Continued Disagreements on Reforms of Banking and Financial Sectors Threaten New Government Mandate

It’s been clear for months that a key issue blocking negotiations with the IMF is the reluctance of the Central Bank of Lebanon (BdL) to open its books to a forensic audit that would allow for the accurate accounting of the country’s debt, assets, funding allocations to the government, and overseas and domestic transfers of funds. Finally in early September, the caretaker Finance Minister Ghazi Wazni signed the three long-promised contracts with outside firms to conduct a forensic audit, financial audit, and financial restructuring plan.

What is unclear, and is the subject of much discussion, are the conditions and limitations the Minister has placed on the forensic audit that would protect the BdL and conceal those who profited from its machinations in the financial sector. In fact, despite public disclosure laws that could force the publication of the contract, there appears that Alvarez & Marsal, the contracted firm, has little recourse but to follow the imposed limitations.

Tracy Chamoun, Lebanon’s Ambassador to Jordan, wrote that she can understand why Speaker of the Parliament Nabih Berri wants the investigation restricted since he may be “Protecting the 30,000 fake employment jobs in the government that he institutionalized? As well as, the more than 5000 fictional positions he created? What about all the illegal daily employees that he also hired in the public sector?”

There is also an alleged restricted time frame on the forensic audit. The previous Diab government opted for a five-year audit, but it is unclear if this is still the case. As Karim Daher pointed out, “A forensic audit traces financial transactions and identifies possible legal infringements, particularly in the context of BDL’s financial engineering or bond issuance/subscriptions. For the international community, including the International Monetary Fund (IMF), the challenge is to determine the exact amount of financial losses. But for the public opinion, the issue is whether there has been embezzlement, money laundering, corruption, insider trading and so on.” Without at least a five year timeline, it will be difficult to establish patterns of illicit or improper actions.

Daher makes the point that misdeeds will have both legal and public consequences, adding to the perception that the opaque nature of the sector is detrimental to an open and credible audit. This was further reinforced by BdL Governor Salame when he promised to cooperate with the government on the implementation of the audit, but “He could not promise that BdL would hand over all the information requested by the forensic auditor because he is bound by Lebanon’s powerful banking secrecy laws.” Ironically, the commission that can lift the laws especially in the cases of investigations is headed by Salame.

The health of the financial and banking sectors is being further eroded by the rapidly depleting foreign currency reserves by a monthly average of $1 billion a month in 2020. According to the Byblos Bank Economic and Research Development team, the drop is due to a combination of decreased trade transactions, “weaker remittances from overseas Lebanese, capital flight in the absence of an official capital controls law, and a growing parallel market for foreign currency.” In the same report, Goldman Sachs noted that “external leakages (of money going abroad) could have originated from capital outflows in the absence of formal capital controls.” It estimated that BdL’s reserves will be fully depleted in the coming 12 months if the contraction rate continues.

In terms of the forensic audit, this decrease reinforces the red flags already apparent in the investigation process. For example, an accurate accounting of the BdL’s reserves is critical to any capacity for the country to borrow funds without paying excessive interest or sacrificing national assets at fire sale prices to raise money.

In the same edition, it was reported that Moody’s Investors Service said that “The economic recovery will depend on access to externally-funded investment projects from the international community, which in turn, is conditional on the swift formation of a new government and the implementation of a specific set of reforms…including restoring the solvency of public finances and the banking system through a comprehensive restructuring of the sovereign debt, enacting legislation to formalize capital controls, eliminating the current multiple exchange rates, implementing comprehensive audits of BdL and state-owned enterprises, and expanding the social safety net to support the most vulnerable segments of the population.”

Speaking of options for growing government revenues, The Hayek Group suggested the establishment of a National Real Estate Fund (NRF) that would include state-owned properties across the country. Of course, there is no centralized system for identifying what properties the government owns, estimated to be worth from $69.1 billion, and little enthusiasm for a public accounting among the private interests currently exploiting these lands.

Which brings us full circle to the importance of an accurate and fully disclosed forensic audit. It is a critical piece of accurate data required to move Lebanon out of its current quicksand of inaction that is leading to default and failure. A credible disclosure will allow consideration of solutions that may yet save the sectors from collapsing.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.

