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| 23 February, 2018

Lebanon reserves recovered after crisis, reform still critical

Lebanon’s foreign-currency reserves have recovered from the shock of Prime Minister Saad Hariri’s surprise resignation

Lebanon's Central Bank Governor Riad Salameh speaks during an interview with Reuters at his office in Central Bank in Beirut, Lebanon October 24, 2017.

Lebanon's Central Bank Governor Riad Salameh speaks during an interview with Reuters at his office in Central Bank in Beirut, Lebanon October 24, 2017.

REUTERS/Jamal Saidi

Lebanon’s foreign-currency reserves have recovered from the shock of Prime Minister Saad Hariri’s surprise resignation, proving the resiliency of the country’s financial system, Central Bank Governor Riad Salameh said.

Reserves fell to about $41.5 billion from more than $43 billion at the end of October after Hariri announced his resignation in an address from Saudi Arabia Nov. 4, Salameh said in an interview Wednesday.

The political crisis roiled markets in the Arab world’s most indebted country, raising its credit risk and sending bond yields soaring. Reserves rebounded after Hariri retracted his resignation a month later. “We are back at over $43 billion,” Salameh said.

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Lebanon relies on private-sector deposits to maintain the stability of its banks, allowing them to buy government debt. Deposits were growing at 7 percent annually through the end of October, but ended the year up 3.8 percent after outflows of $2 billion in November, Salameh said.

Money returned gradually, with inflows exceeding outflows since Dec. 10, he added, declining to give a full-year forecast.

Salameh’s remarks appear designed to reassure investors after the International Monetary Fund last week called on Lebanon to urgently rein in its ballooning public debt, which the fund said could reach 180 percent of economic output in 2023 from 150 percent at the end of last year. For Lebanon to maintain its pegged exchange rate to the dollar, a “significant fiscal adjustment is inescapable,” it added.

“The Central Bank has been calling all the time for reforms and I hope they will happen,” Salameh said. “I cannot speak for the government.”

Hariri’s resignation, which many believe was dictated by Saudi Arabia, thrust Lebanon into a proxy showdown between the kingdom and regional rival Iran. Some Lebanese banks, which hold the majority of government debt, raised interest rates on local-currency deposits to attract customers.

Lebanon is also grappling with an influx of more than 1.5 million Syrian refugees and U.S. pressure to cut the Iranian-backed Hezbollah group out of the banking system.

Aftereffects of the 1975-90 Civil War continue to taint governance with corruption and a disregard for laws and regulations.

Salameh, a former Merrill Lynch banker, said outflows in November were proportionally lower than during two other big crises – the 2005 assassination of Prime Minister Rafiq Hariri and the 2006 war with Israel. The recovery in reserves showed that confidence is “stronger after the crisis,” he said.

He made the distinction between last week’s IMF staff report and another that will follow the Washington-based lender’s board meeting in May or June. “This is the opinion of the staff. It’s not the opinion of the IMF,” he said.

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