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- Central Bank chief says he supports IMF involvement in Lebanon, Macron’s proposal for audit of BDL by Bank of France experts
- Governor working on other means of financing, reassures depositors they ‘will get their money back, even if it takes time’
Riad Salameh has long been perceived as the strongman of Lebanon, the guardian of an economic model that has been the envy of many throughout the region. A skilled financier, he guaranteed the stability of the Lebanese pound for nearly 30 years and was awarded by the largest financial institutions. The banker saw his life change, however, with the October 2019 uprising and the economic collapse, which have mired the Land of the Cedars in turmoil.
Since then, Salameh has come under fire. He is accused of having misused the money of Lebanon’s citizens by granting funds to the government, which have been wrongly managed by a political class corrupt to the bone.
Bank of France experts
In an exclusive interview with Arab News en Français, Salameh defended himself against these accusations, which he considers “unfair.” He claims to be in favor of the audit of the Banque du Liban (BDL) by experts from the Bank of France in order to advance negotiations with the International Monetary Fund (IMF). The audit was proposed by French President Emmanuel Macron, who is visiting Lebanon after the explosion at the port of Beirut on Aug. 4.
“An audit of the BDL, going back to 1993, was conducted by two international firms,” recalls Salameh. “The latest reports of this audit were sent to the IMF at the beginning of the negotiations. It is therefore important to acknowledge that this international audit exists, to dismiss any doubts about the way the BDL is managed. We welcome the proposal of the Bank of France to audit the BDL. The decision is the responsibility of the Bank of France, but we are ready to welcome their experts at their convenience.”
On April 30, the government announced an economic recovery plan and requested assistance from the IMF, from which Beirut hopes to secure about $10 billion in aid. Lebanon initiated negotiations with the fund, but nearly three months later, the process stalled.
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While he admits that Lebanon must negotiate with the IMF, Salameh stresses that he is in favor of “an IMF involvement in Lebanon, even though some have claimed otherwise.” During the negotiations, however, a parliamentary committee and the government diverged on the estimations of the public deficits, those of the Central Bank and those of the banks: from 60,000 to 241 trillion Lebanese pounds (i.e. tens of billions of dollars). The IMF then required a unified assessment.
“The approach we have adopted is different from the government’s plan,” says Salameh. “The differences stem mainly from the fact that, in our approach, we did not consider that we should have reductions in the debt in Lebanese pounds. We also did not take into account differences in the exchange rate. As a matter of fact, half of the losses attributed to the Central Bank in the government plan stem from the fact that the Cabinet varies the price of the dollar from 1,500 pounds to a dollar to 3,500. It is this loss that we have not taken into account. The differences are therefore due to the initial assumptions, not to mention differences regarding non-performing debts.
“Our goal was to reduce losses while remaining transparent, but it was mainly about reducing the constraints that the Lebanese have to endure because of the reforms undertaken in light of the current crisis,” he says.
Asked why the IMF did not accept the BDL figures, Salameh said: “The fund has its own principles and concepts. But it is up to the Lebanese to negotiate now because the real goal is to be able to find a way out of the crisis which, for Lebanon, means international support, essentially. And the latter will not take place without the support of the IMF or a political agreement.”
Slow-coming reforms
Amid the grave economic crisis, the country has been experiencing an unprecedented depreciation of its currency for several months, as well as soaring prices, large-scale layoffs and draconian banking restrictions on withdrawals and transfers abroad.
Deemed incompetent and corrupt and accused of having “lent” depositors’ money to the government, Salameh defended himself, claiming that the central bank “did not take the depositors’ money.”
“It must be clear that the BDL has essentially given loans in Lebanese pounds, which is a currency that the Central Bank issues itself.
“It is not realistic to empower the Central Bank as a conduit between depositors, banks and the government. We have the capacity to print Lebanese banknotes, so there is no need to use the banks’ money. As a reminder, most of the debt we owe to the government is in Lebanese pounds. You will ask me then where the country’s foreign exchange reserves were used ... Over the past five years, the current account has had a cumulative deficit of $56 billion, and the budget deficit was $25 billion. This total amount of $81 billion is Lebanon’s financial gap. It is not linked to the Central Bank at all, but rather comes from the government’s import and deficit figures,” Salameh continued.
Salameh and the Central Bank have been the target of anti-government protesters as Lebanon's economy collapsed in recent years. (AFP/File)
As for the question of why the governor continued to reassure the Lebanese people and did not instead alert the government to the danger of the deficit, given that he was in control of the country’s finances, Salameh answered: “At the central bank, everything was in order. Personally, I have always called for reforms and deficit reduction in all my speeches — some of which were with you actually. I declared that we were in control of the monetary situation, but I have never given reassurances regarding the state of the public finances. I have reiterated and stressed the need for reforms to preserve monetary stability. At the Paris I, II, and III conferences, as well as at the Cedar conference, I demanded that there be reforms.”
Although the Lebanese government adopted its economic bailout at the end of April to boost growth and clean up public finances, reforms, particularly in the electricity sector, are struggling to materialize.
In this regard, Salameh pointed out that the Central Bank has lent money to the government “by legal obligation.”