Mamas – Don’t Let Your Babies Grow Up to be Bankers in Lebanon

In the complicated and arcane world of Lebanese finance, the banking sector has always been held in high esteem and regarded as one of the pillars of the country. Parents could not be happier than if their offspring worked for a bank or investment house. With the right connections, and usually if you were the “right” gender, there was a promising career ahead rewarded with an upper middle-class lifestyle.

Fast-forward to the current day. In Lebanon’s economic downfall this past year, the banks are seen as a key member of the evil forces that have eroded the country’s finances, degraded its currency, and deprived the country of its future. Chief among these villains is the Central Bank (BdL) which drew the banks into a financing scheme for the country’s budgets that enriched the banks, their leadership, stockholders, and biggest depositors. It all collapsed towards the end of 2019, bringing about the first ever default by the country of its Eurobond obligations. Banks have been targeted by angry demonstrators who have destroyed or damaged a number of banking facilities.

Government negotiations with the IMF are not off to an auspicious start as the banks are balking at any reforms that would affect their profitability such as haircuts on their largest depositors and consolidation of the sector. So once again, the Central Bank is attempting to take the lead in strengthening banks, only this time it has drawn the wrath of the Association of Banks in Lebanon (ABL) which represents the banking community. BdL has issued several circulars directing the banks to increase their loss provisions for hard currency deposits and Eurobonds; increase capital by 20% by the end of 2020 with the option of allowing shareholders to transfer ownership of property to their bank for a limited period; and provide depositors an option to convert their deposits into bank shares or convertible bonds.

There is also a wishful thinking recommendation that “Banks should also urge depositors who transferred more than $500,000 abroad as of July 1, 2017, to deposit funds in a special account in Lebanon that will be frozen for five years and equivalent to 15% of the transferred amount. The directive applies to bank chiefs and large stakeholders. The equivalent deposit amount is raised to 30% for “’politically exposed persons.’”

It didn’t take long for the banks and their allies to counterattack, both in the press and in recent meetings with French government officials. Claiming that the measures “will have negative repercussions on the economy and will put additional strains on the already suffering industrial sector,” The Association of Lebanese Industrialists (ALI) objected to several provisions related to conditions for settling loans that in effect would increase funds needed by requiring settlement in foreign currencies.

The BdL also asked banks to encourage importers to transfer from abroad the equivalent of 15% of the aggregate amount of the letters of credits that they opened in any of the past four years, and to deposit these funds in a “special account” and block them for five years, without making a distinction between standby or purchase-related LCs. The ALI warned that the implementation of the circulars could put at risk the remaining productive capacity and sustainability of businesses in the country. These concerns were also echoed by the Beirut Traders Association (BTA).

Another blow is that law suits against the banks in Lebanon and abroad claiming damages resulting from blocking access to depositors are increasingly being decided in favor of the plaintiffs, further diminishing the strength of the sector and leading to the erosion of its credibility. As The 961 opined, “At this stage, with the economic and financial crisis, the banks’ reportedly low liquidity, and their unethical freezing of their customers’ money, Lebanon is losing one the main features that made it stand out in the region: Its banking services.”

And their troubles are far from over. The banks are insisting on selling state assets to repair their balance sheets, a plan rejected by both the IMF and the previous government, so they are now lobbying France which is pushing for reforms in Lebanon as a condition of it receiving international assistance.

The outreach by banks suggests they are “still in denial” over finding a solution that doesn’t inflict losses on their shareholders, according to Dan Azzi, former chairman and chief executive of Standard Chartered Bank in Lebanon. “Banks that were somewhat successful in their local lobbying efforts against a solution which involves a bail-in of their shareholders have realized that the international community will not release any funds until such losses have been recognized.”

However, French authorities prefer to emphasize deep reforms that must be undertaken to restore health to the sector. Among these measures are the swift implementation of capital controls and bank consolidation in a country with 64 banks controlled by 32 groups. Yet the banks are clinging on to the hope of avoiding any painful, large-scale changes in hopes of retaining their once vaunted status as a pillar of the economy. The reality is that the sector isn’t a shining star any longer and won’t be again without serious reforms and consolidation.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.

