Lebanon’s Central Bank governor should serve the country's interests

Lebanon’s Central Bank governor should serve the country's interests

Lebanon's Central Bank. (Credit: NNA/file)

July 31, 2023, will not come fast enough. This will mark the end of the fifth consecutive six-year mandate that has been granted to Riad Salameh by a political “bancocratic” class. It is sad that there is so much focus on the Forry case, not because the Forry case is not relevant: it is a straight-out case of alleged financial corruption, illicit enrichment, fraudulent use of public money and money laundering that is being tried by a neutral justice system. But it is rather sad, because there is scarce talk about the 30 years of continuous violations of the articles of the Law of Money and Credit, the falsification of accounts, the side deals enacted with financial institutions, politicians, members of the media and any single person with authority of guardianship over the activities of the central bank. Few people have tackled the underlying policy of “buying time” adopted since 1997, which has only aggravated the country’s financial problems, the most recent example of which is the financial engineering of 2016.

The selection of the next central bank governor is as sensitive to the future direction of the country as that of the president, the nomination of the prime minister and a functioning cabinet with exceptional powers. Irrespective of gender, confession and nationality, the governor’s selection by the political class must be based on that person’s independence of character: an independence that is based on a lack of conflicts of interests, side dealing with political actors and participants in the financial sector. Basically the candidate must be a person with moral authority that does not cater to the whims or desiderata of the political establishment. His/her responsibility is elsewhere.

This is a turning point in the history of Lebanon. It ought to signal a serious break with the policies and behavior of the past three decades. Otherwise, no credibility will transpire from a new Banque du Liban.

The Governor ought to be unequivocally clear around three central themes: the return to the fundamental principles of central banking; the restructuring of the financial sector; and the adoption of monetary policies in line with the needs of the economy.

The Return to the Fundamental Principles

BDL’s founding fathers have given significant operational and legal independence to the central bank and protected the person of the governor in his decisions, in order to provide him the full legal space required to take decisions that are beneficial to the growth of the economy, stability of the currency and regulation of the financial system. To go back to such fundamental principles, it is necessary for the next governor to “come clean” on the Banque du Liban’s past travails, to restore transparency, accountability and public disclosure. Specifically, the next governor must:

First and foremost, retain an internationally recognized auditor to conduct a full inspection of BDL’s own financial accounts in line with accounting principles generally accepted by the international community and high-quality central banks, as required for an IMF program, and make them available to the public.

Drawing on the conclusions of the aforementioned audit, be ready to clean house of current and former staff that have been involved in all kinds of financial irregularities by rendering public all their financial accounts and subjecting them to an audit.

Cooperate fully, promptly with, and report in a transparent manner to the public on, all financial investigations taking place locally and internationally. The next Governor must require banks to submit all financial data relevant to such investigations to the Special Investigation Commission (SCI), and in turn submit all such information to the appropriate judicial authorities, be they local or international.

Cooperate fully and transparently with the government of Lebanon in support of an IMF program and impose a sense of urgency on the matter as opposed to delaying the disclosure of data and blocking reforms or the sponsoring special interests. Full coordination and synchronization with the government is required for a successful and quick exit from the crisis.

Comply fully with a forensic audit, conducted by internationally recognized players, at the Banque du Liban, as required by many instances, and give such auditors unfettered access to all the drawers, files and documents and commit to render the results public.

Task such auditors to compile all transactions that took place with all commercial banks over the last thirty years (swaps, special arrangements, financial engineering) and render the report public. Similarly, the next governor must task these auditors to compile all transactions that took place in the banking sector with PEPs, judges, military and security personnel, anyone that had a contract with the state, and all members of media and similarly make such results public.

Commit to publish a transparent narrative of the dealings between the Banque du Liban and the state over the last 30 years with documentary support so that all speculation on the size of the public debt or the quality of central bank assets ends, and so that there is not a permanent change in the narrative of the quantum of such interactions.

Restructuring of the Financial Sector

Contrary to the shadow plan actually implemented by the current governor, there is no revival in the economy of Lebanon, no return to international capital markets and no interest in foreign direct investment in the presence of a zombie financial sector. The unique point of entry to a rehabilitation of the country within the international financial world is the upfront and full recognition of losses in the books of the financial sector. That exercise starts at the central bank. Specifically, the next Governor must:

Issue, together with the relevant banking resolution authority, a sector-wide framework and clear accounting guidelines for all banks to run appropriate stress tests upon which an Asset Quality Review will be conducted by an independent firm. On that basis, the resolution authority will assign to each bank a recapitalization target. The next governor will then supervise the restoration of a viable banking sector, sized in line with the needs of the Lebanese economy.

Step up and face the public, talking to them directly about the state of their deposits and the deposit recovery rate that could be expected from the restructuring exercise of both the debt and the financial system. The next governor must be fully transparent of the tools that exist to maximize such recovery without recurring any more to time-buying policies that are detrimental to the whole population.

