- 20
- May
- 2024
BDL’s Strategy to Tackle Deposit Crisis: An Increase in Withdrawal Exchange Rate?
modified on 09 June 2024 à 07:04 Read : 6 minute(s) A A A
The official exchange rate of 89,500 Lebanese pounds to one US dollar is recognized by the Lebanese Central Bank (BDL) as the unified exchange rate, which banks are required to use when drafting their financial statements and periodic reports. This rate aligns with the parallel market exchange rate. BDL’s Acting Governor, Wassim Mansouri, keeps on reiterating, "There is no new exchange rate," in response to queries regarding whether the Caretaker Finance Minister might adopt — in agreement with the government — an exchange rate of 25,000 Lebanese pounds or LBP to the dollar for bank withdrawals.
Mansouri believes that Lebanon has made significant progress in unifying the exchange rate, reaching the final stages of this challenging process. BDL believes that this achievement has allowed for a solid and stable exchange rate. The depositors' calls for an increase in the exchange rate of bank withdrawals in US dollars, currently fixed at LBP 15,000 per dollar, have been ongoing. This is due to the deduction percentage from the actual deposit value, or haircut, which exceeds 80%. Meanwhile, depositors are against the adoption of a new exchange rate that deviates from the parallel market rate, as they wish to protect the value of their deposits.
As for Caretaker Minister of Finance, Youssef Khalil, the only step he managed to take was to issue a decision to raise the exchange rate to LBP 25,000, refusing to bear sole responsibility for its promulgation. He insists on the approval of both the government and the BDL, a condition staunchly rejected by Mansouri, who once again reaffirmed that the official rate endorsed by the Central Bank is LBP 89,500.
To implement this change on cash withdrawals, the government and Parliament must shoulder their responsibilities by making decisions and enacting necessary laws to regulate the volume of LPB cash in the market, as well as the Capital Control Law. This law must also be part of a comprehensive reform plan that positively impacts exchange rates and fosters stability. Sources close to Wassim Mansouri reaffirm his rejection of any decision that might significantly decrease depositors' funds. He asserts, "If they want to adopt an exchange rate that imposes fees on deposits, the decision must then be legislated by Parliament. Any approval by the BDL of a decision issued by the Minister of Finance, even with government consent, runs counter to the Code of Money and Credit and will be rejected by the BDL."
Looking back to the measures that have helped stabilize the dollar exchange rate in the parallel market for some months now — amidst widespread dollarization that has decreased demand for the Lebanese pound — the BDL has maintained control over the market’s money supply. It has been absorbing more Lebanese pounds, reducing its money supply from 83 trillion pounds at the beginning of 2023 to around 61 trillion pounds today.
In coordination with the Ministry of Finance, roughly $681 million worth of Lebanese pounds can be fully covered by the BDL. Moreover, the cumulative rise in cash reserves across currencies has soared, nearing a total of $9.5 billion, amidst tight control over the money supply. This control is pivotal to the success of the mechanism to attract dollar surpluses from companies and institutions in need of liquidity in Lebanese pounds. The decision to keep these reserves intact and refrain from financing the Lebanese state is ongoing, with expenses solely covered by its revenues and available accounts.
In this context, the current stability of the exchange rate hinges on several factors, including political and domestic security concerns, as well as the looming risk of an expanding war. It's widely anticipated that tensions will increase between the government and the BDL post-war, especially concerning their roles in funding business recovery and securing essential dollars. Mansouri's position is clear: BDL is determined in its refusal to finance the state or tap into mandatory reserves, especially in dire circumstances. However, should the military conflict escalate and the Lebanese state need financing, BDL would provide funding on the condition that it is authorized by legislation through the Parliament, as wars fall under exceptional measures.
For depositors, the pressing concern remains the destiny of their deposits, given the successive failures of past and present governments to devise a fair plan ensuring their eventual repayment instead of write-offs. The recent proposal by Caretaker Prime Minister Najib Mikati's administration, backed by Deputy PM Saadeh Chami, faced a significant setback from the State Council. The latter accepted the review submitted by the Association of Banks in Lebanon (ABL), effectively nullifying Cabinet Decision No. 3, made on May 20, 2022. This decision sought to revitalize the financial sector by canceling a substantial portion of BDL’s foreign currencies to banks, aimed at reducing the deficit in BDL’s capital and closing the bank’s net open foreign exchange position.
These obligations, totaling approximately $60 billion, are fundamentally depositors' funds. In its bold decision, the State Council confirmed that this debt is owed by the state, which must repay it to the banks and, in turn, to the depositors. In this regard, the State Council decision overturned Chami’s plan, much like it previously canceled out former PM Hassan Diab's plan, which was similar in form and substance to Najib Mikati's government's approach to handling deposits. This approach, aligned with the International Monetary Fund, aimed to write off deposits and start from scratch. This would burden the depositors with all the losses and devastate the remaining banking sector by erasing its capital and bleeding its banks dry.
Currently, with the bank restructuring plan and the roadmap for the next phase still pending, depositors can rely on two circulars: Circular 166, which allows monthly withdrawals of $150, and Circular 158, which authorizes monthly withdrawals between $300 and $400. These circulars provide depositors with a means to access part of their funds.
However, several problems have arisen regarding the implementation of monthly withdrawals for depositors by banks, ranging from complete suspension to partial or full implementation. This came after the deadline for implementing Circular 151 expired earlier this year. This circular allowed a monthly withdrawal limit of $1,600 at a rate of LBP 15,000 per dollar, totaling 24 million pounds. With the BDL no longer endorsing the 15,000-pound exchange rate for the dollar and the inability of banks to adopt the new rate of LBP 89,500 without clear restrictions and procedures, banks have been forced to stop the operation of this circular.
As for the setback in implementing the alternative Circular No. 166, which allows depositors to withdraw only $150 in cash, regardless of the number of accounts they hold in one or more banks, the main issue persists in the long period needed to check depositors' compliance with the set conditions.
Nevertheless, addressing the issue of deposits and exchange rates remains contingent on government decisions and plans that have yet to materialize. Sources close to BDL’s Acting Governor, suggest that the latter is seemingly working on a new strategy to tackle the deposit crisis. However, this solution must be complemented by essential legislative measures from Parliament and necessary government decisions. As of now, details of this new proposal have not yet been disclosed.
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