Do the US and France See Eye to Eye on Lebanon?

It is instructive to review the French draft Plan presented by President Macron to the oligarchy during his September 1 visit in light of the subsequent visit, statements, and interviews by Assistant Secretary of State for the Near East David Schenker. There has been some commentary that France’s position on Hezbollah is less stringent – proposing that political and economic reforms will weaken its control over large swaths of the Lebanese government and people – whereas the US prefers to use sanctions to change Hezbollah’s behavior. France also regards Hezbollah as made up of a political and a military wing, to which Schenker responded, “In democracies you have to choose between bullets and ballots. You cannot have both. Political parties do not have militias.”

The differences over a Hezbollah strategy notwithstanding, a closer reading of the plan shows a strong correlation between the approaches and reflects what Schenker refers to as the close collaboration between the US State Department and the French Ministry of Foreign Affairs. Schenker notes that the US and France are on same page when it comes to political and economic reforms being a prerequisite to unlock any international financial assistance to Lebanon.

According to the Lebanese Center for Policy Studies, “The plan requires the majority of the commitments (20) to be achieved within one month of the government gaining confidence, two within the first three months, one by the end of this year, and one within one year.” Here are some of the highlights of the French draft Plan that demonstrate overlapping approaches.

The first two points refer to the need to address the impact of Covid-19 on the most vulnerable and marginalized segments of society. This is accompanied by the statement that immediate steps should be taken to set up a coordinating mechanism with the UN to facilitate the distribution of international aid in a “transparent and traceable manner.” The US is currently the largest contributor of humanitarian assistance to Lebanon to fight Covid-19 and is working to strengthen its initial allocation of $30 million in both humanitarian and reconstruction assistance after the Beirut blasts. On the ground, the US is working with the UN to provide food assistance despite the White House’s known disdain for UN bodies. Even France is insisting that the government of Lebanon keep its hands off humanitarian assistance to circumvent pilferage and the resale of donated products on the open market.

Another area of cooperation mentioned in the proposal is the reconstruction of neighborhoods and the port of Beirut according to “fair standards.” Given the general reluctance of the international community to provide direct assistance to the government, it will be challenging to develop a comprehensive redevelopment plan without some official involvement as there are many issues including zoning, utilities, transportation access, etc. that will require coordination. Perhaps this is one of the areas in which the yet-to-be-named government can make a credible attempt to gain recognition and support. A good start would be implementing the plan’s call for “Conducting an impartial and independent investigation within a reasonable timeline.”

Of course, underlying all of the issues in the Plan is the need to engage the IMF in reforming the economic and financial sectors, which will require extensive reworking and a myriad of regulations. One recurring condition mentioned in the plan are time specific deadlines for actions. This includes implementing passed reforms to the electricity sector, launching tenders for gas-fired power plants while reducing the reliance on private sector generators, and recasting the current Selaata power plant project that is mired in controversy.

On the issue of raising electricity rates, the plan calls for rates that first affect more affluent users. It also mentioned the importance of the capital controls draft law that must be completed and implemented, again according to a rigorous timetable. While US statements have not been as detailed, this is consistent with the general thrust of its policy recommendations. Importantly, as in Schenker’s statements, throughout the Plan, the French insist that the government regularly exchange views and ideas with civil society.

Rather than giving immediate access to the CEDRE funds as steps are being taken, the plan envisions a local follow up conference to review priorities and set schedules. This is to be in conjunction with implementing actions to approve the proposed law on an independent judiciary and transparent appointments based on competence in the judiciary and electricity, telecommunications, and civil aviation sectors. In tandem, it is recommended that the new government work an international body on an analysis and census of the public sector and an assessment of the public administration.

On the pervasive issue of corruption, the French Plan calls for setting up the National Anti-corruption Commission that has been drafted and provide it with the necessary resources to do its job. It encourages the government to establish within 90 days controls to provide oversight at the ports of Beirut and Tripoli, the airport, other cross-border entry points, and implement customs reforms. To strengthen the investment environment, it stresses the need for a law on public procurement and to provide adequate resources to the Higher Council for Privatization and Public-Private Partnerships.

