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

Friday, September 25, 2020
Opinion By Jean AbiNader

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.