No magic wand: Lebanon’s new central bank boss comes up short

Mansouri said he wanted more transparency, including how the supply and demand for dollar financing was met by the BdL by using the Bloomberg platform for its operations. But the plans never saw the light of day.

Geopolitical tension and Hezbollah's campaign against Israel in the south of Lebanon were listed as an excuse, alongside a concern that initiating this by executive decree may have broken a law relating to the Beirut Stock Exchange.

One rule for one

The exchange rate was set in a band between 89,500 Lebanese Pounds (LBP) per US Dollar (USD) and 90,000 LBP per USD for retail transactions and commercial activity, leaving depositors facing tax exposure at the top of that band, but they could only withdraw dollar deposits at a lower banking exchange rate of 15,000 LBP per USD.

Salameh claimed at the start of Lebanon's financial crisis that a banking exchange rate was adopted for dealings between the BdL and commercial banks before he took a later decision to adopt multiple exchange rates at different levels.

The current approach is different. Mansouri insists that it should not be the BdL that sets the banking exchange rate with the dollar, but rather ministers or parliament. Until a solution is reached, depositors who withdraw will continue to be squeezed, suffering a steep differential (more than 60%) on the rate they get.

There is some stability in Lebanon's current dollar exchange market, but it is artificial and unfounded—the country has become a cash economy largely running on dollars, which has even been encouraged by officials, who have allowed pricing in dollars.

The BdL has secured the salaries of its employees in dollars—in a blatant violation of national monetary sovereignty—and has tightened the supply of liquidity in LBP. Friendly politicians have supported Mansouri by limiting speculators operating on exchanges in the open market.

Protecting the banks

A deeper sense of confusion has reached another vital issue: Lebanon's troubled commercial banks. In August 2020, Mansouri and colleagues required every bank to prepare a plan to resume operating and present it to the BdL for approval.

Any bank unable to do so faced the prospect of imposed management and referral to the judiciary for liquidation and asset seizure. A BdL committee was set up to restructure the banks, but after four years, there is no meaningful progress.

Instead, responsibility for compliance has shifted to the politicians, based on an idea put forward by the Association of Banks in Lebanon, an industry body, that suggested the crisis was systemic.

There was also confusion over depositors' dollar withdrawals, with the monthly limit reduced from $400 to $300 without explanation. This was just the latest blow to constitutional protections designed to protect property rights.

The deposits left in after the limit was lowered were used to cover the costs of another set of revised withdrawal arrangements.

These were designed to benefit account holders who converted deposits from LBP to USD after 17 October 2019 (as the financial crisis emerged), arrangements which were supposed to be funded from dollar deposits at the BdL made before that date.

These deposits from commercial banks to the BdL were made mandatory at the BdL's behest. That meant account holders' funds were seized and ended up in state funding. In effect, this was illegal.

The BdL's call for mandatory deposits was contrary to the long-established terms set out by international donors when Lebanon was refinanced after a meeting held in France known as the Paris II conference.

No accountability

There had been hopes (since dashed) that Mansouri's legal acumen would mean he prioritised restitution of these dollar deposits. The proper course of action would have been to restore them to depositors on record before 17 October 2019.

The correspondent banks that helped with the transfers into the BdL should have backed any such restitution, not least to avoid being complicit in wrongdoing that seized account holders' dollars.

Mansouri frequently says that to end Lebanon's economic crisis, legal accountability is needed, adding that he has done his bit by providing everything requested by the judiciary from the central bank. But he has overlooked a crucial matter.

As BdL governor, Mansouri is legally authorised to file charges through the public prosecutor against alleged perpetrators, and specific names appear in a forensic audit prepared by consulting firm Alvarez & Marsal, yet he has taken no such action.

Be tough, not kind

Furthermore, referrals to the Banking Control Commission (a judicial body at the central bank, chaired by Mansouri himself) rarely result in punitive action. Temporary managers are seldom appointed to failing banks.

The Commission instead seeks compromises, but this cordiality stands in contrast to the strident action taken against problematic lenders by central banks in other countries.