It calls for the now instituted forensic audit of the Central Bank and asks Parliament to vote on a 2021 budget by the end of 2020.

Although there are no additional explicit terms in the French plan regarding political reforms, there is a call for election reform in that “The government will organize new legislative elections within a maximum period of one year,” and, “The electoral law will be reformed to fully include civil society, allowing Parliament to be more representative of the aspirations of civil society.” This also reflects the US position that steps need to be taken to more broadly engage civil society in governance whether through electoral reform or other mechanisms.

Both the US and France refer to the imposition of sanctions if steps are not taken in the short term. While the French have made some explicit references to deadlines, the US has already imposed initial sanctions against leaders who are charged with enabling Hezbollah to subvert the Lebanese state. A well-coordinated pressure campaign towards the new government, when it is installed, will be a crucial opportunity for the US and France to make a significant contribution to Lebanon’s recovery. With Gebran Bassil and Nabih Berri already saying they will not be part of a new government, it is hoped that other old regime paragons will likewise fade and give some semblance of new leadership emerging to lead Lebanon forward.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.

Rescuing Pets in the Aftermath of the Beirut Blasts

I have friends who are rather generous in their posting of beasts of all sizes on Facebook, both entertaining and really cute, but I try to avoid paying attention to them except when it’s Watson or Jack, our family canines, neither of whom live with me – I might feel differently if they did. Among the stories that are streaming from Lebanon are several about organizations working to reunite pets and their owners and caring for those who have been abandoned. The Lebanese greet each rescue and reunion as a sign of hope, giving us stories that reject the notion that all is lost.

My friend Ken Close wrote to tell me about Animals Lebanon, featured in many of the stories, which is sponsored by a US non-profit, The Last Animals Foundation. It is an organization founded, run, and managed by women with over 200 volunteers searching through rubble and destruction to find lost animals whose owners have registered their pets’ pictures and descriptions online. Together they launched a GoFundMe campaign complete with a poignant video to bring attention to their work and some of their early successes.

Animals Lebanon works to change legislation and the culture of animal welfare in Lebanon. The group also rescues trafficked and abused endangered animals from all over the Middle East and resettles them abroad. It has received a donation of 74 acres of land in the mountains east of Beirut on which to build a large-scale rescue and recovery center for animals of all sizes and an educational center to continue their work changing the culture around caring for animals.

According to Ken, these new facilities will allow them to have the space and proper resources to give the animals they rescue time to recover until they are well enough to be resettled elsewhere in the world. The specialized infrastructure has already been designed on a pro-bono basis by architects in Europe who have experience designing animal sanctuaries.

It is intriguing that in the midst of the reporting on the catastrophe in Beirut, major news organizations such as BBC, AP, CBS, and CNN featured stories on Animals Lebanon and Lebanon BETA and their efforts. The BBC segment tells the story of two dogs separated from their owner who used the recovery network set up by volunteers to reclaim her pets, even though one was 50 miles away, picked up by someone who found the injured pet on his way back to Tripoli.

CNN focused on the initial impact of the blasts and how Animals Lebanon mobilized to pull together volunteers from all over the country to engage in the rescue effort. According to Jason Bier, the executive director, they search for animals trapped in the rubble, tend to the injured, and care for those whose owners died. With 300,000 homeless, it is a great challenge to both find the owners and resettle pets in new locations.

One of the first stories to cover the rescue efforts was posted by The 961, a very helpful site that early on captured the challenges of working in the wreckage to find survivors. It noted that “In the chaos of the blast, too many animals and family pets went missing; close to a thousand as reported by activists.”

AP reported that “Animals Lebanon Teams go out at night and early mornings to search for the pets, before the streets become too crowded with people going through what remains of their homes or noisy bulldozers and forklifts trying to clear the rubble. The noise and the commotion keep the animals in hiding. Kamal Khatib, a volunteer, said that “We had a few cases where we would rescue a cat and then the building would collapse. Since the day of the explosion, we have maybe climbed more than 300 floors going up and down, looking, looking into elevator shafts, looking under cars, looking amid in the rubble.”

