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Financial Crisis In Lebanon
August 29, 2017
   Lebanon is living financial crisis conditions, which may turn into a full-fledged crisis affecting the Lebanese Lira’s exchange rate and the banking sector unless appropriate and specific actions are soon implemented by the authorities. Crisis conditions are essentially due to Banque du Liban’s (BDL’s) long-standing policy of generous interest rates paid to banks for their $-deposits, which significantly exceed the international interest rates it receives when placing the $-funds received from banks. This has resulted in mounting losses incurred by BDL since early this century. Crisis conditions also are due to rising fiscal deficits and government debt resulting from unrestrained spending by government on current items (interest on debt, wages and various transfers) rather than on capital projects. The main implication of BDL’s policy has been a situation of negative net reserves, where BDL’s liabilities exceed its assets in foreign currencies, and a continuing need for $-funds at ever increasing interest rates. In fact, in the summer of 2016, a “financial engineering” operation by BDL has brought in additional $-funds by banks to BDL of about $5 billion. In parallel, BDL has paid the banks about the same amount in “commissions” but in Lebanese Lira. As confirmed by an IMF report, the amount paid by BDL was equivalent to a contribution by BDL to the banks’ capital without any equity stake in return.
The Financial Crisis in Lebanon

Lebanon is living financial crisis conditions, which may turn into a full-fledged crisis affecting the Lebanese Lira’s exchange rate and the banking sector unless appropriate and specific actions are soon implemented by the authorities.
Crisis conditions are essentially due to Banque du Liban’s (BDL’s) long-standing policy of generous interest rates paid to banks for their $-deposits, which significantly exceed the international interest rates it receives when placing the $-funds received from banks. This has resulted in mounting losses incurred by BDL since early this century. Crisis conditions also are due to rising fiscal deficits and government debt resulting from unrestrained spending by government on current items (interest on debt, wages and various transfers) rather than on capital projects.
The main implication of BDL’s policy has been a situation of negative net reserves, where BDL’s liabilities exceed its assets in foreign currencies, and a continuing need for $-funds at ever increasing interest rates. In fact, in the summer of 2016, a “financial engineering” operation by BDL has brought in additional $-funds by banks to BDL of about $5 billion. In parallel, BDL has paid the banks about the same amount in “commissions” but in Lebanese Lira. As confirmed by an IMF report, the amount paid by BDL was equivalent to a contribution by BDL to the banks’ capital without any equity stake in return.
The impact of BDL’s policy on Lebanese banks probably is an even more serious implication. About 60% of banks’ total assets currently represent credit to the public sector. This adversely affects the banks’ financial condition as it has become interlocked with the weak financial condition of the public sector. This bank asset structure also means that banks have been disintermediating with economic activity in Lebanon, noting that financial intermediation with the private sector is in principle their main function.
The current situation carries additional risks and pressure on the financial situation in Lebanon: rising fiscal deficit and government debt, increasing need by BDL for $-funds, and a probable increase in international interest rates.
Two specific measures are proposed to contain the crisis conditions, measures that need a firm prior agreement among the President, the Speaker and the Prime Minister. The first is an announcement by the Council of Ministers of a declining fiscal deficit target over a number of years, say starting with a maximum of $4 billion in 2018. This would give local and international markets confidence in the future financial situation in Lebanon. The second consists in calling to account BDL’s policy, as required by law, in particular its interest rate policy.
Policy papers #12 - Financial Crisis In Lebanon
الأزمة المالية في لبنان

يعيش لبنان في ظلّ أزمة مالية قد تتحوّل إلى أزمة مستفحلة تنسحب تداعياتها على سعر صرف اللرة اللبنانية وعلى القطاع المصرفي، ما لم تنفّذ السلطات عاجاً إجراءات ملائمة ومحدّدة. وتعود أسباب الأزمة إلى السياسة الي انتهجها مصرف لبنان )المصرف المركزي( منذ زمن طويل والقائمة على دفع أسعار فائدة سخية للمصارف، مقابل ودائعها بالدولار الأميركي لديه، والي تجاوزت بحدّ كبر أسعار الفائدة العالمية الي يتقاضاها نفسه مقابل إيداع هذه المبالغ. وقد أدى ذلك إلى تزايد الخسائر الي تكبّدها مصرف لبنان منذ مطلع القرن الجاري. وتعود أسباب الأزمة أيضاً إلى ارتفاع العجز المالي والدين العام الناجمن عن الإنفاق الحكومي غر المقيّد على بنود النفقات الجارية )الفائدة على الدين العام، والأجور، وتحويات مختلفة( وليس على المشاريع الإنتاجية.
اوراق سياسية رقم 12 – الأزمة المالية في لبنان



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