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Economic Letter
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August 2018

Lira, interest rates, and housing loans

Deafening uproar during hard times

           (Published by Lebanon Opportunities)


[LEAD] Whispers, talk, and writings about a looming financial and economic collapse in the country are everywhere. These views have reached high, and often a conceited, pitch. There is concern about mounting pressures on the lira and the dramatic change in the interest rate structure on the lira and the dollar, as well as about the need for banks to resume their provision of subsidized banks to provide subsidized housing loans. All this tumult is unsurprising, but the excessive frenzy is unjustified. 

To start with, regarding the lira, let citizens be assured that nothing ominous is likely to happen in the foreseeable future. The Lebanese, both residents and non-resident, have actually become the sole holders of lira deposits. Foreign assets at the Central Bank (BDL) totaled $43.3 billion in mid-September 2018 compared with $43 billion a year earlier. BDL’s gold reserves are still at 9.22 million ounces notwithstanding the volatility of gold prices on global markets. The volume of the Central Bank’s portfolio of sovereign and foreign securities did not change significantly over the same period ($29.5 billion in September 2018 compared with $28.7 billion in September 2017). BDL’s published balance sheet shows that the net liabilities owed to the banking and financial sector inched up slightly over the period, from $85.05 billion to $85.3 billion. Public sector deposits at BDL remained practically the same at $6.4 billion. In other words, the structure of BDL’s balance sheet did not noticeably change for an entire year, from September 2017 to September 2018. This means that the fundamentals of the lira’s exchange rate and BDL’s tools to carry on its policy of monetary stability are still in place. Why are some people crying wolf and wailing about dreadful and sinister outcomes?

The second issue pertains to interest rates. A recent announcement by a single bank caused uproar. The bank, which is the biggest, launched a hybrid lira-dollar financial product at interest rates that are attractive when compared with the market. The product aims to attract large deposits with long-term maturities. Other banks also launched similar offerings. The outcome of this trend has been positive as it has contributed to monetary stability amid rumor-generated pressures on the foreign exchange market. These high-interest operations, however, involved a small number of deposits. The best evidence for this is the very limited change in the average interest rates on deposits between July and August. The average interest rates on lira deposits and dollar deposits were 7.81 percent and 4.93 percent respectively at the end of August 2018, according to the Association of Banks. These figures are close to rates on term savings and deposits for the end of July 2018 published by BDL: 7.57 percent on term savings and deposits in liras and 4.65 percent on those denominated in dollars. The limited change in interest rate levels reflects the stable structure of BDL’s assets and liabilities as shown above.  It is obvious that interest rates on the lira and dollar markets witnessed an upward trend over the period July 2017/July 2018. These rates increased from 5.94 percent to 7.57 percent on the lira and from 4.09 percent to 4.65 percent on the dollar, according to BDL. The upward trend is likely to take hold in the near future especially with a worsening fiscal deficit, a widening deficit in the balance of payments, the failure to address the economic and social issues, and the delay in putting into effect the pledges made at the CEDRE conference.

The third topic to be discussed is public finance and housing credit. The Minister of Finance did well by informing the Parliamentary Finance and Budget Committee about the true current economic and financial situation. Awareness of the current precarious circumstances could be a prelude to addressing these problems, conditioned on goodwill and if accompanied by “walking the talk”. Parliament also did well in ratifying some laws that open the door to accessing the outcomes of the CEDRE conference. The Minister of Finance and Parliament must also be complemented for approving the housing subsidy law, which specifically authorizes an interest rate subsidy of LL100 billion ($60 million) for housing loans. It is also commendable that a decision was made to grant this subsidy through the lending procedure stipulated in the protocol signed between the Public Corporation for Housing (PCH) and a number of banks. PCH’s share in housing loans provided by banks has so far reached nearly 30 percent in terms of the value of the loans ($3.8 billion out of a total of $13.1 billion) and 42 percent in terms of the number of beneficiaries (56,000 out of 132,000 citizens). The housing subsidy law is necessary legislation, but is not by itself sufficient. Many requirements need to be fulfilled in order to put it into effect. A mutual understanding must be reached between the PCH and the banks regarding the subsidized and non-subsidized portions of the interest rate on housing loans. PCH’s General Manager has in fact alluded to the need for understanding.  It is also necessary to reassure the banks that are willing to provide housing loans that the subsidy will last until the expiry of the loan duration of 20 to 30 years! The most critical issue, is that banks willing to be involved in residential lending must have available a combined liquidity in lira of more than LL1,000 billion ($660 million) to be allocated for these loans! The LL100 billion approved subsidy is equivalent to nearly 4,000 housing loans at the rate of LL270 million as a loan ceiling, as reported by the press. It is not yet clear how the liquidity will be made available in light of a BDL circular that requires banks to reduce the loan-to-deposit ratio in liras to 25 percent by 2019. Coordinating financial and monetary policies is desirable in order to allow housing loans to flow smoothly through their normal channels.

An additional note regarding housing loans: To be fair, the achievements realized through the collaboration between banks and BDL over the last two decades must be recognized. More than 132,000 middle- and low-income households have benefited from housing loans worth over $13 billion thanks to this cooperation. This loan portfolio was granted by using part of the banks’ reserve requirements in lira and through BDL’s stimulus packages. It is not fair, indeed it could even be unjust, to focus on a small number of loopholes in housing credit activities over the past 20 years. These cases represent just 3.3 per thousand of the number and volume of housing loans, as published by BDL. It is also unfair to discount 99.99 percent of the total value and number of housing loans which were granted to eligible borrowers. It was once said that the history of Beirut didn’t start with one person and today we reiterate: Residential lending didn’t start with the recently approved law (Sept. 25, 2018). The banks set off this kind of lending at least two decades ago and they are still engaged in it. Denigrating the accomplishments of the banks’ and BDL’s housing policy is not conducive to establishing trust. This trust is seriously needed for the success of the law ratified by Parliament – for which Parliament deserves acclamation. Let us all be humble for the sake of the common good.



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Last Updated on October 09, 2018
 
 
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