Foreign Assets and Liabilities and Financial Gap at Lebanese Banks: March 2023

In this economic digest, we will provide estimates of Lebanese banks’ foreign assets and liabilities and financial gap and a discussion of their implications.

In March 2023, the above table indicates that USD foreign assets and liabilities stood at $101.3 billion in March 2023. The reason that they are exactly matched is that, in case of any discrepancy, the capital account will adjust to restore equality between the two entities: for instance, if foreign liabilities are greater than foreign assets, then the resulting negative net foreign assets (NFA) will reduce the capital account by an equal amount to bring back equality to foreign assets and liabilities or turn NFA to zero.

The capital account in the above table is the amount denominated in USD, and if we add those denominated in LBP, the total will come to $4.8 billion. Given that Lebanese banks’ capital was $20 billion before the crisis, and given that BDL stipulated a 20% increase in capital at the beginning of the crisis, then more than $19 billion in banks’ capital was eliminated as a result of the crisis!.

It is evident from the table too that the most notable figure is banks’ deposits and CDs at BDL which stand at $82 billion and constitute close to 88% of customers’ deposits. Moreover, the USD deposits (i.e. excluding CDs) by banks with BDL were largely involuntary, as banks were mostly compelled to do that due to BDL regulations and practices. More important, and in consequence, the retrieval of the $82 billion at BDL is the responsibility of BDL and/or the government, as is well-known and practiced all over the world.

As to the financial gap, its size should be equal to $82 billion minus the remaining foreign reserves at BDL. Given that the latter is currently around $9.5 billion, then the financial gap would be: 82 – 9.5 = $72.5 billion. And if we consider BDL’s gold stock, currently valued at $18.5 billion, the gap would then be $54 billion.

Most important, this financial gap at $72.5 billion – or $54 billion including gold – constitutes the heart of the matter. In this respect, there can’t be any serious and credible restructuring of Lebanese banks before deciding first who will bear the burden of this gap and by how much. Ideally, and in a world ruled by the letter of the law, it is BDL and/or the Lebanese government who should bear the full burden. In fact, this concurs with article 113 of the Lebanese Code of Money and Credit which states that BDL losses are the responsibility of the Government, or “losses should be covered by general reserves, and in case these are not available or are not enough, then losses should be covered by an equal amount form the treasury”, especially that most of the financial gap was spent on unsustainable public expenditures by the government (EDL, subsidies, …etc). In this respect, it is ironic to hear calls requiring banks to re-capitalize, but hardly any calls asking BDL to recapitalize by assuming its responsibility for the gap.