Mansouri: Lebanese Government Has to Fend for Itself; Godman Sachs: Change of Guard at BdL does not Bring Resolution to Economic Crisis Any Closer!

In a press conference held on 25/8/202, Acting BDL Governor Dr Wassim Mansouri outlined BDL’s policy for the duration of his tenure, and the most salient feature of it is that BDL will stop funding government deficits in both LBP and USD. The main policy involves the following:

• BDL will fund this month’s public sector wages for about 400,000 employees in USD at the rate of 85,500 LBP to protect the ‘social peace’; but BDL will only convert partially and overtime the USD requirements for EDL and the ministries of Communications, Health, Public Works, Education, and Foreign Affairs. In other words, BDL will only fund current USD expenditures, not what are mostly capital expenditures!
• BDL will control the money stock – it will be BDL’s operational target – to keep the exchange rate as stable as possible.
• BDL will no longer fund or monetize budget deficits both in LBP and USD; the government has to fend for itself by increasing and widening tax collection, re-opening striking government departments, closing unlawful border and port crossings, and controlling much better its lawful ones.
• Most important, BDL lamented the government’s complete inaction on the reform front that is hurting badly economic growth and stability, encouraging the cash economy, and causing more isolation of Lebanon in international markets and institutions.
• A report on BDL gold holdings (whose summary will be published soon by BDL) observed that the country’s gold is currently worth $18bn with a third if it held in the US and the remaining two thirds in Lebanon.

In the same week, Goldman Sachs published a report on Lebanon titled, “Change of Guard at BdL Does not Bring Resolution to Economic Crisis Any Closer“addressing the issue of changing of guards at BDL. The report started by saying that, “after 30 years at the helm of the Lebanese central bank, the Banque du Liban (BdL), Governor Riad Salameh’s term came to an end on July 31. There is no successor owing to the lack of consensus within government on a candidate, but Mr Wassim Mansouri, the first Vice Governor, has taken control of the institution in the interim”.

More broadly, the report argued “Lebanon remains in political stasis, with no agreement yet in place on a successor to former President Michel Aoun, who left office almost a year ago at the end of his term. The government continues to govern in a care-taker capacity under Prime Minister Najib Mikati. Until the election of a new President and the formation of a new cabinet, it is unlikely in our view, that material progress can be made on many of the prior actions required by the IMF, given their politically sensitive nature. No single prior action illustrates this more than the requirement to pass a Gap Resolution and Capital Restructuring Law to address the bank losses. These losses amount to around $65-$70bn approaching … four times GDP. With no prospect for the government to recapitalize the banks, a bail-in of depositors is likely to be required to restore viability to the banking sector. How these losses will be distributed between the government, bank shareholders and depositors is a highly contentious question. Various proposals have been submitted to parliament, but none have received support across the political spectrum. This is unlikely to change in the near term, in our opinion”.

More important, the report was mainly pessimistic, as it said there is still no resolution in sight: “despite improving prospects after restoration of diplomatic ties between Saudi Arabia and Iran, political impasse continues to delay already lagging reform efforts and progress on IMF prior actions; and despite that some incremental progress possible under interim BdL Governor Mansouri, particularly on floating FX regime”.

The report concludes that “Lebanon’s path to economic recovery is thus a long one, beginning with the election of a new president, the formation of a new cabinet, and the subsequent agreement of all political factions on a reform agenda. Only then, and assuming the reform agenda conforms with the IMF’s requirements, would this clear the path for an IMF program and the crowding in of funding in the form of concessional lending and grants from Lebanon’s partners, including multilateral agencies, the Gulf and Europe. At this point, we could also see a resolution to the defaulted Eurobonds. Putting a time frame on this is extremely difficult, but our best guess is that it is highly unlikely to occur in the next 12 months”.

In addition, the report showed that Debt Sustainability Requires Deep Haircut of 80% or a recovery value of 20 cents per 1 USD and at a coupon rate of 12%. And assuming growth of 5% and nominal interest rate of 6%, in addition to an exchange rate of 65, 000 LBP, the debt to GDP can accordingly fall from 350% in 2022 to 50% in 2032.