Will Lebanon's new central bank governor disappoint?

It would undoubtedly have been remarkable if the governor's deputies, during their first joint press conference, announced the publication of their financial statements. This would have informed the public of any changes in these statements, in response to a recommendation made in the IMF report on Lebanon (2018).

It's worth noting two key decisions that have been made.

The first is the decision to provide the company that conducted the forensic audit at the BDL with important documents that it hadn't yet received.

The second is the decision of the Special Investigation Commission to freeze the bank accounts of the former governor and his associates, following similar freezing decisions taken in other countries due to various charges. This helps to lift the secrecy surrounding these accounts.

A proud Mansouri additionally announced the securing of salaries and wages of public sector employees "in fresh dollars," without affecting mandatory foreign currency reserves, and without inflation of the monetary mass.

This was criticised by some, however.

A central bank has no authority, according to the renowned economist Joseph Stiglitz, to discriminate among the public's different segments, especially in the absence of an investigation into the thousands of employees who have entered the public sector illegally.

Questions arise

The imminent launch of the Bloomberg trading platform was also announced, with a great deal of enthusiasm. This would allow the public to trade in pounds, dollars, and other currencies, as well as stocks and metals.

It replaces Sayrafa, established by the BDL and through which a vast amount of bank depositor dollars had been squandered.

The new platform will be more transparent, which could help clear Lebanon of suspicions that it has become a hotbed for money laundering. It could also theoretically establish the liberalisation and unification of exchange rates thanks to a mechanism of supply and demand.

But many questions remain: Why not revive the Beirut Stock Exchange and its currency exchange floor that proved successful for several golden decades? Can the Council of Ministers override the BSE Law, which allows currency exchange on its floor?

Will the BSE or the Financial Markets Authority have a role in overseeing the new platform? And what would that look like?

What happens if enough dollars aren't available to meet demand? Will the BDL re-intervene and use mandatory reserves against all pledges not to? Or will it return to the parallel market to buy dollars, a move that could skyrocket exchange rates?

Conflicting statements

It seems clear from Mansouri's interview with the Al Arabiya news channel, on the sidelines of the Arab banking conference in Saudi Arabia, that he's confused about key issues.

Regarding the official exchange rate, Mansouri said that the LL15,000 to the dollar rate is set in the budget law of 2022 and not by the BDL.

In fact, contrary to regulations that require the exchange rate to be calculated based on the average of the dollar prices in previous periods and announced by the central bank, a different rate was decided upon based on customs.

This led to a discrepancy between the finance minister and the prime minister, with the former initially stating that the central bank would adopt this rate as the new official exchange rate a month after its announcement. However, the finance minister later retracted this statement, saying that the rate was dependent on the approval of the anticipated recovery plan.

Meanwhile, Prime Minister Najib Mikati said that the application of the rate of LL15,000 to the dollar will be gradual and have exceptions.

These statements don't match those of the former governor Salameh, who for decades said that the official exchange rate is determined by the BDL based on its operations with commercial banks.

Recovery of funds

Confusion has also emerged on the issue of the recovery of depositors' funds. In a previous statement, Mansouri said that he had no answer on the subject.

But he said during a TV interview that "the BDL will be taking part in the establishment of the legal framework (with the government and Parliament) to repay deposits," without providing any further details.

"The revaluation of banks is part of a legislative workshop to determine the parties that will bear the loss," he added.

"This is linked to financial balance to determine the gaps and responsibilities and which banks can't return deposits. Only after the evaluation will we know which banks can stay in operation and which can't and will be referred to the Supreme Banking Authority; no referral will occur before that."

This is highly concerning as it means that the application of legal provisions will be haphazardly suspended until future laws are issued. Until then, the BDL will continue to manage banks that have failed to re-establish systemic and legal positions, the most serious of which being capital positions.

Power for good?

The BDL – its governor in particular – enjoys wide-ranging powers: he heads the governing authority for banking affairs, supervises the performance of the Banking Supervision Committee, heads the Special Investigation Commission, and heads the Supreme Banking Authority, which approves sanctions on law-violating banks.

Mansouri and his colleagues can benefit from this by launching a comprehensive banking reform campaign. As part of this, they can appoint temporary directors for banks that have failed to put their affairs back in order.

The temporary director can review the bank's operations to identify and correct irregularities. But more importantly, they can decide whether these irregularities indicate fraudulent bankruptcy and refer the bank to the judiciary as necessary.

Any delay in doing so could bring about legal culpability for making things worse.

This situation has arisen due to a failure to review circulars issued both before and after the crisis began. Most circulars are based on a distorted interpretation of the articles of the Code of Money and Credit, which regulates the central bank and other banks.

Conflict of interest

Mansouri and his colleagues' survival (and jobs) hinge on bills that evade responsibility, mask irregularities, and preserve the stunning profits made from the outrageous scheme called "financial engineering."

The bills are set to be approved by a government and parliament, whose members (most, if not all) have been able to withdraw their money from banks and smuggle it abroad, thanks to their privileges. This makes them a poor choice of decision-makers, due to conflicts of interest.

The matter will, of course, be raised before the Constitutional Council upon appeal.