CBSP, Subsidies, Economic Update, Social Safety Net

Subsidies Paid For From Depositors’ Dollars

14:36 | 1 November 2020LIMS output
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Subsidies

Against experts’ warnings, the Lebanese government opted for subsidies to help citizens weather the inflation storm. LIMS cautioned repeatedly that despite the well-meaning intentions of such a policy, the only outcome would be shortages and the depletion of the central bank’s meager foreign reserves. Currently, the central bank is only left with the $17.5 billion required reserves, a number that could decrease even further if the recent talks of lowering the required reserves ratio from 15% to 10% translate into reality. LIMS considers that this would be an extremely dangerous decision that would wipe out any chance of small depositors getting their money back. In fact, the reserves have dropped from $31.5 billion to $17 billion, and the governmental plan to spare small depositors has vanished now that their savings have been squandered on subsidies. Decision makers seem to revolve around 1 common denominator, which is for depositors to bear the full consequences of the state’s collapse. 

While wasting reserves on failed government subsidies, the central bank issued Circular 154 that asked banks to convince clients, who transferred more than $500,000 abroad, to repatriate 15% of the transferred sums. The circular also requested banks to persuade large account holders to convert one third of their deposits into capital. LIMS expects depositors to turn a blind eye to this request for a voluntary bail-in, especially when they see how dollar reserves are being wasted. 

LIMS sees the currency board as a gateway out of the crisis, and an opportunity to halt the currency devaluation, along with attracting investments and hard currencies. Any delay in adopting it increases the losses, as the GDP drops, the reserves dwindle down further, and the exchange rate continues its death spiral. Banks would probably still need to restructure under a currency board, but their losses would be lower, making the process easier. 

LIMS Media Interviews
  • Central Bank: Grave Decree Looming On The Horizon, November 26, 2020: Spot Shot, TV Interview AR
  • Banks In Denial, And Still Dodging The Problem, November 27, 2020: Nidaa Al Watan, Article AR
  • Did The Banks Start Recapitalization? How Does It Affect Depositors? November 27, 2020, Al Jadeed, TV Interview AR
  • Lifting Subsidies Bodes Ill On Consumers In Lebanon, November 30, 2020, Anadol Agency, Article AR