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April-May 2017

Seal of approval for the Governor and evading the crisis

                                                                                                                   (*) Original text edited in Arabic

The Council of Ministers has renewed for a fifth mandate the term of the Governor of the Central Bank (BDL) which expires in mid-2023. This is not a passing event to be brushed aside, especially at the Association of Banks, which was at the forefront of those calling for this renewal. What has been written in support of the Governor’s reappointment, and interventions made to urge and speed it up, were based on the grounds of four reasons briefly exposed herein.

First, there are exceptional circumstances that the country is facing due to the turmoil in neighboring countries, with dangers looming from all directions. The events on the eastern border are to be considered. The army is there in open confrontation with terrorists striving to infiltrate the national fabric in order to weaken it and tear it up. Wisdom dictates that the leadership should not be changed in the midst of such events. The country, however, has been going through exceptional circumstances since the 1960s. Saying that circumstances are unusual today is insufficient reason, as everything in the country is exceptional. A second reason put forward contends that renewing the Governor’s term is necessary if a new bill at the US Senate and House of Representatives is to be dealt with effectively. The bill aims to amend the anti-Hezbollah law and relating sanctions. On the positive side, there is the successful dealings with the legislations passed in 2015, especially the course of action approved by the Special Investigation Commission headed by the Governor, since it took into consideration our domestic concerns, which was as well acceptable to the American side. The proponents of this viewpoint, which was decisive in the reappointment of the Governor, consider him the most qualified to deal with international stakeholders in the context of new expected sanctions, due to his extensive relationships with these entities and his trustworthiness in their eyes. This is a fact, but not the entire story. Dealing with the new sanctions will require effective action by the State in all its legislative, executive, and judicial bodies. It will also necessitate a close follow-up by the Association of Banks, which has carried out unprecedented efforts to contact the concerned parties in an attempt to protect the country and the banking sector from the serious collateral damage that would result from the new draft law. It is not fair to let the Governor alone shoulder this concern. The State, with its timid action, is indeed still not entirely fulfilling its duty in this regard. What is worse is that the country has failed to appoint an ambassador in Washington. And beware of embroiling the position of the ambassador in petty political bickering.  

The third reason for renewing the Governor’s term pertains to the stance of politicians who have an eye on many institutions affiliated or related to the BDL and the job opportunities these organizations provide. The politicians seek to dole out these coveted positions to their followers. There is no exception or clemency in the practice of patronage. The final reason was to uphold BDL’s policy of monetary stability that it has consistently maintained across the four previous terms of the Governor. What is meant by monetary stability is the maintenance of exchange rates and interest rates that affect savings and indebtedness toward the banking sector, by individuals, families, or institutions. Monetary stability also includes the funding of the chronic public deficit, since revenues does not cover expenditures. The most obvious, effective, and positive outcome of the monetary stability policy, is that it protects the purchasing power of those whose incomes are denominated in the national currency. The social dimension of the monetary stability persuaded the majority of the public opinion to support the renewal of the Governor’s term. In people’s minds, there is a perception of a link between the stability of the lira and the person of the Governor. This is a fact.

These four reasons have been put forward in support of the renewal of the Governor’s term. Does this mean, or should mean, a renewal of monetary and financial policies adopted in the last quarter of a century? The adjective ‘financial’ has been added to ‘policies’ because BDL – in other words its Governor – in collaboration with the banks, has led funding the State to become possible. This has ensured that public finance would remain to be functioning, despite repeated expectations by the International Monetary Fund (IMF) that this model cannot be sustainable. In the minds of those in charge of international financial institutions, the ability to persevere (or not) depends on the size of the public debt relative to the size of the economy. It also depends on the deficit in external payments relative to the size of the economy. The two deficits, of course, are organically linked and feed on the existing gap between saving and spending. BDL’s monetary policy that the Governor has established and perpetuated should be credited for funding the State. The term ‘State funding’ covers the volume, cost, and sustainability of the funding against all pressures and circumstances that the country, the region, and the world have gone through. The Governor has played a noticeable role in managing the debt. The fact that 92 percent of the country’s public debt is held internally means that any problem could impair national savings. BDL is on the alert to prevent any such predicament.

In parallel to the overall management of public finance, BDL, and the Governor in particular, is in charge of maintaining the balance in the external payments and the stability of the national currency’s exchange rate, which is a complex, costly, and painstaking process. It is not easy to support exchange rates in a country whose current balance of payments shows a persistent deficit of ten percent or even, for some years, 15 percent and 17 percent, according to the IMF's periodic reports on Lebanon. Countries with current deficits of this magnitude are rare. The monetary policy followed in the last 24 years, and which involves pegging the lira to the dollar, has allowed the country to attract funds (especially from the Diaspora) after foreign direct investment dropped to its lowest levels, particularly in the last five years. Most savings have become either bank deposits or are frozen in the real estate sector. It has become difficult to continue with this model that requires increasing annual liquidity inflows amid the decline in resources, which includes those coming from the Gulf countries whose financial surpluses are shrinking. The swap operations, carried out in 2016, were an exceptional measure taken by the Governor to finance the country's trade deficit.

These facts explain why few people were interested to take on the post of Governor of the Central Bank. The financial equilibrium in the macroeconomic sense has become a difficult and complex process. The stability of the exchange rate of the lira is a task assigned to the Governor, originally by the Monetary and Credit Law and later by the politicians and decision-makers. The cost of maintaining the stability of the exchange rate has become high and the Governor is required to come up with alternative policies that will not be feasible unless two conditions are met: Controlling the deficit in public finances, and achieving satisfactory economic growth rates. Each condition requires a different interest rate policy. Economic growth necessitates low interest rates, while upholding the lira needs high interest rates. The sustainability of the economic model, which is not part of the Governor's prerogatives, entails an economic restructuring that involves reducing the gap between savings and spending. In other words, the country needs new monetary, financial, and economic policies that are different from the existing ones. So, who will take the lead in order for us to avoid a full-fledged crisis?



Last Updated on July 05, 2017
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