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WEEKLY NEWSLETTER
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Lebanon
Index
Throughout years of the most appalling political, economic, and
social suffering, the Central Bank was the only institution that
preserved its reputation for essentially sound management. Since
1964 the Central Bank had been the guardian of the country's
financial orthodoxy. It embodied the business beliefs common to a
variety of Lebanese citizens, from merchants and bankers to the
traditional Christian and Muslim political leaders.
From 1974 onward, successive bank governors constantly had to
determine how much the Central Bank should squeeze commercial banks
in order to secure revenue for the government through the sale of
treasury bills. Securing revenue this way provided the bank with
some of its more anxious movements as it saw its share of public
debt climb steadily, particularly in the mid-1980s.
The Central Bank's activities eventually became controversial,
and key issues needed to be addressed. There was the question of
whether the bank should use the country's still considerable
reserves for reconstruction and development projects
(see Aid and Reconstruction
, this ch.). There was also the issue of the extent
to which the bank should continue propping up the Lebanese pound in
the face of currency speculation, widely believed to involve
leading Lebanese politicians.
Still, the Central Bank functioned with surprising efficiency,
despite its location in the middle of the West Beirut battleground
and despite the vicissitudes of the 1970s and 1980s. It reported a
L£1.2 billion profit for 1984, essentially from domestic lending
operations. In 1985 the profits were L£2.6 billion and in 1986,
L£4.9 billion. As customary, the bank kept 20 percent of its
profits for reserves and sent 80 percent to the treasury. Although
profits appeared respectable when measured in United States
dollars, they showed that the bank was losing the battle to
maintain its own real income or that of the government. Thus
profits, calculated at year-end rates, were US$137.5 million in
1984, US$124.2 million in 1985, and just US$56.4 million in 1986.
Although the Central Bank was keeping the government solvent,
it eventually reached a watershed in 1986. At the start of the
year, public debt totaled L£53.4 billion (about US$3 billion), of
which the bank's share was 25 percent. By May, however, its share
had ballooned to 44 percent. Bank loans to the state rose by 41
percent in the first 10 months of 1986 to total L£22 billion,
compared with L£15.6 billion at the start of the year. Concern over
the bank's funding of public debt grew, causing undersubscription
of treasury bills. At the same time, the Central Bank imposed new
regulations that angered the commercial banks.
Prime Minister Rashid Karami intervened in May 1986 by helping
to negotiate a new agreement in which the size of commercial banks'
statutory reserves was reduced, as was the amount of deposits that
they had to keep in the form of treasury bills. The agreement,
unfortunately, came at a time of renewed clashes between Shia Amal
militiamen and Palestinians in the southern Beirut refugee camps.
The clashes pushed the value of the pound even further at a time
when the Central Bank accord with the commercial banks had been
expected to strengthen the currency
(see Chaos in Beirut and Syrian Peacemaking Efforts
, ch. 5).
The measures negotiated by Karami proved insufficient either to
restore faith in the currency or to end the dispute between the
commercial banks and the Central Bank. The Central Bank imposed
tighter controls in December 1986. It raised the statutory reserve
to 13 percent, increased the volume of bank deposits to be kept in
treasury bills, and banned loans in local currency to nonresidents
(unless they were for trade purposes). The bank also forbade
nonresident banks from receiving deposits, providing credits, or
opening accounts in Lebanese pounds. Understandably, the commercial
banks opposed the new rules. Before the announcement, only nine of
the eighty-two commercial banks then operating were in violation of
regulations. But under the new measures, sixty-three banks would
have to increase reserves and treasury bill purchases to be in
compliance.
The commercial banks protested. They believed that the Central
Bank's attempts to force them to cover the budget deficit were
preventing them from undertaking more profitable activities. In
January 1987, the Central Bank softened its position. Its new
policy meant that the largest banks were obliged to keep no less
than 45 percent of their deposits in treasury bills, on top of the
13 percent required as statutory reserves. This left the banks with
limited funds for productive lending.
The Central Bank's actions did little to improve the national
currency, boost the economy, or ease relations with the commercial
banks. Just a few weeks later, on February 11, 1987, it took L£100
to buy a single United States dollar. The subsequent deployment of
Syrian Army units in West Beirut temporarily reversed the
situation, improving the rate to L£85 to US$1, but on March 3 the
pound lost 20 percent of its value in a single day's hectic
trading. The Central Bank accused commercial banks of attempting to
hoard foreign currency and of acting in league with speculators.
But the Lebanese Bankers' Association blamed the Central Bank for
failing to stabilize the market when the dollar began to move and
for selling dollars too late.
Data as of December 1987
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