He said: “It’s not like we went to place investments with the Lebanese government. Article 91 of the Currency and Credit Code obliges the Central Bank to finance the government when the latter requests it. In the budgets voted by parliament in 2018, we were requested to lend $6 billion in Lebanese pounds, at an interest rate 1 percent lower than the usual adopted interest rates. In 2019, another law was enacted for the BDL to lend $3.5 billion in Lebanese pounds at 1 percent interest rate. As for the 2020 budget, a law has requested us to repay the interest we receive on the portfolio we have with the state, and also to repay a trillion Lebanese pounds. In other words, $3 billion. It is not really fair to say that the Central Bank and its governor painted a rosy picture for the Lebanese people. I wonder if there are no bad intentions behind this image they are trying to give of us.”
While he accuses those in power of having such “bad intentions” toward him, Salameh believes that this may be motivated by “local politics, ideological reasons, or opportunism,” but says that “falsifying realities in recent months” has really “surprised” him.
Regarding the criticisms leveled against him for having based his financial strategy on a gigantic “Ponzi scheme,” with financial engineering and loans that were costly for Lebanon, Salameh replied: “When you look at the transactions carried out between the banks and the Central Bank, and at the figures between 2017 and June 2020, you will see that the Central Bank has issued foreign currency liquidity to the market and banks in addition to collecting money from banks. You will be surprised to find that we injected much more money than we took out: 11.5 billion.”
‘The depositors’ money is here’
How, then, does Salameh explain the fact that banks have run out of money? “This money went into the trade balance deficit. Ponzi would not be proud of us because, in principle, it is the Central Bank that should have benefited if there were really a Ponzi scheme in place,” he explained.
He added: “There have been back-to-back shocks that put pressure on banks, creating panic among depositors, including the closure of banks in October for a month at the beginning of the protests. This turned the Lebanese economy into a ‘cash economy.’ People lost faith in the system. Then came the government’s declaration that the country was unable to repay the maturities of its national debt on Eurobonds. I was personally against this and expressed as much officially.”
On March 7, Lebanon, which is currently crumbling under a debt of $92 billion (170 percent of its gross domestic product), defaulted on a first installment of its debt, amounting to $1.2 billion. On March 23, Lebanon also announced that it would not be paying all of its treasury bills issued in dollars.
Salameh said: “This unfortunately prevented Lebanon from gaining access to international markets and international bank credits, which paralyzed us. Then came the effects of the COVID-19 pandemic and the port explosion. The system is still holding up amid all of this. The depositors’ money is here. Depositors are gradually withdrawing it, investing in real estate, and getting loans. The only problem lies in international transfers, and these will be resolved once the reforms are implemented and confidence is restored. We discussed the goal of the government’s plan. We are against haircutting depositors. We intend to give depositors their money back. It may take a while, but they will get it back. Many depositors have already invested in real estate to maintain the value of their deposits.”
However, many Lebanese complain that the haircut is applied de facto, since dollar depositors can only withdraw a limited amount of their money in Lebanese pounds, at the rate of 3,800 pounds to the dollar, while the black-market rate currently hovers around 8,000 Lebanese pounds to the dollar.
“The market and the demand decide that,” said the governor. “There is no law that takes money away from people, and that difference is critical. Today, we certainly have different prices for the dollar, but the official rate as well as the rate charged for imports and that of the black market vary because we have become a cash economy. There is evident pressure amid all these events. The Aug. 4 explosion destroyed many homes, and people are in need of cash, especially since merchants only accept cash. But there is no law that says this. What the market decides is different from what the legislator does.”
He continued: “Today, the Cabinet is thinking of creating a fund to bring together real estate and give currency certificates to the Central Bank from this fund, which will be able to reduce losses without increasing debt and maybe create the necessary symmetry to execute the plan. The idea is still recent; the minister of finance has just introduced it.”
Heading toward the end of subsidies?
A few days ago, an official source at the Central Bank revealed to Reuters that the BDL would only be able to provide subsidies on fuel, medicine and wheat for three months, a statement the governor confirmed.
“The BDL is doing its best, but it cannot use the reserve requirements of banks to finance trade,” he said. “Once we reach the threshold of these reserves, we will be forced to stop funding. Nevertheless, we are in the process of creating other means of financing, whether through banks or through a fund that we have set up abroad, called ‘Oxygen.’ However, the BDL is not the government, and it is the government that must take action. The Central Bank cannot be held accountable for everything and then be blamed for what it does afterwards. We have laid out the situation well in advance. Let those responsible take the necessary measures.”
Asked about the colossal amounts pulled out of Lebanon by bankers and politicians before Oct. 17 and about the possibility of retracing their course, the governor said: “We will soon issue a circular to hold these depositors accountable and encourage them to bring significant liquidity back to the country without confiscating their money. Today, it is a matter of ethics — not a legal one — because it is a system that has benefited everyone. The BDL must empower these depositors who can restore liquidity in the banking sector by refinancing the country through external deposits.”
Lastly, accused by some of having taken advantage of the system for his personal enrichment, Salameh replied that he made a good living well before becoming governor of the BDL, with a salary of $165,000 per month at the Merrill Lynch bank. “I showed all the documents on television. I arrived at the BDL with a fortune of $23 million, which was invested and which produced results. I am accused of having siphoned off billions. My answer is clear: Since I can validate the source of my fortune, it is enough to prove that I am not abusing my position. In fact, I have sued those who have defamed me.”
Is the end of the crisis near? “It is primarily political,” said Salameh. “It is mainly regional tensions that have gained the upper hand in Lebanon, and international support is needed to create liquidity in the country. I have no doubt that the Lebanese people will be able to manage afterwards.”