Lebanon Offers Banks Dollars as ‘Haircut’ on Deposits Ruled Out

(Bloomberg) — Lebanon’s central bank has no plans to impose formal restrictions on the movement of money or force depositors to accept losses but will offer “unlimited” dollars for commercial lenders to finance trade and meet customer demands through weeks of protest.With demonstrators gathered outside the central bank’s Beirut headquarters, Governor Riad Salameh said lenders could borrow dollars at an interest rate of 20% to ensure that they were able to give depositors ready access to their money– on condition that the funds are not transferred abroad. The central bank had also asked lenders to accept Lebanese pounds from clients repaying loans in dollars.The move comes in response to restrictions imposed by individual banks on the transfer and withdrawal of dollars in order to minimize capital flight after the protests forced them to close for a week. Since opening, some have also frozen credit facilities for importers, leaving some unable to settle payments for goods already in transit to Lebanon and causing a public outcry and fears of shortages.Lebanon Warned on Default and Recession as Its Reserves DeclineSalameh said he had asked lenders to meet with merchants immediately to find a way to finance imports.“There is a lot of talk about capital controls in the legal term and this is not on the table,” he said. “The central bank doesn’t have the power to do this and it does not want to. We are a country that lives off transfers and we can’t put Lebanese in a situation where they transfer their money into the country and cannot get it out.”Capital Controls?Calls have mounted for Lebanon to impose formal restrictions on the transfer of dollars abroad in order to defend its dollar peg as the country enters its third week without a prime minister. Saad Hariri resigned in the face of public protests last month but political bickering means no replacement has been named while the caretaker government is unable to take measures needed to pull the economy back from the brink.To keep its lenders stable and defend the dollar peg, Lebanon relies on inflows from the millions of Lebanese living abroad. However, capital inflows needed to finance the large current account and fiscal deficits have slowed as confidence has dwindled. Meanwhile, outflows have gathered pace.Salameh said that some $2 billion had been withdrawn from the banks during the crisis, mostly by panicky depositors storing emergency cash at home. A lack of access to dollars at the banks has forced importers and ordinary people to turn to exchange bureaus creating a parallel exchange rate and pressuring the peg.Defending the PegThe central bank has repeatedly said that Lebanon’s peg of 1,507.5 pounds to the dollar was a guarantor of social stability and would be not be compromised to ease the financial crisis. But on the street, it now costs at least 1,800 pounds to buy a single dollar, forcing up prices in a country that relies heavily on imports.Salameh said the rise of a parallel dollar exchange rate was a natural response to the crisis but the measures announced on Monday should help restore some balance.To contact the reporter on this story: Dana Khraiche in Beirut at [email protected] contact the editors responsible for this story: Lin Noueihed at [email protected], Paul AbelskyFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

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