesn’t support such a measure,” Mr Salameh said.
Mr Salameh said the central bank had instructed banks to adhere to certain confidence-building measures to restore stability and assure jittery citizens that have been critical of lenders for implementing curbs on withdrawals and charging fees on dollar transactions. One of the requests was for banks to maintain the limit on credit cards and not reduce it, to resume lending to clients and facilitate trade financing, with the goal of averting a liquidity crunch. However, he said the transfer of money abroad will be subject to certain conditions
“Deposits are secured,” Mr Salameh said. “The measures we put in place are to protect any bank … we notified the banks that they can borrow from the central bank at 20 per cent but the funds are not permitted to be transferred abroad.”
The governor downplayed concerns about the strength of the central bank saying its reserves excluding gold stood at $38 billion and the regulator has the ability to deploy $30bn of that amount if needed immediately and will maintain the stability of the Lebanese pound.
The country’s worsening economic climate culminated in more than three weeks of protests that forced prime minister Saad Hariri to step down last month. Citizens have demanded reforms and changes in the political system that has governed the country since the end of a 15-year civil war in 1990. They blame Lebanon’s political elite for widespread
corruption and nepotism, which they say contributed to the country accruing $86bn of public debt, equivalent to 150 per cent of gross domestic product. The central bank holds about 35 per cent of the state’s debt in Lebanese currency.
The social unrest and protests are the largest the country has seen since the assassination of former prime minister Rafik Hariri in 2005, which forced Syria to withdraw its troops from the country after a 29-year presence there.
Lebanon saw an outflow of about $3bn in the first nine months of the year, according to the Institute of International Finance. Mr Salameh put the figure at $2bn and said some $3bn was withdrawn by depositors and stored at homes in Lebanon.
Both Moody’s Investors Service and Fitch Ratings cut the ratings of the country and its banks further into junk territory, on the back of the deteriorating economic climate.
Deflecting public criticism waged at him by some in Lebanese media outlets, Mr Salameh said over the last 27 years central bank adhered to policies that helped Lebanon in environments that were not conducive to the bank’s operations.
“Financial engineering allowed us to accumulate reserves which backed the Lebanese pound, and implementing international standards of the banking system, and funding the country,” he said.
Mr Salameh referred to various challenging junctures that included heightened internal political tensions that left the country without a president on two occasions, the sanctioning of by the US of two Lebanese banks that led to their closure and regional geopolitical developments like the war in neighbouring Syria that has had direct reverberations on Lebanon’s economy.
“Lebanon today is living in a historic time … our view is that the government’s budget should not have a deficit…we also hope there are essential reforms…and that the private sector is reenergised,” Mr Salameh said.
Lebanon’s economy is projected to slow to 0.2 per cent this year, from about 0.3 per cent in 2018, according to International Monetary Fund estimates. Prior to Mr Hariri’s resignation, the fund was assessing an emergency economic reform package unveiled by the Lebanese government that sought to tax banks and cut the pay of officials, in an attempt to avert a financial crisis. The emergency plan, announced by Mr Hariri on October 21, proposed a 2020 budget that targets a fiscal deficit of 0.6 per cent of GDP.
Most of Lebanon’s sovereign debt is held by local banks and the financial system, which underpins the economy, attracted billions of dollars in capital flows that helped the country service its fiscal and external deficits over the past three decades.
“I do not want to blame responsibility on anyone,” Mr Salameh said. “This is an exceptional time in Lebanon. The priority today is to preserve stability with the measures and objectives so that the country can take off again once the situation [improves]… Lebanon has the capacity … to overcome … to exit this crisis.”
Updated: November 11, 2019 07:10 PM