Is Lebanon’s central bank governor to blame for fuel shortages?

It was 2008 and unlike many countries, Lebanon was sailing through the worst global downturn in 80 years largely unscathed.

With a booming economy and resilient banks, central bank governor Riad Salameh confidently talked up Lebanon’s success.

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“I saw the crisis coming and I told the commercial banks in 2007 to get out of all international investments related to the international markets,” Salameh, who has run the Banque du Liban for 26 years and is now one of the world’s longest-serving bank governors, told the BBC at the time.

Those efforts were lauded by the International Monetary Fund, and accolades followed.

More than a decade later, however, Salameh’s record is under attack.

Detractors partly blame his policies for Lebanon’s worst economic crisis in 30 years, including strains in the financial and banking systems that were not even seen during the 1975-90 civil war.

Defenders view the central bank as the linchpin of stability and one of the few institutions operating effectively through years of bad governance at the hands of politicians whose corruption is the underlying cause of the crisis.

Protesters on the streets, who once revered Salameh’s ability to steer the financial system through bouts of unrest, now daub graffiti on the walls of the central bank.

“People used to think the governor was a god, but now they know what is happening,” said Leila, a 30-year-old entrepreneur.

The policies that largely defined Salameh’s tenure include the Lebanese pound’s peg to the United States dollar and, in recent years, so-called “financial engineering” that involves siphoning dollars from local banks at high interest rates to keep the government’s finances afloat.

His approach has drawn increasing criticism in the wake of anti-government demonstrations that erupted on October 17 and led Saad Hariri to step down as prime minister, panicking depositors and spurring them to pull billions of dollars from banks.

This week banks shut again, after being closed for much of October, and they have restricted transfers abroad and curbed US dollar withdrawals.

Dwindling flows

Nasser Saidi, a former central bank vice governor in the early part of Salameh’s tenure, has described financial engineering as a “Ponzi scheme”, as it relies on fresh borrowing to pay back existing debt.

The charge has been echoed by Nassim Nicholas Taleb, a Lebanese-American and a professor of risk engineering at New York University.

In response, the Banque du Liban’s legal department said its operations were in conformity with the law as set out in the 1963 Code of Money and Credit.

That allowed the bank “to ask for obligatory reserves or increase in capital, and other elements common to BDL operations and used by other Central Banks,” it told Reuters in a statement.

Salameh’s admirers suggest he had little choice but to opt for financial engineering. In 2016, with Lebanon struggling due to dwindling inflows from its diaspora, pressure grew on the bank to act.

Salameh began operations to borrow from banks at high interest rates, which it then had to service, leaving the central bank owing, by some estimates, around $85bn – more than twice the level of its foreign exchange reserves.

Although the exercise helped raise reserves, it also contributed to higher interest rates, undermining the economy, said Garbis Iradian, chief economist of Middle East and North Africa at the Institute of International Finance.

“This for me is plastering over cracks,” said Tony Asseily, a Lebanese former investment banker. “And the plaster eventually goes. And the cracks remain.”

Toufic Gaspard, a former finance ministry adviser, says if banks had not relinquished their dollar liquidity from correspondent banks abroad and put them with the central bank, the financial system would not be in trouble. He contrasts this with practices during the civil war, when lenders kept enough liquidity with their correspondent banks, helping stabilise the system.

“The fundamental cause of what we have seen in terms of capital controls, rush on banks, is due to central bank monetary policy and commercial bank bad policy … independently of any other development,” he said.

Shortages

Lebanese citizens began to question Salameh’s acumen when they began noticing food and other goods were more costly, and fuel shortages were occurring, as the official exchange rate began to splinter due to tightening dollar liquidity.

Salameh, 69, insists the financial system remains robust.

On Monday, he acknowledged that while financial engineering could not go on at present, usable foreign cash reserves of $30bn were enough to support the peg.

The latest crisis is not the first Salameh has faced since leaving behind a promising career at Merrill Lynch to head the central bank starting in 1993.

Peers credit him with a quiet strength and a conservative view of regulation, necessary in a country prone to instability.

He oversaw the fixing of the pound to the dollar in 1997 at its current rate, which helped stabilise the economy. Such has been his star power that the cigar-smoking Salameh has repeatedly been seen as a possible presidential candidate.

But recent events haven’t helped.

Financial support supplied by Gulf states following the 2006 conflict has not been forthcoming this time. Slow government progress towards narrowing the deficit has also posed problems.

“We are providing the funding for the country, to preserve the continuity for this country that we love,” Salameh said on Monday. “But we are not the ones spending the money.”