Retain an internationally recognized forensic auditor to conduct an audit on the structure of deposits in order to identify illegitimate deposits, among other things. The next governor must provide the right cover for the write-off of such illegitimate deposits in the context of a banking restructuring resolution. In particular, the next governor must also provide the results of such forensic audits to the Ministry of Finance, in order to identify all Lebanese that have not paid income taxes in order to allow the ministry to levy the right adjustments and therefore reduce the existing financial gap, thus increasing the recovery on legitimate depositors.

Commit to stop immediately all sorts of financial engineering operations with financial institutions using public money unless truly compensated for (e.g. through equity stakes in the banks or debt instruments at market rate).

Monetary Policies in Line with Economic Needs

The central bank has in the last three decades embarked into uncharted and non-traditional territory, delving into several quasi-fiscal policies (e.g: the subsidies), sponsoring specific sectors of the economy (e.g: real estate), owning non-traditional assets (e.g: Casino du Liban or MEA) and engaging in questionable side dealings with financial institutions it ought to be regulating (e.g: Financial engineering or Sayrafa). The next governor must operate a significant about-face in its governance of the financial sector and the development of monetary policy. More specifically, the next governor must:

Provide, on his/her first day on the job, an ultimatum to the government of no more than 90 days and comply fully with the provisions of the Code of Money and Credit in terms of non-financing of the state. The next governor has to step out from the fiscal space and refrain immediately from adopting any quasi-fiscal policy.

Commit to propose a new governance of the financial sector starting with the regulatory authorities: a commitment not to intervene with the work of the Banking Control Commission, giving it full independence, moving its headquarters away from the central bank and ensuring its accountability before a parliamentary body; commit to propose changes to the laws that set-up the SIC, to step down as chairperson of the commission, and to give it full independence away from the central bank and make their decisions appealable and answerable to a parliamentary body; a commitment to do the same with the CMA. The next governor must further commit to participate fully in an independent commission that will redesign the governance of the financial sector within 120 days of taking office, including a full revision of the Code of Money and Credit, and commit to accept and implement their results.

Commit to establishing a separate Banking Resolution Authority, that is independent of the central bank, to effectively manage the restructuring of the financial sector.

Commit to crack down on all the actors in the financial sector, irrespective of their political loyalty and make them comply with central bank rules and regulations. He/she has to publicly announce that all organizations that collect money from individuals and lend to others (such as Qard-al-Hasan) in any shape or form are subject to the regulation of the central bank.

Commit to crack down on the elimination of cash transactions in the banking sector and strengthen the adherence to international compliance rules.

Engage in a responsible policy of providing liquidity to the market and setting interest rates through traditional market means only.

Engage the country on the path of floating the currency (as required by law) with the assistance of the IMF. He/she must commit to the immediate elimination of the multiple exchange rates created by the central bank today. Furthermore, he/she must eliminate Sayrafa as set up today, and force all market participants (banks, money changers and individuals) to trade on a public platform that shows the prices and volumes in real-time and immediately stop using Sayrafa as a Ponzi tool to redistribute income from one group of people (mainly depositors) to another group of people (mainly civil servants).

Adopt a macroprudential approach to the management of the financial sector to avoid another systemic meltdown or undue exposure to a single obligor.

Commit to keeping gold stocks untouched as a backstop to financial sector stability. He/she must stop using the hard currency liquidity that exists in the system unless it is part of a national policy, as part of an IMF program.

Commit to offload from the balance sheet of the central bank all non-traditional assets (such as its ownership of the national airline and casino) so that it can play the role of a central bank and not that of an asset manager.

The next governor must be answerable only to the flag of Lebanon, operate for the common good of the Lebanese people, fully respect the laws and render public any and all interactions that involve interference or intervention from public officials. He/she must be ready to barricade himself/herself for the next six years at the central bank for the good running of this public institution, to shield himself/herself from any political or banking interference and he/she must be ready to change the modus operandi by setting up an arm’s-length relationship with commercial banks, bankers and bank owners to establish a normal regulatory relationship as per international standards.

The next governor will be responsible before the people as to how he/she will perform against each of these points. Civil society will be monitoring, measuring the performance, and reporting to the general public. There is no second chance to restore to this grand institution the impeccable record of all the former governors, namely Philippe Takla, Elias Sarkis, Michel el-Khoury and Edmond Naim.

Henri J. Chaoul is a Managing Partner at Levantine Partners, a Board Member of the NGO Kulluna Irada and a former member of Lebanon’s negotiating team with the IMF (resigning in 2020).

This opinion piece originally ran in French in LOrient-Le Jour.

July 31, 2023, will not come fast enough. This will mark the end of the fifth consecutive six-year mandate that has been granted to Riad Salameh by a political “bancocratic” class. It is sad that there is so much focus on the Forry case, not because the Forry case is not relevant: it is a straight-out case of alleged financial corruption, illicit enrichment, fraudulent use of public money and...