LEBANON: RESTAKING ITS CLAIM AS A FINANCIAL HUB
By Gordon Platt
Global Finance interviews Lebanon’s central bank governor, Riad Salameh.
Riad Salameh has been Lebanon’s central bank governor for the past 20 years. He is credited with shielding the country’s banks from the global financial crisis. He issued a directive in 2004 forbidding banks from getting involved in subprime lending and exotic derivatives. Salameh spent 20 years as an investment banker with Merrill Lynch in Beirut and Paris.
Global Finance: How can the central bank stimulate the economy and control inflation at the same time, particularly with public-sector wages rising?
Salameh: We have launched a stimulus package putting at the disposition of the banks $1.47 billion at 1% interest in Lebanese pounds. The banks must lend these funds to support housing and new projects, particularly for small and medium enterprises, as well as for energy conservation and research and development. This should give an input to the economic growth rate of 2%, which means that real GDP this year should be in the 2%-to-4% range. We are controlling the inflation through the management of liquidity. We are keeping interbank rates in the 2%-to-3% range and making sure they don’t go any higher. Our objective is to meet a 4% inflation target this year, even with a 2% public-sector wage hike. Although the Lebanese pound is pegged to the dollar, we have an independent monetary policy. We have instruments to influence the economy using dollars and pounds. We have certificates of deposit in dollars and [sight] deposits in dollars, and we can lend in dollars. Banks can borrow dollars from the central bank.
GF: Does Lebanon, once known as the Switzerland of the Middle East, still have financial secrecy?
Salameh: Yes, we have bank secrecy, but under [Law 318] passed by parliament, the central bank has established the Special Investigation Commission to fight money laundering. We have the right to lift bank secrecy in suspected cases and exchange information with institutions like ourselves around the world. We don’t want bank secrecy to be used to cover up illegal transactions. We have lifted secrecy when asked for information by the authorities in the US and Europe.
GF: How do you stop money laundering and terrorist financing? How are relations with the US on this issue after the incident with Lebanese Canadian Bank [which is alleged to have been engaged in money laundering]?
Salameh: I can confirm that Lebanese banks are complying fully with US sanctions. On April 2, 2012, the central bank issued a circular asking Lebanese banks not to deal with any companies or individuals on sanction lists. Lebanese banks are forbidden to deal with Hezbollah, and Hezbollah is not using the banking sector. They mostly deal with cash. We have issued many circulars on this to banks and exchange houses.
GF: What is your strategy to help Beirut regain its status as the region’s main financial center?
Salameh: Lebanon has shown resilience in the face of political and security issues. The balance sheets of the banks are increasing constantly. There is confidence in our banking model, which separates commercial and investment banking. We want to go one step further and create a capital market. There is a new law that will help create the proper environment, but this will take some time. First, we have to privatize the Beirut Stock Exchange and implement the necessary regulations. We want to create districts where financial companies could operate outside the Lebanese financial system. This would be structured similarly to the Dubai International Financial Center but would target start-ups and private equity.
Do Lebanese banks hold too much government debt? Should they be lending more to small enterprises?
Salameh: Since 2009, banks have been lending more to the private sector. Last year they lent $44 billion to the private sector and held $28 billion of government paper. This is a big change from previously, and the trend is continuing. Loans to the private sector are now more than the GDP of the country, which is good penetration. We are encouraging the trend, and we have allowed them to use reserves to lend to certain sectors.
GF: Should Lebanese banks continue to wind down their operations in Syria? Should they stay for the long run?
Salameh: The Lebanese banks operating in Syria have reduced their exposure by 60% and instituted general provisions to cover losses. We do not expect any further negative impact. Their presence in Syria today is a silent presence. The banks are not making new loans. They have chosen to stay there, and once the hostilities end, they might play a role in financing the country when it returns to normal.
GF: Electricity is a basic necessity in the modern world. What is the cure to the daily power cuts [owing to long-standing electricity shortages]?
Salameh: The Lebanese people have developed a parallel system[of electricity provision] that relies on generators to power offices and homes. There are districts and streets where people can subscribe to power from generators. But this issue needs to be dealt with by the Lebanese government. It is hurting the country’s competitiveness and is costly. Government subsidies for electricity equal 5% of GDP. The central bank is concerned because it is hurting the budget deficit and the balance of payments.
GF: What is being done about the widening budget and trade deficits?
Salameh: We import $6 billion of energy a year, and the trade deficit is usually covered by the inflow of capital from Lebanese working abroad. These inflows are equivalent to 20% to 30% of GDP, and we hope to retain them. There are no plans to promote exports of goods. The cost of production is too high because the labor is expensive and the price of land is high. The service sector is providing the exports. Our currency is attached to the dollar, so our competitiveness increases when the dollar is weak. Due to the events in Syria, we have lost visitors coming from the Gulf countries, which hurts tourism.
GF: What is your opinion of the recently announced plan by Cyprus to tax bank deposits as part of that country’s bailout?
Salameh: By touching on deposits, they will lose the confidence of depositors. This is a self-defeating initiative. It means that in the future, the banks will have to pay higher interest rates. Lebanon has not been affected by the sovereign debt crisis in Europe. The dollar is the first currency in Lebanon, and the use of the euro is limited. As the euro weakens, however, the competitiveness of Lebanon is affected.