Lebanon central banker Riad Salameh pushes back against criticism, defends dollar peg
Lebanese central bank Governor Riad Salameh said the country’s peg against the dollar remains viable to protect purchasing power that’s eroded with a plummeting local currency as he pushed back against criticism for his handling of the crisis gripping the economy.
“A stable pound is a political decision,” said Salameh, who’s been at the helm of the central bank since 1993. “We at the central bank are convinced of it because we know. And now you see the movement at the exchange bureaus and how it impacts the purchasing power of the Lebanese.”
Addressing Lebanon in a rare televised speech on Wednesday, Salameh also called on the government not to impose losses on depositors and said Lebanese lenders won’t be allowed to go bankrupt. The central bank had $20 billion in liquidity as of April 24, said the governor as he sat behind a desk with a stack of papers to his side.
A raging currency crisis is bringing Lebanon closer to its day of reckoning after decades of fiscal mismanagement and growing budget deficits in the absence of real reforms. Remittances that the government depended on to finance its needs have dried up, leading to a severe dollar shortage that has wrought havoc among banks and across the import-dependent economy.
The central bank has financed $81 billion of budget and trade deficits over five years and is owed $16 billion by the Finance Ministry, the governor said. Funding the government allowed the Treasury to pay salaries and continue basic services, he said.
“This $81 billion is the hole, not the accounts of the central bank,” Salameh said.
Prime Minister Hassan Diab last week accused the central bank of causing the sharp and quick depreciation of the local currency on the black market, questioning Salameh’s policy and calling on him to be transparent and honest with the Lebanese people.
Salameh has been under scrutiny from the current government and critics for conducting what the central bank calls financial engineering, which boosted its reserves by encouraging commercial lenders to purchase bonds by offering them above-market rates for deposits. The International Monetary Fund has warned that the operations increased risks in the system by contributing to dollarization and raising local lenders’ exposure to sovereign debt.
In his speech, Salameh said he’s a target of a “systematic campaign,” and defended the financial engineering carried out by the central bank. The operations helped raise enough dollars to support the import of essential goods in the current crisis, he said.
“The cost of the financial engineering - which they say has a negative impact, compared to the interest rates that the central bank was paying - is acceptable,” he said. “We were forced to do the engineering to buy time for Lebanon to fix itself.”
Mounting anger over the country’s currency meltdown is now threatening to reignite a broad anti-government movement that had subsided with the coronavirus outbreak, after clashes between protesters and troops left one man dead late on Monday in the northern city of Tripoli.
On the parallel market, the Lebanese pound has been trading more than 50 percent weaker than the official peg of 1,507.5, which is now effectively in place only for importers of essential goods.
The government defaulted on some $30 billion in Eurobonds last month, saying foreign-currency reserves reached critically low levels and needed to be preserved to support the import of fuel and wheat.
The current government, in place since January, estimates that the central bank has incurred losses of more than $40 billion, mainly due to the financial engineering it began conducting in 2016. Salameh has said those losses can be amortized against future revenues.
Almost half of Lebanon’s bank assets are parked at the central bank and losses on them could reach around $62.2 billion, according to preliminary figures outlined in the government’s draft rescue plan.
Salameh said recent circulars by the central bank sought to offset the depreciation of the currency on the parallel market, allowing depositors to withdraw money at a weaker rate in the face of faster inflation.