In a segment that was shown in many stations in the US, CBS updated earlier reporting on Animals Lebanon, saying that it had received 540 requests for help and 331 people have volunteered in search, rescue, and care efforts. It also noted Animals Lebanon’s extensive use of social media including Facebook and Instagram to issue reports. So far, the organization said it has provided veterinary care to 216 animals. It said it was able to reunite 110 lost animals with their owners, and that 61 animals are in need of adoption.

Thanks to Animals Lebanon and other generous groups, there is a bit of good news is all that is awful about the aftermath in Beirut. Again, its GoFundMe site is here.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.


Living through Letters – the Last Days of Bim Nakely

I don’t have much time for casual reading. Keeping up with US foreign and domestic policy issues that affect my work takes hours every day so when I take a break, I really want to enjoy what I’m reading or viewing. So it was a great pleasure to hear from an old friend, Sam Hazo, a doyen of Lebanese-American literati, that his latest book had been published and he sent me a copy. It is loosely based on his musings about letters that might have been written by an elderly Lebanese woman in the US knowing that she would die in several months.

His own family immigrated to the US from a small village near Saida in the early 1900s. Patterned after a great aunt who was a fixture in his growing up, it offers letters written by Bim (Barbara) Nakely to her sister Lottie (Charlotte), as well as to FDR, Mae West, Rita Hayworth, Charlie Chaplin, and others, many of whom have already passed away. She felt that she had something to say to them, and want to share her thoughts about life before hers ended.

Her letters are a way of capturing the values and concerns of someone transplanted to a new land and life, who lived in a circumscribed world expanded by her readings and movies. For example, when she writes to FDR, she recounts how President Theodore Roosevelt intervened to save her and Lottie from being sent back to Lebanon from Ellis Island because they had eye infections. A story quite similar to my own mother’s family except there was no presidential reprieve!

The book’s title, “If Nobody Calls, I’m Not Home,” is a classic Arab formulation. Loath to talk about death directly, she calls death “Nobody,” which I have found a common practice to reference death by another name among older generations throughout the region. The book is a series of letters, no commentary, no introduction. The letters provide the milieu for her life, expectations, reminisces, experiences, and final wishes. They are easily digestible, and at 143 pages, it’s a summer’s gift, a book club classic, and an all-around great read.

In a conversation with me, Sam said that her character was based on his aunt: courageous, independent, who didn’t know the meaning of defeat. In the book, her sister Lottie dies at a young age and leaves her two boys to Bim’s care who raises the boys and, as a consequence, has no life of her own outside of her family. The letters let us see her candor and admiration for icons of the 20th century. Bim’s attitudes and opinions certainly resonate with those of us who have older immigrant relatives. One difference I appreciated was the strength that came through, even though she lived her life for others, again reminding me of my mother – devoted to her extended family, misused by her elders as a child, and rooted deeply in values that she found lacking in her children to the very end!

Here are some selections.

To Mae West. “You were always Mae West, and if others didn’t like it, that was too bad. That’s something special, especially in a woman. I know so many women who change the way they really are depending on the people they’re with. With men they’re all flirty, and you know the rest…I’m not a great believer in all this business about men and women being the same. Equal is all right, but not the same.”

To Babe Ruth. “Sometimes when I look at flowers in bloom, I feel like I’m going to cry. I can’t explain it, but I just start crying. You were no flower Babe, but you lived the way flowers live. You were always yourself, and you stood out because you were never competing with anybody else. You just went and did your thing, and it was good enough to make everybody take notice. That’s not much different from what flowers do, is it?”

To Charlie Chaplin. “A lot of people who didn’t know a word of English came to the Nickelodeon and really enjoyed themselves just watching you. There was nothing to translate. Isn’t that something? In those days, there was every kind of nationality up on the Hill and all over Pittsburgh – Polish, Germans, Italians, Syrians, Jews, Slovaks, Irish, and a lot of Slavs. Except for the Irish none of the others could speak English that good, but it didn’t matter. They all spoke Charlie Chaplin.”

Enjoy the read. You can order the book on Amazon.

Or directly from the publisher Wiseblood Books, which offers discounts on multiple orders.

The views and opinions expressed here are those of the author and do not necessarily reflect the position of the American Task Force for Lebanon.