It is no exaggeration to say that the state of foreign exchange or currency reserves held by BDL - and recently updated - is one of the keys to the crisis in Lebanon since 2019, with its currency losing around 95 percent of its value.
According to the BDL's latest bi-monthly report, foreign exchange reserves officially stood at $14.75 billion at the end of Aug. 2022, not including 286.8 tons of gold worth $15.9 billion. This is the second largest gold stockpile in the region after Saudi Arabia's 323.1 tons.
While the BDL cannot use gold freely (a 1986 law requires express authorization from Parliament), it is empowered to use foreign exchange reserves as part of its monetary policies, taking into account the reserve requirements that banks are obliged to deposit with it. In Lebanon, these investments must cover 14 percent of the total amount of foreign currency deposits held by banks (compared to 15 percent before the 2021 amendment).
Opacity versus legality
The $14.75 billion in foreign exchange reserves also includes Eurobonds (foreign currency debt instruments) issued by the Lebanese government, but on which it defaulted in March 2020.
The BDL estimates that they total $5.03 billion. But this is a theoretical value, as these securities are currently trading at 7% of their value among investors, or just over $350 million.
The remaining $9.72 billion is published without any details on the proportion of required reserves, or what would remain of the $1.135 billion Lebanon received in 2021 in exchange for two allocations of Special Drawing Rights (SDRs) from the IMF.
The BDL also gave no indication of the details of the inflows that would feed its reserves, including foreign exchange operations via its Sayrafa platform in an increasingly dollarized and cash-based economy.
In fact, it is difficult to get a precise idea of the exact amount of reserves, especially since there is an omerta on this subject in political and banking circles.
"The opacity is total, we don't know if the SDR envelope has been totally consumed or not, but what seems to be a given is that the required reserves have indeed been used up, if they represent 14% of the approximately 100 billion deposits that the banks are supposed to hold," says a banking source on condition of anonymity.
Another source working in the financial sector, based on the figures of the BDL, estimates that its net reserves could currently be "seven billion by counting the commitments made, but not yet accounted for." She suspects the BDL to integrate the deposits held by the BDL abroad in its reserves, or even assets whose value it inflates.
While these sources did not provide further details, an audit of the BDL's accounts carried out in 2020 by two international firms, Deloitte and Ernst & Young (E&Y), which was leaked to the press, had accused the institution of inflating its assets "by using unorthodox accounting methods." BDL has always defended its choices by emphasizing its legality.
The central bank's reserves have a central role as an instrument of monetary policy. For a long time, reserves were used to stabilize the exchange rate at LL1,507.5 to the dollar before financing the subsidy mechanisms that benefited importers of several products to limit the impact of the lira's depreciation.
They have also contributed to mechanisms of the central bank that adjusted the restrictions on foreign currency accounts, which have been unilaterally put in place by banking institutions since 2019. They also allow for BDL to cover its long-term commitments in foreign currency to banks, estimated at more than $80 billion.
However, although BDL regularly publishes the count of its foreign exchange reserves, several voices question its figures and call for them to be put in context, as BDL awaits the results of the audit of its foreign exchange assets, commissioned by the government to the international firm KPMG to definitively clarify the issue. This audit is part of the first reforms listed in the preliminary agreement reached on April 7 between Lebanon and the International Monetary Fund, a prelude to a possible financial assistance program of 3 billion dollars over 4 years.
This article was originally published in French at L'Orient-Le Jour.