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Financial crisis

Subsidies: Are BDL’s mandatory deposits really untouchable?

Banque du Liban Gov. Riad Salameh said that the central bank has the ability to continue the current subsidies on basic imported goods for just two months, an apparent ultimatum directed at a political class that refuses to make any decisions

Subsidies: Are BDL’s mandatory deposits really untouchable?

BDL headquarters in Hamra, Beirut. (Credit: Marwan Assaf)

With its foreign currency reserves falling by an average of nearly $1 billion every month for over a year, will Banque du Liban be able to continue to subsidize essential imported goods?

In theory, yes. But Lebanon has no interest in maintaining such a costly and inefficient mechanism.

According to official data, the central bank still had some $20 billion in foreign currency reserves at the end of November, not counting eurobonds.

But pressure mounted a notch on Nov. 25, when a source close to BDL told Reuters that foreign exchange reserves currently stand at $17.9 billion with only $800 million in usable reserves.

A few days later, BDL Gov. Riad Salameh drove his point home in an interview with Saudi-owned TV station Al-Hadath, saying that the central bank will be able to cover subsidies for just “two months.”

This statement caused panic among the Lebanese, who will be left defenseless against a sharp rise in prices, which have already been increasing for a year now.

If Salameh stated that he would not lower the threshold of $17 billion, it is because this amount is the minimum obligatory reserves required of domestic banks, which is equivalent to 15 percent of the country’s total foreign currency deposits.

“This ratio is imposed on banks as per the central bank’s Decision 7926 of Sept. 20, 2001, which is based, among others, on Article 76 of the Code of Money and Credit, which has been amended several times,” says Nasri Diab, a lawyer in the Beirut and Paris bar associations.

Extending the deadline

Reuters’ source said that in order to keep subsidizing key imports, BDL’s Central Council is discussing the option to lower the required reserve ratios from 15 percent to around 12 or 10 percent, freeing up at least $3.4 billion. As things stand, this would allow it to keep subsidies in place for a few more months.

“Obligatory reserves are a monetary policy tool whose main role is to limit the credit multiplier. But this is no longer the case since no bank is giving credit anymore,” says Charbel Nahas, an economist, former minister and the secretary-general of Citizens in a State, a minor political party.

Commercial banks, however, do not agree. “If ratios are modified, the released funds that were deposited at the central bank as per BDL regulation will have to return to banks,” says Nassib Ghobril, the director of the economic research department at Byblos Bank.

Riad Obegi, the CEO of Banque Bemo, views this as an opportunity for the banking sector. “Banks would naturally be encouraged to inject liquidity back into the market, and in particular into productive exporting sectors, to revive the economy,” he argues.

For others, this is a matter of principle. “This money belongs to depositors and should not be spent. Obligatory reserves are the last strategic reserves of the Lebanese whose deposits have evaporated in recent months,” says Mansour Bteish, the former economy minister and a former managing director of Fransabank.

So, the pertinent question is, if other deposits have “evaporated,” why would authorities have any qualms about using the rest to stave off the risks posed by ending subsidies?

“If subsidies on imports are lifted, the social consequences will be devastating, especially since BDL stopped injecting dollars, which would also expedite the depreciation of the Lebanese lira,” says Jean Riachi, the CEO of FFA Private Bank.

“This would risk triggering a terrible social revolt,” he adds.

Pushing politicians

In this context, BDL’s stated refusal to tap into mandatory deposits appears to be more as a means of pressure than a red line.

“If the loans in dollars granted to banks are subtracted, that is to say, $8 billion, then foreign currency reserves appear to be less than $12 billion. It is a matter of slowing down the fall, because the more the BDL dips into the obligatory reserves, the greater the ‘haircut’ on deposits,” explains Gerard Zouein, co-author of a study on solutions to the Lebanese crisis.

By Riachi’s estimation, BDL raised the issue of the obligatory reserves to “push the political class to act” and spark a debate on subsidies, which favor better-off classes over the poorest and encourage smuggling.

The objective would therefore be to target the most vulnerable as a priority and to consider the best way to allocate the existing foreign currency reserves.

“It is necessary to know how many dollars are available, and from there political decisions must be made regarding the allocation of these resources that could also be used for other needs, such as stabilizing the price of the Lebanese lira, investment spending and the continuity of government spending in foreign currencies. This is not to mention the upcoming deadlines regarding the financial system,” says Charbel Nahas.

He goes on to say, “The fact that BDL has to deal with the issue of subsidies is an aberration. This type of public spending should normally be recorded in the budget, which authorities do not even bother to vote on. But the political class believes it would be wise not to run this risk in order to remain in power as long as possible, because when you make decisions, you have to deal with the consequences.”


This article was originally published in French in Le Commerce du Levant. Translation by Sahar Ghoussoub.

With its foreign currency reserves falling by an average of nearly $1 billion every month for over a year, will Banque du Liban be able to continue to subsidize essential imported goods?In theory, yes. But Lebanon has no interest in maintaining such a costly and inefficient mechanism.According to official data, the central bank still had some $20 billion in foreign currency reserves at the end of...