In Iceland, for example, when a series of banks failed, dozens of bankers were jailed and their property confiscated. This suddenly prompted others in Iceland to embark on wide-ranging restitution, even using funds from tax havens to repay depositors.

The rule of law had been well and truly established, which acted as a deterrent against wrongdoing. Sure enough, Iceland made a rapid return to the international financial markets and achieved a growth rate of 7% just seven years after the crisis struck.

Tracing the transfers

Mansouri's plan to exit Lebanon's crisis also involved urging officials to establish a clear programme for dealing with what had happened to dollar deposits, and how vital foreign currency left the country before the BdL called for the mandatory transfers.

Yet the governor is among those who excused what happened. He and others argued in August 2020 that transferring funds abroad (as was done by VIPs and even bankers themselves) after restrictions were announced was unethical—but legal.

That was followed by moves to encourage the return of some of these funds to new dollar accounts at banks, rather than replenishing balances in old ones now subject to stricter restrictions.

More recently, Mansouri proposed subjecting these transfers to a retroactive tax. This would legitimise them, when instead such violations should be pursued by the High Banking Commission and the judiciary, with punitive action taken. Those who made the estimated $10bn of transfers should also be prosecuted.

Borrowers' repayments

Moreover, there has been an even bigger disaster on Mansouri's watch. The BdL has turned a blind eye to borrowers repaying their dollar loans in LBP at low exchange rates, further harming the interests of depositors.

This also applies to how dollars have been converted into LBP at incentivised rates, allowed despite a judicial ruling against it and in defiance of prominent Western legal advice that repayments should be made in the currency in which the loans were taken out, to ensure the proper level of repayment.

The value of the dollar loans affected is staggering, around $30bn.

Alarmingly, Mansouri seems fine with mechanisms like this, even though they will, in effect, reduce dollar deposits in various ways. This makes full restitution after account holders' funds were inaccessible for so long more difficult to achieve.

Proposals have even including writing off interest rates exceeding 1%, even though the cost of borrowing in the Middle East over the past decade has typically been 5-7%, including in Lebanon as well as Turkey and Egypt.

No transparency

Attention would perhaps have been better focused on the interest rates featured on Salameh's financial engineering operations. According to the admission of one politician involved in them, they reached 30%.

A UN human rights commissioner, Olivier De Schutter, estimated the total interest charged on these financial engineering operations amounted to 10% of Lebanon's gross domestic product (GDP).

There are also questions over the lack of auditing and legal checks on numerous and varied operations carried out by banks in recent decades, during which time banks' capital has increased from less than $300m, to over $20bn. Calls for scrutiny of this were ignored.

Mansouri and his colleagues promised to achieve greater transparency in the financial statements issued by the BdL, but this has not happened. One need only compare the BdL's recent financial statements with those of the European Central Bank to see.

For instance, the ECB provides a clear and comprehensive explanation for the losses incurred in its operations, and their causes. The BdL does not.

Not using his powers

Mansouri and Co. remain reluctant to speak up against politicians and those running Lebanon over the way they still deter investors and deprive the Lebanese of legitimate flows of foreign currency that they so desperately need.

The disruption caused to Lebanon's tourist season this year from Hezbollah's military operations in the south is a case in point.  

A properly run modern central bank should have a clear mandate. Very often, this is to ensure monetary stability and control inflation, keeping it low to promote growth and job creation. Independence is often part of this.

A central bank can be responsible for drawing political leaders' attention to the negative repercussions of political policies, so it can be the job of a central banker to speak out.

This can jar with the notion that no civil servant, whether high-ranking or otherwise, should publicly criticised democratically elected leaders.

But history honours the central bankers who stand up to governments, including over political issues. France's Emile Moreau and America's Paul Volcker come to mind.

In Germany, a central banker was one of the first to speak out against the Nazi government's lure of Austria in its war effort by offering an attractive exchange rate.

More recently, the Bank of England's first foreign-born governor, Mark Carney, warned of the dangers of the UK leaving the European Union.

Clear examples like this of the functioning independence of a central bank are good for the reputation of nations, and the investment case they offer to international capital.