Before Lebanon’s current financial crisis, central bank faced a $4.7 billion hole in reserves

Lebanon’s central bank had a $4.7 billion hole in its reserves by the end of 2015 that was not disclosed to the public, an early warning sign of the financial collapse that has since all but wiped out many people’s savings.

The figure is contained in an April 2016 report drawn up for Lebanese financial authorities by the International Monetary Fund.

The confidential report, known as an aide memoire, said that while the gross reserves of the Banque Du Liban central bank (BdL) were high at $36.5 billion, “reserves net of the commercial banks’ claims on BdL and gold were negative USD 4.7 billion in December 2015”.

Lebanon’s central bank has been headed by Riad Salameh since 1993. In late 2016, it began what it called “financial engineering” — funding a ballooning fiscal deficit and keeping banks buoyant by paying ever higher interest rates for dollars.

By the time investor confidence wore out amid civil protests against the ruling elite in 2019, the central bank’s losses had multiplied.

Three people with knowledge of the matter said Salameh himself had insisted to IMF officials that the figure not be published by the IMF on the grounds it would destabilise the financial market.

Asked why the negative net reserves figure was not published in a January 2017 IMF report, a central bank spokesperson, speaking on behalf of Salameh, said “the central bank does not have the power to change IMF reports” and declined to elaborate further on that point.

“The misrepresentation of the causes of the crisis to concentrate (blame) on the BdL is unprofessional and being used to throw responsibility onto one institution, the only civil institution still keeping the (financial) system alive despite the acute crisis,” the spokesperson added.

An IMF spokesperson, ask why the figure was left out of published reports and whether the Fund should have been more proactive in demanding remedial action, declined to specifically address the omission of the $4.7 billion, but said the report “provided an early warning as well as possible solutions to strengthen the financial system”.

“It emphasized the need to reduce economic and financial risks, including the reliance on new deposit inflows to cover large fiscal and external deficits,” the spokesperson said. “It also pointed to significant resources that would be needed to ensure banks remained capitalized in the event of a severe shock.”

When foreign exchange inflows dried up in 2019, the banks, many of them with leading politicians as shareholders, shut depositors out of their accounts. Withdrawals have since been limited, mostly made in Lebanese pounds which have lost 90 per cent of their value.

CENTRAL BANK AUDIT

By 2020 the central bank deficit had grown to $50 billion with total bank losses to $83 billion, according to a rescue plan prepared by the finance ministry in April that year. Both the central bank and the banking association dispute these figures but have not publicly given alternatives.

A forensic audit of the central bank is a condition for Lebanon to secure an urgent IMF rescue package. The audit resumed last week after an almost year-long hiatus due to disagreements over access to information.

Countries are not required to publish their net reserves figure but many countries do. Two former senior officials said more disclosure of the financial weaknesses early in the crisis would have avoided the buildup of debt which has made the financial collapse so disastrous.

The crisis, described by the World Bank as one of the deepest depressions in modern history, has propelled 74% of the population into poverty, according to the United Nations.

“The social impact, which is already dire, could become catastrophic,” the World Bank said in April. Even during Lebanon’s 1975-1990 civil war, the banks remained solvent and functional.

“This lack of disclosure led us to where we are because depositors would have made different decisions had they known about the fragility and the banks’ exposure,” Henri Chaoul, a Lebanese government negotiator with the IMF and adviser to the Finance Minister until June 2020 said.

Chaoul quit after the commercial banks, the central bank and the ruling elite disputed the size of the losses in the financial system and how they would be shared, torpedoing a government rescue plan and talks with the IMF.

Toufic Gaspard, an economist who has advised both the IMF and a former finance minister, echoed Chaoul’s views.

He said that had the information in the 2016 report been made public the impact of the crisis might have been much less damaging to depositors. “At least policies would have had to be taken to stop this haemorrhage,” he said.

Nassib Ghobril, chief economist at Byblos Bank, said the central bank had been trying to maintain market confidence while waiting for the authorities to implement reforms, noting that the collapse was rooted in years of state waste and corruption.

In his view, publishing the $4.7 billion figure would not “have changed the course of events because ratings agencies and international financial institutions warned the authorities multiple times of the need to implement reforms”.

BUYING TIME

Salameh has repeatedly said he was acting only to buy time for Lebanese politicians to agree reforms to cut the budget deficit and that it was not his fault that they failed to do so.

Asked if the IMF had a duty to be more proactive in pushing for the $4.7 billion negative net reserves figure to be published.

These say that a country may ask for non-public material to be removed from a report if it is: “Highly market-sensitive material, mainly the Fund’s views on the outlook for exchange rates, interest rates, the financial sector, and assessments of sovereign liquidity and solvency.”

The IMF spokesman declined to say whether Lebanon specifically made this request and also did not address whether there is a formal limit on the size of net reserves.

Earlier this year, Swiss authorities launched an investigation into “aggravated money laundering in connection with possible embezzlement to the detriment of the Banque du Liban (central bank)”. Salameh has denied any wrongdoing and said the investigation is part of a campaign against him.

Swiss newspaper Le Temps first reported earlier this month that key information had been kept out of the public eye by the central bank in 2015. The central bank had said the report “had nothing to do with the truth”.