Salameh’s Tenure Ends: Will a New Era of Monetary and Exchange Rate Policy Begin?

After 30 years at the helm of BDL, Governor Riad Salameh’s tenure ended on July 31^st, 2023. As a result, the first Vice Governor, Wassim Mansouri, will take over as Acting Governor, and will run BDL in conjunction with the remaining three Vice Governors. On July 20^th, 2023, the four Vice Governors put out a Preliminary Comprehensive Plan that could be a harbinger of what to expect from the new leadership at BDL.

According to the Vice Governors, the plan “constitutes a high level plan to enable the correction of the monetary policy, and start the recovery process. Its major objective is to float the exchange rate in a “managed” manner on an internationally recognized exchange platform, so that it reflects the real value of the Lebanese Pound. The expected timeline of this plan is over six months, while ensuring social stability and protecting the purchasing power of public sector servants and the most vulnerable population”.

Moreover, the plan could “happen through the following three steps:

• Budget Review
• Enactment of Capital Control Law, Bank Restructuring and Resolution Law, and Gap Resolution Law, with a protection of customers’ deposits.
• Coordination between BDL, the Parliament, and the Government to improve the depth of the Foreign Exchange Market”.

In the context of the Budget Review, the plan argued that “the government will need to strengthen its budget revenue framework through deeper reforms. A major review of tax, fees; and excises at the level of various ministries should be done”. As to the other two objectives, the plan’s main points stated “that:

• The Government will need to review and approve the Gap Resolution and Capital Restructuring Law by end of September 2023, while finding ways to protect eligible depositors (using DRF or other securities).
• BDL will commit to setting the rules and regulations to move exchange rate into a floating.-system by end of September 2023 with the ability to intervene when necessary (Managed Floating).
• BDL will continue buying USD in the market when possible, according to articles 75 & 83 of the code of money and credit, to lesser the pressure on his foreign reserves.
• BDL will commit to intervene in the market using the part of the approved envelope by the parliament during the coming few months to stabilize as much as possible a ‘unified exchange rate’ on Sayrafa.
• BDL will use the Auction mechanism on the International Provider Platform to respond to speculative attacks on the LL within clear policies and procedures to create a smooth transition into a floating market mechanism”.

In closing, the plan emphasized the following: “We strongly believe that the remaining reserves in foreign currencies at BDL are mandatory placements of the banks… As vice governors, since our nomination, we made it clear that those reserves should be preserved until we have a comprehensive plan which explains the fate of banks’ deposits, and use them in full alignment with the plan. At this stage, we believe that the use of any part of those reserves should be based on a national consensus between the Parliament, the Government and the Central Bank within a plan, which allows the government to reimburse any used amounts from those reserves. The Parliament shall pass a law that allows the Central Bank to lend the government, from the Mandatory Placements up to $200 million per month on average over a six-month period with a total sum not exceeding $1.2 billion over this period. BDL will provide its best effort to stabilize the Exchange Rate of the Lira to USD, and secure a smooth transition to a ‘Managed’ Floating Exchange Rate Platform”.

So based on this plan, the new BDL leadership intends to break with the past. It is expected to follow a managed float exchange rate system as its new monetary framework, to stop lending to the Government unless it is approved by parliament and is repaid back, and to intervene on the FX platform so as to stabilize as much as possible a ‘unified exchange rate’. It also mentions the need for a Deposit Recovery Fund to retrieve customers’ deposits. However, it is shy on what is going to happen to Sayrafa and how it is going to be phased out (beyond payments to public employees).

Overall, these are good, meaningful policies and carry the embryo of a comprehensive reform program; as to whether the political process will facilitate their implementation, only time will tell!

Disclaimer:

This article is a research document that is owned and published by Blominvest Bank SAL.

No material from this publication may be modified, copied, reproduced, repackaged, republished, circulated, transmitted or redistributed directly or indirectly, in whole or in any part, without the prior written authorization of Blominvest Bank SAL.

The information and opinions contained in this document have been compiled from or arrived at in good faith from sources deemed reliable. Neither Blominvest Bank SAL, nor any of its subsidiaries or affiliates or parent company will make any representation or warranty to the accuracy or completeness of the information contained herein.

Neither the information nor any opinion expressed in this research article constitutes an offer or a recommendation to buy or sell any assets or securities, or to provide investment advice.

This research article is prepared for general circulation and is circulated for general information only.