Public Deposits and Foreign Reserves Accumulation at BDL

Source: BDL

After learning its lessons the hard way, BDL resorted to ‘monetary policy basics’ and the pursuit of risk-averse central banking under its new interim leadership starting on 31/7/2023. This simply meant stabilizing the exchange rate by controlling the money stock (more precisely currency in circulation), halting debt monetization, and clamping down on speculation[1] – and trying to accumulate more foreign reserves whenever feasible in the process.

In this note we will suggest that BDL relied mainly on public deposits as its main instrument to accomplish its objectives. In this respect, what strikes you looking at BDL’s balance sheet between 31/7/2023 and 31/1/2024 are three things, as can be seen from the table above: foreign assets increased noticeably, currency in circulation declined slightly, and public deposits rose substantially. But what was behind these changes? And how could they be validly interpreted?

To answer these questions, let us first note that – valued at 15,000 LBP to the USD – the increase in foreign assets was 11.9 trillion LBP or 793.3 million USD during that period. However, the increase in public deposits was a whopping 89.7 trillion LBP; but how did that come about? In its report of November 2023, the MOF expected its revenues to equal 24 trillion LBP a month starting in May 2023, including 20 million in USD from Airport and other public utility fees[2]. As such, over the six months period under study, total government revenues should have reached 24 x 6 = 144 trillion LBP; and given that 89.7 trillion LBP of those were deposited at BDL, then the difference of 54.3 trillion LBP were actually public expenditures between end July 2023 and end January 2024, as hardly any new TBs were issued during that period. Moreover, of the 89.7 trillion in deposits at BDL, there were 120 million in USD collected during the six months (20 x 6) or the equivalent of 1.8 trillion LBP. Therefore, the LBP component of public deposits amounted to 87.9 trillion LBP.

The crucial point, of course, is that 87.8 trillion LBP were sucked away from circulation and deposited at BDL; however, the currency in circulation during that period fell by about 4.9 trillion LBP only (the difference between currency at end January 2024 of 57.08 trillion LBP and currency at end July 2023 of 61.96 trillion LBP). Hence, 83 trillion LBP (87.9 – 4.9) were injected as currency back into the economy by BDL. More importantly, these were injected by buying USD from the FX market; and if we assume they were bought at the market rate of 90,000 LBP per the USD, then this would imply a purchase of  922.2 million USD by BDL over the six months period[3].

So the above simple calculations point to the fact that BDL foreign reserve accumulations from operations involving public deposits should have been: 120 million USD from MOF foreign currency deposits and 922.2 million USD from market interventions using MOF LBP deposits. This would add to 1042.2 million USD.

But that is not all. It is estimated that BDL’s foreign liquid assets are close to 9.5 billion USD. If we assume that BDL invests those in 1-month US TBs earning a current annual interest of 5.4%, then the six months’ interest earnings would amount to 256.5 million USD. As a result, BDL’s foreign reserves accumulation between 31/7/2023 and 31/1/2024 would equal to 1,298.7 million USD (1,042.2 + 256.5).

At the beginning of the note, we have seen that BDL’s actual or net accumulation of foreign reserves was 793.3 million USD. So during the period BDL must have spent 505.4 million USD (1298.7 – 793.3), primarily on public wages and Circular 158, or close to 85 million USD monthly[4].

We would like to conclude with two observations. First, it is ironic that BDL’s foreign reserves were previously lost by its underwriting of endless public expenditures, however now they are being accumulated by its judicious exploiting of public revenues. Perhaps that is ‘poetic justice’; though some would argue that public deposits should be put to better uses, but then what is a better use than accumulating needed foreign reserves! Second, BDL’s job and success is not only in stabilizing the exchange rate –commendable as that may be – but also in ensuring the safety and viability of the banking system, and these are matters whose success is of utmost importance to the country as it will make or break its financial future!.

[1] The clamping down on speculators was presumably accomplished using political and ‘other means’ of persuasion.

[2] The revenues were estimated by applying the Sayrafa rate to the customs dollar in May 2023; see, “Public Finance in the Face of Expected Risks under the Current Circumstances,” MOF, November 2023.

[3] In 2023, Lebanon is estimated to have received 6.4 billion USD in remittances, or the equivalent of 3.2 billion USD in six months. So at 922.2 million USD, BDL must have absorbed close to 29% of them.

[4] In fact, the Acting Governor put an upper limit on monthly public wages at about 55 million USD (or the equivalent of 58 trillion LBP annually), which leaves close to $30 million USD monthly for Circular 158 and other auxiliary payments.