Month: September 2020

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.

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.