Salameh gives farewell interview steeped in contradictions

Lebanon's central bank governor leaves office after three decades, leaving depositors and the fate of their life savings in the hands of a crude ruling elite

Reuters

Lebanon's outgoing central bank governor Riad Salameh.

Salameh gives farewell interview steeped in contradictions

Toufic Chanbour

last update on 31 Jul 2023

“The last concern and duty of central bankers is to tell the truth to the public,” says Alan Stuart Blinder, a professor of economics at Princeton University who previously served as vice-chairman of the Federal Reserve’s Board of Governors – and is currently considered one of the most influential economists in the world.

The farewell speech of Lebanon's central bank governor Riad Salameh lent credence to Blinder's assertion. His term ended today (31 July 2023) after holding the position for three years. Salameh leaves behind depositors and the fate of their life savings in the hands of a crude ruling elite.

Salameh repeated in his speech that "the state borrowed from the Banque Du Liban (BDL) $20bn,” and “owes it $16bn as a result of several operations carried out by BDL on its behalf;” “these funds aren’t losses incurred by the central bank,” he explained.

“And when the state faces a crisis, the central bank must secure liquidity for it to avoid the collapse of the entire system.”

On the other hand, he added, “the first serious reform steps begin with the abolition of the possibility of the state borrowing from BDL,” in clear contradiction with his practices of providing various types of financing to the treasury from depositors’ savings in foreign currencies.

This violated the law and the legal framework, which allows the BDL to finance the public sector – only in exceptional circumstances and in case of extreme necessity, as well as under a contract between the state and the bank, which needs to be submitted to parliament for approval. These are restrictions that the governor overstepped during his 30-year term.

Reuters — Demonstrators protest against the collapse of the lira and the economy, in front of the Banque du Liban building in Beirut last March.

On the issue of exchange rate stabilisation, the governor stated that this has been going on for more than two decades, based on policy statements prepared by the cabinets to gain votes of confidence in parliament.

In fact, what was needed was a speedy joint decision by the Council of Ministers – which has the constitutional authority to formulate public policies – and the BDL – which sets target exchange rates and their fluctuation ceilings – to be issued after a thorough discussion about the move’s cost and sources of funding.

This never happened.

What was needed was a speedy joint decision by the Council of Ministers, and the BDL which sets target exchange rates and their fluctuation ceilings – to be issued after a thorough discussion about the move's cost and sources of funding. This never happened.

Circulars and haircuts

Addressing the exchange rate entailed a review of two infamous BDL circulars, 151 and 158, which imposed a ceiling on withdrawals in foreign currencies, as well as "lilarisation," i.e. the withdrawal of deposits in foreign currencies in Lebanese pounds at a much lower exchange rate than that in the parallel market.

This resulted in haircuts ranging from 40% to 80% of the value of each withdrawal. The governor justified the move by saying that benefiting from the circulars was entirely up to the depositor's choice, that BDL didn't force anyone to do so, and that those who acted according to the circulars were convinced that they served their interests.

Protesters burn the entrance to a bank in Beirut, in protest against the withholding of depositors' money in banks since late 2019.

But he didn't explain how it was in the interest of a person to recover their deposit by the illegal forcible deduction of a large portion of its value.

The BDL governor continued to justify fixing the exchange rate during the three years following the crisis – allowing the withdrawal of foreign currency deposits at the rate of LL 1,500 to the dollar, which is significantly lower than the exchange rate in the parallel market (LL 50,000 to the dollar at the time; now LL 90,000 to the dollar).

His pretext was that the official rate was adopted in BDL operations with the banks and that the volume of these operations was much greater than that of operations in the parallel market. This false statement remained in place until BDL established the Sayrafa platform to buy and sell dollars under its supervision, where the exchange rate for the dollar is about LL 85,000, which is 6-10% lower than that in the parallel market.

The exchange rate of the dollar set for withdrawing deposits in foreign currencies from banks was raised to LL 15,000 only, which led to the largest robbery and dissolution of deposits that Lebanon has known since its inception.

The exchange rate of the dollar set for withdrawing deposits in foreign currencies from banks was raised to LL 15,000 only, which led to the largest robbery and dissolution of deposits that Lebanon has known since its inception.

