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Lebanon

The Central Bank

Throughout years of the most appalling political, economic, and social suffering, the Central Bank was the only institution that preserved its reputation for essentially sound management. Since 1964 the Central Bank had been the guardian of the country's financial orthodoxy. It embodied the business beliefs common to a variety of Lebanese citizens, from merchants and bankers to the traditional Christian and Muslim political leaders.

From 1974 onward, successive bank governors constantly had to determine how much the Central Bank should squeeze commercial banks in order to secure revenue for the government through the sale of treasury bills. Securing revenue this way provided the bank with some of its more anxious movements as it saw its share of public debt climb steadily, particularly in the mid-1980s.

The Central Bank's activities eventually became controversial, and key issues needed to be addressed. There was the question of whether the bank should use the country's still considerable reserves for reconstruction and development projects (see Aid and Reconstruction , this ch.). There was also the issue of the extent to which the bank should continue propping up the Lebanese pound in the face of currency speculation, widely believed to involve leading Lebanese politicians.

Still, the Central Bank functioned with surprising efficiency, despite its location in the middle of the West Beirut battleground and despite the vicissitudes of the 1970s and 1980s. It reported a Lú1.2 billion profit for 1984, essentially from domestic lending operations. In 1985 the profits were Lú2.6 billion and in 1986, Lú4.9 billion. As customary, the bank kept 20 percent of its profits for reserves and sent 80 percent to the treasury. Although profits appeared respectable when measured in United States dollars, they showed that the bank was losing the battle to maintain its own real income or that of the government. Thus profits, calculated at year-end rates, were US$137.5 million in 1984, US$124.2 million in 1985, and just US$56.4 million in 1986.

Although the Central Bank was keeping the government solvent, it eventually reached a watershed in 1986. At the start of the year, public debt totaled Lú53.4 billion (about US$3 billion), of which the bank's share was 25 percent. By May, however, its share had ballooned to 44 percent. Bank loans to the state rose by 41 percent in the first 10 months of 1986 to total Lú22 billion, compared with Lú15.6 billion at the start of the year. Concern over the bank's funding of public debt grew, causing undersubscription of treasury bills. At the same time, the Central Bank imposed new regulations that angered the commercial banks.

Prime Minister Rashid Karami intervened in May 1986 by helping to negotiate a new agreement in which the size of commercial banks' statutory reserves was reduced, as was the amount of deposits that they had to keep in the form of treasury bills. The agreement, unfortunately, came at a time of renewed clashes between Shia Amal militiamen and Palestinians in the southern Beirut refugee camps. The clashes pushed the value of the pound even further at a time when the Central Bank accord with the commercial banks had been expected to strengthen the currency (see Chaos in Beirut and Syrian Peacemaking Efforts , ch. 5).

The measures negotiated by Karami proved insufficient either to restore faith in the currency or to end the dispute between the commercial banks and the Central Bank. The Central Bank imposed tighter controls in December 1986. It raised the statutory reserve to 13 percent, increased the volume of bank deposits to be kept in treasury bills, and banned loans in local currency to nonresidents (unless they were for trade purposes). The bank also forbade nonresident banks from receiving deposits, providing credits, or opening accounts in Lebanese pounds. Understandably, the commercial banks opposed the new rules. Before the announcement, only nine of the eighty-two commercial banks then operating were in violation of regulations. But under the new measures, sixty-three banks would have to increase reserves and treasury bill purchases to be in compliance.

The commercial banks protested. They believed that the Central Bank's attempts to force them to cover the budget deficit were preventing them from undertaking more profitable activities. In January 1987, the Central Bank softened its position. Its new policy meant that the largest banks were obliged to keep no less than 45 percent of their deposits in treasury bills, on top of the 13 percent required as statutory reserves. This left the banks with limited funds for productive lending.

The Central Bank's actions did little to improve the national currency, boost the economy, or ease relations with the commercial banks. Just a few weeks later, on February 11, 1987, it took Lú100 to buy a single United States dollar. The subsequent deployment of Syrian Army units in West Beirut temporarily reversed the situation, improving the rate to Lú85 to US$1, but on March 3 the pound lost 20 percent of its value in a single day's hectic trading. The Central Bank accused commercial banks of attempting to hoard foreign currency and of acting in league with speculators. But the Lebanese Bankers' Association blamed the Central Bank for failing to stabilize the market when the dollar began to move and for selling dollars too late.

Data as of December 1987


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