Recently, few Lebanese commercial banks offered for depositors high interest rates on deposits in Lebanese pounds maturing in a year that reached 45% annually. This issue raised concerns and was highly criticized in media.
The reason behind these high interest rates is that banks have liabilities that should be paid in LBP such as taxes, salaries, and some administrative expenses. However, the Central Bank recently decided and succeeded to decrease LBP in circulation from $20.51B in 2020 to $0.73B in 2024 in order to stabilize the LBP exchange rate against the US dollar and prevent its deterioration further. This procedure has started since beginning of the reign of acting governor of the Central Bank Mr. Wassim Mansouri, and led to a shortage in the LBP in the market. Thus, the banks that have shortage in LBP were pushed to take loans from other banks, and due to the shortage in the market, “interbank rates” increased dramatically starting May 2023 from 50% to 120% in July 2023 and reportedly it reached around 140% recently. Therefore, some banks offered depositors rate of 45% annually in order to decrease the cost of obtaining LBP to cover their shortage and maybe to relend them to other banks at the “interbank rates”.
On the other hand, some depositors who benefitted from these high interest offers expect that the high probability of election of a new president for the Lebanese republic and the potential aid from Arab and Western countries might result in an appreciation of the LBP.
These high interest rates will lead to several risks. First, banks might face liquidity risk in which depositors might not be able to withdraw these deposits in full at maturity in case Central Bank’s procedure remains and this will expand depositors’ losses. In addition, this procedure might deepen banks’ balance sheet problems since banks ceased providing loans to customers and they need to invest these deposits in investments that generate profits exceeding the rates given to depositors. Second, there is risk that depositors will suffer additional losses in case the LBP depreciated against the USD, although the probability of such scenario is currently low.
As such, the Central Bank might use the second tool, other than controlling currency in circulation which usually central banks utilize to fight inflation and change in currency exchange, which is controlling interest rates. The Central Bank succeeded to stabilize the foreign exchange rate and to decrease inflation, however, due to the banking sector crisis and the absence of new deposits and loans, the Central Bank was not able to use the second tool. So, hopefully, the Central Bank will be able to conduct its monetary policy in full using more available instruments. Lastly, one procedure that the Central Bank can follow – if it decides not to use the interest rate instrument – is pay banks their interest on USD deposits at the Central Bank not in Lollars but in LBP and, accordingly, provide banks with their needed liquidity.