Changes in Banks’ NFA: Another Indicator of Lebanese Banks’ Retrenchment

Changes in NFA of the Banking System:

Source: BDL

It is commonly practiced in Lebanon that the balance of payments (BOP) is measured as the change in net foreign assets (NFA) of the financial sector, which in Lebanon is broadly represented by the banking system that includes the banking sector and BDL. The idea is that – after the dust settles on all international transactions — if a BOP surplus emerges, then this surplus has to be used to invest in new financial assets or to pay down existing financial liabilities, the result of which is a positive change in NFA that is identical to the BOP surplus; and vice versa for the case of a BOP deficit.

The above table shows the BOP and its components as made up of the change in NFA of banks and BDL for the crisis period 2019-2022. We can obtain the following important observations from table:

1) In each of the 4 years a BOP deficit was recorded, with the worst one obtained in 2020 where the BOP deficit reached 10,551 million USD.

2) In 2020 too, BDL’s change in NFA was a negative 14,274 million USD, driven mostly by a useless subsidization program during the Diab government that neither improved living conditions nor stopped the severe depreciations in the exchange rate (as smuggling was a big part of the explanation). It was, to put it bluntly, an “economic crime” to waste so mush FX reserves. Only in September 2022 did the change of BDL’s NFA turn positive when the notorious subsidization program was terminated.

3) What is also remarkable is that in 2019 the change in NFA of banks was a negative 1,946 million USD (and negative 2,534 million USD in 2018); however, it turned to a positive 3,723 million USD and 2,622 million USD in 2020 and 2021 respectively and with hardly any change in 2022 (at negative 153 million USD only).

4) This indicates that banks engaged in foreign financial retrenchment during the crisis years so as to better manage their FX liquidity and commitments, drawing back their financial liabilities while reducing by less their financial assets, such that the end result was a positive change in NFA. Specifically, on the main liability side, non-resident customers’ deposits were less by 12.2 billion USD between Oct 2019 and Dec 2022, and non-resident financial sector liabilities fell by 5.4 billion USD. On the main assets side, however, claims on non-resident financial sector (correspondent banks) fell by 4.2 billion USD, and claims on non-resident customers fell by 4.6 billion USD.

5) This retrenchment can also be observed by the figures covering the opening of letters of credit (LCs) for import and exports at banks. In this respect, documentary imports LCs fell from 9.9 trillion LBP to 169.4 billion LBP between Dec 2018 and Dec 2021; whereas documentary export LCs fell from 5.2 trillion LBP to 163.7 billion LBP!

It is clear that the crisis had tremendous impact on Lebanese banks, though it was not their own making. Not only it stopped their intermediation role internally, but it also had a major dent on their external intermediation. That had led to increasing marginalization of the country’s foreign financial presence, something that is bound to increase if the umbilical cords with the correspondent banks are severed further. That is why, it is extremely urgent that reform and restructuring plan for the economy and banks is needed, not the least so that banks can resume their fledging role in foreign transactions and put the country back on the international economic map.