Late last week, the Lebanese government launched talks with the IMF on the back of its economic reform plan seeking up to $10bn in aid. These talks launched during an unprecedented arrest at the Lebanese Central Bank, the Banque du Liban (BdL), and despite any support from the Lebanese banks on the economic reform plan submitted to the IMF.
On Friday, Lebanon’s financial prosecutor, Ali Ibrahim, ordered the detention of a senior director at the BdL, charging him with currency manipulation and buying dollars from private exchange bureaus, thus weakening the Lebanese pound (LBP). In the past few days, security forces have arrested several owners of private exchange bureaus claiming they were violating BdL circulars on currency conversion and operating without licenses; in protest, these private exchanges closed thus lowering dollar availability.
Lebanon’s financial prosecutor is affiliated with the Amal Party, which keeps close ties to Hezbollah.
In April, the BdL requested exchange bureaus not to sell dollars for over 3,200 LBP; the LBP was trading close to 4,200 last week on the black market especially with the exchange bureaus shut. The BdL has said it will lift banking secrecy rules to show the transactions between the bank and private money traders in response to the detention of their executive. The bank continues to state foreign currency reserves were depleted as they were used to finance the government’s massive uncontrolled budget deficits.
The LBP official peg of 1,500 is in place for importers of oil, wheat and medicine, which are now essentially subsidized by the BdL. The bank has also said it will provide dollars to importers at a rate of 3,200 to control the price of food. Food prices have soared in recent days with the price of ground beef rising to almost $9 per pound, double its normal price, and making it out of reach for the average citizen.
In the midst of this new war on private money exchanges, there is no mention of al-Qard al-Hassan, Hezbollah’s key money exchanger and a bank replacement for the Lebanese Shia community. This entity, sanctioned by the US government, has soared in popularity in the midst of the banking turmoil and has been pushed as a bank alternative.
While the currency faces unprecedented volatility and depreciation, the market awaits a release from the Association of Banks in Lebanon; the Association was not consulted and does not support the draft economic plan submitted to the IMF. They have pledged to release their own plan to the government in the coming days.
As we reported earlier, the current plan to the IMF envisions the banks absorbing up to an $83bn loss. As the banks’ capital base is around $20bn, this means the remaining $63bn would be absorbed by depositors; it is being called a contribution by depositors. Under that plan, depositions are being marked as “large” or “small:” “small” depositors will be protected while “large” depositors will take a “haircut.” Rightfully so, the banks claim a fiduciary duty to all depositors and a so-called “haircut” would destroy confidence in the once vaunted banking sector. The Association of Banks has stated that seizing the capital of depositors infringes upon the private property vested rights guaranteed under the country’s constitution. They have asked Parliament to reject this plan; indeed, if the government perseveres down this path and does not reject the plan, they will destroy any remaining credibility left in their banking sector.