Reforms: BDL denies responsibility

As part of his exchanges with the International Monetary Fund (IMF) delegation visiting Lebanon this week, acting Governor of Banque du Liban (BDL) Wassim Mansouri had the could review the measures he has taken since the mission’s last visit in September.

However, nothing new has happened on this front since the IMF and World Bank meetings, which were held in Washington last month, and which Mansouri attended. On his return to Beirut, he said in a press conference that “BDL has done everything the IMF asked it to do.”

This was Mansouri’s way of presenting any progress as BDL’s achievements, and the many existing hurdles as issues he is not responsible for, passing the buck to the cabinet and Parliament.

This presentation of the facts was met with skepticism by many local and international observers, and needs to be put into perspective in several areas: The decision to stop financing the state to the stabilization of the exchange rate through bank restructuring, the avoidance of the Financial Action Task Force’s (FATF) grey list and the reforms linked to the institution’s governance or accounting.

Drying up foreign exchange market

As far as the exchange rate is concerned, relative stability was seen before the end of former Governor Riad Salameh’s term of office in July. Since May 2023, the rate on the parallel market has fluctuated between LL86,000 and LL94,000 to the US dollar, before stabilizing at around LL89,500 since August.

However, this price does not necessarily reflect the reality of supply and demand. The new monetary policy, which has lost many tools including the interest rates, is now based on the strategy of drying up the market, notably by controlling the lira supply in circulation — between LL53,000 and LL58,000 billion ($600-650 million), which is as low as seven percent compared to foreign currency reserves.

One of the main pillars of this policy is that the BDL sells Lebanese lira to merchants and importers for them to pay customs duties and VAT, thereby improving the level of its foreign currency reserves — up by more than $1 billion since last summer.

This control of the money supply in local currency is all the more strict given that, since September, BDL has interfered in fiscal policy and “manages tax levies with the Finance Ministry and, above all, how they are used,” Mansouri himself stated on more than one occasion.

This is to ensure that public spending does not contribute to an increase in the supply of lira on the market and speculative demand for dollars. In this way, the sums levied for tax purposes are only spent according to a precise calculation, based on the absence of any impact on the exchange rate.

As a result, the equivalent of LL125,000 billion has been accumulating for months in the government’s account with BDL (no. 36), as caretaker Prime Minister Najib Mikati revealed when discussing the 2024 budget in late January. The situation has not changed much since then.

Concerning the relative floating of the exchange rate, Mansouri’s promise in autumn to launch a trading platform that Bloomberg would manage has been postponed indefinitely, due to the ongoing conflict in Gaza and south Lebanon.

Informed sources, however, said that the current stability is a requirement of the ruling political class, which does not want supply and demand to determine the market, mainly to preserve the effect of public sector employees’ salary increases on their purchasing power.

Another point of satisfaction that Mansouri often puts forward is the end-to-state financing by BDL. But in reality, this dynamic began with Salameh, when he decided to stop providing Électricité du Liban (EDL) with dollars to import fuel in 2021.

While Mansouri and the other members of BDL’s central board have gone further, some considered BDL’s provision of dollars to pay public sector salaries as a form of state financing, even if these dollars are purchased on the market and not drawn (for the time being) from its reserves.

Gray list

Similarly, BDL hinted that its efforts have prevented Lebanon’s imminent inclusion on FATF’s grey list of countries that do not cooperate sufficiently in the fight against money laundering and terrorist financing. But in reality, this prospect remains on the agenda of the FATF’s meetings in autumn.

At the same time, Mansouri passed the buck to other government departments as to the responsibility for a likely deterioration in Lebanon’s rating and for placing it under FATF’s monitoring.

For the IMF, one of the key issues is the delay in restructuring the banking sector for at least the last four years. This restructuring was delayed under Salameh, and it is not clear what Mansouri is doing to move the process forward.

On the contrary, some observers have criticized him for saying that he was “not convinced by the draft law,” that BDL had helped to prepare when it was being discussed by the cabinet in February, in the wake of the campaign the Association of Banks in Lebanon (ABL) and its political allies waged against it.

What’s more, while Mansouri initially seemed unconcerned by this issue, some of BDL’s circulars that have not been strictly applied, including Circular No. 154 of August 2020, are at the heart of this process.

A more comprehensive bill is needed, as banking conditions have deteriorated considerably since then, but BDL remains at the center of this operation and is the main interlocutor of the IMF and caretaker Deputy Prime Minister Saade Chami in this dossier.

Indeed, Mansouri said in a television interview last month that “BDL will work again with the cabinet, certainly on a new draft law” on the restructuring. But while the IMF links the latter to a new amendment to the banking secrecy law, BDL does not consider this one of its priorities, believing it to be a matter for the cabinet and Parliament.

Accounting issues

In addition, Mansouri’s remarks, reported in ABL’s latest monthly report, according to which the acting governor reportedly agreed that “the crisis is systemic and that the state should contribute in large part to the restitution of deposits,” have spawned confusion.

This is because such support for the banking lobby’s position on this issue will have direct implications on the staff-level agreement signed with the IMF in April 2022. The latter included a warning against “expanding the use of state assets to pay back the $72 billion in losses,” most of which are deposits.

Another major issue in the negotiations with the IMF concerns the modification of BDL’s accounting system. While Mansouri said he is working on this with the IMF, many complications are preventing sound progress here.

A key complication is including in its 2023 budget a debt that the state must pay back to BDL. This is despite that successive finance ministers have refused to recognize these operations that date back to 2007 as a loan from the central bank, considering them to be a mere exchange transaction in which the state provided BDL with lira in exchange for dollars. Although a joint committee was formed, the two parties have yet to reach agreement on the matter.

But for the IMF and Eurobond holders, Mansouri’s insistence on recording this amount as a debt to be borne by the state is extremely important, as it creates obligations and rights that had not been foreseen until 2023. Creditors could thus claim that they have been fooled for years by the state, which would have communicated grossly understated figures on public debt in dollars for 17 years.

There are other equally serious questions, such as how BDL is cooperating with the judiciary regarding the results of the forensic audit conducted by Alvarez & Marsal. The latter revealed that the cost of “financial engineering” carried out from 2015 amounted to $76 billion.

On all these issues, the governor’s communication strategy is based on the denial that the epicenter of the crisis is BDL itself, which has lost over $60 billion, and that these losses are drawn from the deposits of the banks, which have taken huge risks with BDL for years and together squandered the depositors’ money in a Ponzi scheme unlike any of its kind.

This article was originally published in L'Orient-Le Jour. Translated by Joelle El Khoury.