A platform that does more harm than good

In the television interview, the governor stressed the need to preserve the Sayrafa platform or amend its rules, which made BDL a key player in the exchange market – offering dollars when necessary.

He claimed that it benefited a large segment of citizens and public sector employees through the dollarisation of their salaries. But he didn't mention the serious ramifications produced by this platform — most notably the transformation of the Lebanese into speculators and the benefit incurred by influential people of its operations, especially the bankers – as the operations of the Sayrafa platform pass through their banks.

Axel Rangel Garcia

The legal clause on which the platform was based clearly indicates that the intervention of BDL as a buyer and seller of dollars is "direct" with the public, not through banks.

The governor alluded to his reservation and fear of a plan being studied by his deputies, in which the BDL would have a neutral role in the Sayrafa platform. This exposed disagreement within the BDL over the proposal and highlighted the fact that the decision to establish the platform was issued by the BDL's Central Board, i.e. with the tacit approval of a number of the governor's deputies.

But the extension of the decision's validity was decided through an agreement between the governor and the finance minister alone, which means that the governor's opinion is preponderant. This led some to say that Salameh exercised "dictatorship" over the BDL's Central Board — an accusation he has denied.

The extension of the decision's validity was decided through an agreement between the governor and the finance minister alone. This led some to say that Salameh exercised "dictatorship" over the BDL's Central Board — an accusation he has denied.

A $57bn financial gap

On the banking issue, the governor said that he returned to the banks their deposits, but he later acknowledged the existence of a financial gap at the BDL worth $57bn — representing the difference between its obligations to the banks and the available remaining funds.

On the other hand, he assured that the people's deposits were with the banks — not with the BDL — while expressing at the same time his intention to reconstitute the deposits. There are contradictions in his statements. Circulars 150 and 165 create "free zones" in the banks to accept new, restriction-free deposits.

Jamie Wignall

Meanwhile, deposits predating 17 October 2019 — the date of the popular uprising — are governed by controls and restrictions on withdrawal, payments, and transfers – and, more seriously, fresh resources can't be used to carry out these operations.

That the bankruptcy of insolvent banks can't be allowed until the adoption of a reform law, is a deviation from the correct and legal way of dealing with matters.

Temporary directors of these banks must be appointed to protect their remaining deposits, instead of leaving the banks in the custody of those who have lost all right to make any decision regarding these banks and their deposits.

That the bankruptcy of insolvent banks can't be allowed until the adoption of a reform law, is a deviation from the correct and legal way of dealing with matters. Temporary directors of these banks must be appointed to protect their remaining deposits.

As for the BDL, Salameh said that the central bank is the first institution in the country to have commissioners monitor its accounts and operations, which of course is good in principle; but in fact, the BDL contracted as auditor an institution that previously audited Lehman Brothers and was accused of fudging reports to hide the bank's misconduct before it collapsed.

On the other hand, no report of the designated monitoring commissioners on the BDL's businesses and operations, as required by the law, has been published in conjunction with the publication of the BDL's budgets and operation reports.

There is talk about the possibility of suing the BDL's monitoring commissioners before the judiciary because they concealed the BDL's misconduct in their reports; this contributed to the crisis, similar to what happened with Lehman Brothers.

Speaking about communication with the IMF, the governor pointed out that the BDL has implemented what was required of it, but he didn't mention that he obstructed the scrutiny of the bank's operations and accounts.

Speaking about the talks with the IMF, Salameh pointed out that the BDL has implemented what was required of it, but he didn't mention that he obstructed the scrutiny of the bank's operations and accounts.

He also didn't mention that the multiple exchange rates that govern transactions are his own responsibility.

He had promised the IMF in the past to unify these rates, but this never happened.

The governor began the interview by dismissing accusations of adopting a Ponzi scheme to attract deposits and resources in foreign currencies, arguing that his ability to maintain the market was evidence to negate these claims.

But the accusation was levied by two international officials — namely the UN Secretary-General Antonio Guterres and French President Emmanuel Macron. The latter talked about the association of the Ponzi scheme in Lebanon with cheating and fraud, including false assurances that "the lira is fine," and that the banking sector is solid, in order to attract foreign deposits.

One of the first official reactions to Salameh's interview came from Lebanon's prime minister, Najib Mikati, who said: "Salameh spoke realistically and has the right to defend himself."

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