An Indirect Methodology to Estimate BDL’s Foreign Assets and Liabilities

On February 1^st, 2023, BDL changed the official exchange rate for Lebanon from about 1,500 LBP to 15,000 LBP per 1 USD. As its balance sheet – which is published bi-weekly – is measured in LBP, we expect domestic assets and liabilities that are denominated in LBP not to change (instantaneously or in a very short time) in magnitude due to the re-valuation. However, we expect foreign assets and liabilities which are denominated in foreign currencies – primarily USD – to change as a result of the re-valuation. And it is the magnitude of this change that will allow us to estimate or identify the original magnitude of foreign assets and liabilities as denominated in foreign currencies, once adjusted to the difference between the two exchange rates (15,000 – 1,500 = 13,500). To our knowledge, this is the first time (or opportunity) BDL’s foreign assets and liabilities are estimated by this methodology.

To elaborate: the table above depicts BDL’s balance sheets on 31/1/2023 – the last one measured at 1,500 LBP – and on 15/2/2023, the first one as measured by the new official exchange rate of 15,000 LBP. The items in the balance sheet that will move most during those two periods are, naturally, foreign assets and liabilities. Specifically, on the assets side, these are (if we leave Valuation Adjustment at the side for the moment):

Gold at 253.89 trillion LBP = 16.92 billion USD

Foreign Assets at 222.22 trillion LBP = 14.81 billion USD

Loans to the Public Sector[1] at 247.57 trillion LBP = 16.51 billion USD

On the liabilities side, these are as follows. First, is Financial Sector Deposits, which has changed by 1,190.54 trillion LBP, making the foreign liability component equal to:

 1,190.54/13,500 = 88.18 billion USD

Second, is Public Sector Deposit whose change was 50.25 trillion LBP, which makes its foreign liability component equal to:

50.25/13,500 = 3.72 billion USD

Third, is Other Liabilities whose change was 9.25 trillion LBP, making its foreign part equal to:

9.25/13,500 = 0.685 billion USD

Thus, according to this methodology, foreign assets FA are equal to:

16.92 + 14.81 + 16.51 = 48.24 billion USD

And foreign liabilities are equal to:

88.18 + 3.72 + 0.685 = 92.58 billion USD

Hence net foreign assets, NFA or foreign assets minus foreign liabilities are equal to:

48.24 – 92.58 = -44.24 billion USD

Two points are worth elaborating[2]. First, the Valuation Adjustment[3] at 548.24 trillion LBP is actually a balancing item to make assets equal liabilities in the balance sheet, after accounting for the capital account. In other words:

Assets + Valuation Adjustment = Liabilities + Capital Account

Assets – Liabilities = Capital Account – Valuation Adjustment

Given that NA is net assets or assets minus liabilities, then:

NA = 10.72 – 548.24 = -537.52 trillion LBP

Thus BDL has a negative equity of 537.52 trillion LBP. Note also that NA = NFA + NDA (where NDA is net domestic assets), and given that NFA in LBP is equal to -663.6 trillion LBP (-44.24 x 15,000), then NDA is equal to:

NDA = -537.52 + 663.6 = 126.08 trillion LBP

Second, not surprisingly, more than 123% of the negative equity at BDL arises from the negative NFA. And, more important, it is owed to commercial banks, or ultimately depositors.

[1] These are denominated in USD since they reflect borrowing by the government from BDL to undertake foreign currency expenditures; as to domestic currency expenditures, these are funded through increases in BDL’s Securities Portfolio (or debt monetization).

[2] Similarly, we see that the change in capital account due to the revaluation was 5.49 trillion LBP, which makes its foreign component equal to: 5.49/13,500 = 0.407 billion USD.

[3] The Valuation Adjustment should be actually Net Valuation Adjustment as it nets the valuation adjustment arising from changes in Gold prices that is equal to zero on the liabilities side of the new balance sheet.