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Central Bank Governor Riad Salameh Wednesday brushed off calls for a managed devaluation of the Lebanese currency, warning that such a step would be detrimental to the national economy. “We are not considering any devaluation because we believe that it will be detrimental to confidence, detrimental to the economy and interest rates will go up much more. Any country which floated its currency had to increase the interest rates to control inflation. This [measure] will also be detrimental to social stability because of the inflation. Lebanon being a dollarized economy will not gain any competitiveness. The issue of those advocating for remedies is that they don’t realize that Lebanon is a dollarized economy,” Salameh told The Daily Star in an interview.
Advocates of managed devaluation argue that this measure aims to bring the prices of national currencies close to market value without the need for the interventions of the Central Banks.
Since he assumed the position of Lebanon’s Central Bank governor in August 1993, Salameh has pursued a firm monetary policy based on the intervention in the market to protect the national currency from any sharp devaluation.
Before Salameh took this responsibility, the Lebanese pound deteriorated in an alarming way, triggering protests in the streets at that time.
The governor also assured that Lebanon is in sound financial position, refusing any notion that the country is bankrupt.
“A bankrupt country is a country that lacks liquidity to meet its obligations in terms of foreign currency. Lebanon has not defaulted on settling its debt since it was an independent country. The country has been paying its obligations in foreign currency this year and we have ample assets in foreign currency to meet our obligations for the coming years,” Salameh said.
Citing an example, he said that the balance of payments in the first two months of this year was in positive territory.
“Usually the first two month of the year are not great historically for the balance of payments. We can see also a growth in deposits the foreign assets of BDL were rising. These are clear signs that we are not only not bankrupt but also there is no preceding sign of a crisis in the country,” Salameh stressed.
The governor emphasized that one of the best ways to reduce the Central Bank’s intervention in the market is to cut the government’s deficit to GDP ratio to reasonable levels.
“The Central Bank has been carrying the cost of the high deficit by the subsequent governments. The Central Bank had to manage all this excessive liquidity and retrieve from the market at a cost. But if the government managed to reduce the deficit to GDP ratio which currently stands at 10 percent then BDL’s intervention in the market will be much less,” Salameh said.
He added that the more the deficit to GDP is reduced the more the market can be confident of the macro stability of the country and this enables BDL to reduce its intervention.
“The country was living off deficit of around $3 billion per year at a time when the GDP was around $45 billion and that has created a certain stability. If we go back to these ratios of 7 to 8 percent to GDP then the confidence will regain. One way to reduce this deficit is to have growth in the economy and this is possible if we give the private sector the proper environment for investment and consumption,” Salameh said.
He added that the portion of GDP related to the public sector has grown in the past years to around 34 percent of the GDP.
“This growth has not been healthy for the economy. If we look at the budget deficit over the past five years, the figure will amount to around $20 billion while the GDP of the country in this period went up only by $6 billion. The growth of deficit in the public sector is not healthy for the Lebanese economy,” Salameh said.
He commended the government’s move to encourage the private sector to play a role in stimulating the economy through the Public-Private-Partnership program.
Salameh reiterated that BDL has no plan in the foreseeable future to raise the interest rates on the Lebanese pound after the U.S. Federal Reserve raised the interest on the dollar by 25 basis points.
“The interest rates on the Lebanese pound were raised in November of last year [following the resignation of Prime Minister Saad Hariri] and prior of the Fed’s decision to increase the interest rates. Our rates are higher by 2 percent on the Lebanese pound and this has created attraction to the pound and created new equilibrium in the market,” he added.Salameh said that following the rise in interest rates on the pound, the deposit maturity period went up from an average of 40 days to 120 days.
As for the dollar rates, he said that it was up to the market to decide the levels of these rates, noting the dollar rates in Lebanon are higher than those offered in the U.S., and for this reason the banks are not likely to hike them more in the near future.
In another note, the governor underlined the importance of the CEDRE conference in Paris, adding that all the soft loans for infrastructure investments in Lebanon will create good growth. He also dismissed the possibility of any new financial engineering in the near future.
“The environment is different now because we have growth in deposits which we did not have in 2016. We also have good balances of payments which are relative to the conditions of the country,” Salameh said.
Furthermore, he said that the Lebanese banks are well capitalized which was not the case in 2016.