Lebanon’s Salameh to Push IMF Talks But Dual Pound Rate to Stay
Lebanon’s central bank will do what’s needed to advance stalled bailout talks between the government and the International Monetary Fund, its veteran governor said, but for now won’t accede to a demand to end the dual exchange rate that curbs essential prices.
Riad Salameh said in an interview Friday that possible steps include opening the bank’s books and undertaking with French officials a balance-sheet audit demanded by officials abroad to unlock billions of dollars in aid. Lebanon desperately needs the funds after this month’s explosion in Beirut deepened the nation’s worst political and economic crises in decades.
“All I can tell you is that the central bank is willing to do what is necessary to make the relation with the IMF a good one and a sustainable one,” said Salameh, who’s been at the helm of the Banque du Liban, or BDL, since 1993.
Decades of corruption and mismanagement saw Lebanon accumulate debt of up to 175% of output. The economy has been in freefall since October, when anti-government protests accelerated a financial crisis years in the making.
As confidence fell, dollar inflows dried up and the currency plummeted, the government was forced to default on its foreign debt and turn to the IMF for a $10 billion loan. Inflation soared as the pound, pegged to the dollar since 1997, plunged in value.
The central bank subsidizes wheat, fuel and medicine imports at the rate of 1,507.5 pounds per dollar, and essential food items at 3,900 pounds. Foreign-exchange reserves of about $20 billion are dwindling, and Salameh has said he won’t dip into banks’ mandatory reserve requirements estimated at $17.5 billion. Other imports are priced at the market rate of around 7,000 pounds, making them prohibitively expensive for many.
“For the time being, we have to live with these two prices because the country will suffer a lot if we depart from the official price,” Salameh said. Leaving the peg and unifying rates, an IMF demand, will depend on Lebanon’s political, economic and fiscal standing, he said.
Premier Hassan Diab’s short-lived administration quit following the Aug. 4 explosion in Beirut’s port that killed more than 170 people and shattered parts of the city, though it continues in a caretaker capacity. Talks on naming a new prime minister are set for Monday.
The central bank and local lenders have been at the forefront of Lebanon’s crises. They opposed a government recovery plan approved by the IMF, and Salameh took a different approach to mitigate losses accumulated by both BDL and banks, estimated at 241 trillion pounds.
Talks with the Washington-based lender have been on hold for months with the government and other stakeholders unable to agree on distributing the losses.
The IMF wants more transparency and accountability, such as comprehensive audits of key institutions, including the central bank, and an end to multiple exchange rates to stem the pound’s deterioration.
President Emmanuel Macron has backed those calls for political change in the former French protectorate. Donors are concerned aid could be siphoned off by a corrupt ruling class or funneled to the powerful Hezbollah militant group.
Salameh on Thursday unveiled directives asking banks to recapitalize and conduct a fair valuation of their assets and liabilities by February 2021. The governor has asked the lenders to raise capital by 20% by June.
Banks who fail to comply will be taken over by the central bank. Salameh asked lenders to offer depositors the option of converting their funds to perpetual bonds or shares.
The central bank has also proposed that banks get clients, particularly the “politically exposed” -- a designation used to identify those with possible ties to politicians or in control of companies that count politicians as partners or equity owners -- to return some of their funds from abroad.
©2020 Bloomberg L.P.