HomeUncategorizedBetween Stanley Fischer and Riad Salameh. Why does the new Code of Money and Credit’s facelift fail to reform expectations

Between Stanley Fischer and Riad Salameh. Why does the new Code of Money and Credit’s facelift fail to reform expectations

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Authoritarian single centered prerogatives of governor are left untouched as market operations begs a new stabilization policy

During an Israeli Knesset session on May 30, 2005, a few days after the government summoned Professor Stanley Fischer, former First Deputy Chairman of the International Monetary Fund, and granted him Israeli citizenship in preparation for his appointment as Governor of the Bank of Israel, the latter had asked the parliament to allocate a hearing for him to present the main lines of the policy he had defined, as well as the means adopted in it, and those on which he had taken immediate decisions. 

There were four reform proposals presented by Stanley Fisher and later on ratified. The first is amending the primary objective of the bank to begin achieving price stability in addition to secondary objectives, the most important of which are working to stabilize the financial system, stimulating growth and employment, and reducing social gaps. The second, then, is establishing independence in the bank’s use of the means that enable it to achieve what was agreed upon with the government, provided that matters are linked to an accountability system based on checks and balances. The third is adopting a management system that separates reporting on monetary matters, which is handled by a special committee, the Monetary Committee, from implementing current operations and all matters related to the bank’s budget, which is handled by the Board of Directors. Last, the fourth is adopting an effective system for achieving transparency through the preparation of annual and quarterly reports, management and operations reports.

The previous proposals do not exist in Lebanon, but what is implemented is rather the opposite. Any facelift of the Lebanese Code of Money and Credit (CMC) should have taken into consideration those articles but alas they were downplayed. A proposal for a partial overhaul of the Code, the main basis for regulating the Lebanese banking and financial system and birth certificate from the Bank of Lebanon (BDL), is on the burner.

The Code of Money and Credit was promulgated by decree n°13513 of 8/1/1963: it covers the regulation of money, the Central Bank of Lebanon’s role and functions, the banks activities in addition to the activities of the professions linked up to the banking profession.

Don’t be fooled, the new facelift is still biased and does not convey the kind of transparency nor governance or accountability the BDL needs in a time of crisis.


BDL prerogatives left untouched

A central bank must have clearly defined and prioritised objectives, sufficient authority to achieve these objectives, and autonomy to remain credible, an IMF study notes. At the same time, it must be accountable for the authority delegated to it to ensure checks and balances. Reforming the legislative framework for a central bank – often after a crisis – can help boost the credibility of monetary policy. Has the new facelift achieved those objectives ?

This reduces the perceived inflation bias and thus the real interest rate, which advances sustainable economic growth. However, a consistent reform of the legislative framework must be supported by commitment to establish a good governance scheme.

Reportedly, the acting Prime Minister mandated a commission just after the publication of the BDL audit reports carried out by the firms KPMG, Oliver Wyman and Alvarez & Marsal, commissioned by the government of Hassan Diab in 2020. Sources told NOW Lebanon that “Mikati specified that he wanted a clean-up of the law which does not affect the prerogatives of the governor – a seemingly delicate confessional matter given to the prerogatives of the Maronite Presidency of the Republic.” The caretaker Prime Minister also stressed that “regulations between banks and the central bank or banks should be left untouched.”

Needless to say that for central banks, the nomination and appointment procedures, together with appropriate safeguards against undue influence, are likely to be more important for good governance. In its analysis of the need to develop a new CDC reform plan, the committee aimed primarily to “restore confidence in the Lebanese financial and monetary system,” which explains why its drafters did not include a provision which “endangers the rights of depositors vis-à-vis banks.

The new facelift has downplayed the degree of autonomy delegated needed in the central bank – a measure that has affected the design of the structure of the governing bodies and the accountability provisions. Strong accountability provisions are needed with increased autonomy to ensure the authority delegated to the central bank is actually used as intended. Although a new legal framework – the de jure autonomy and accountability – can facilitate sustainable economic growth, the track record – the de facto autonomy and accountability – is the litmus test.

The committee, which worked pro bono, included two bankers – Hassan Saleh (Audi Bank) and Abdel Hafez Mansour (member of the Special Investigation Commission) -, three former Ministers – Chakib Cortbawi, Nicolas Nahas and Ibrahim Najjar -, the former vice-governor of the BDL Ghassan Ayyache, Judge Rana Akoum (also the Ministry of Justice’s anti-corruption liaison officer to the United Nations Office on Drugs and Crime), and jurist and doctor of law Nasri Diab.

The committee, which began its meetings in August 2023, amended a substantial part of the 230 provisions of the CMC, in a 113-page document seen by NOW Lebanon. The proposal needs to be ratified by Parliament following a  Council of Ministers decision or need to be proposed by a Member of Parliament.

The issue of transparency versus accountability and independence has been poorly addressed by the new CMC facelift, Toufic Chambour former head of the international department of the BDL and lecturer told NOW. On top of that is the need from the BDL to  publish a formal statement to that extent. For instance, in cases where international reserves decline to levels insufficient to conduct international transactions due to factors outside the central bank’s control, it shall make recommendations to the government. If the government does not react within a specified period, the central bank should notify the general public that it temporarily cannot be held accountable for price stability due to factors outside its control. The BDL “fooled” the Lebanese public by always giving falsely wrong signals about the stability of the Lebanese pound.


Governor prerogatives

The committee turned a blind eye to the governor’s extensive prerogatives of the Central Bank governor knowingly that it placed the fate of the entire financial system in the hands of a single person. The decision of the committee was to postpone dealing with this important matter until a time when political circumstances permit, that is to say when the executive power is regulated by the presence of a head of state.

In this context, the governor of the BDL, according to the provisions of the CMC, is responsible for the management of the Central Bank. He chairs its Central Council, which decides on monetary and banking policies, its special investigation committee (CIS), its Higher Banking Council and the Financial Markets Authority. It also supervises the Banking Control Commission in Lebanon (CCBL), as it comes under the BDL.

Too much governance to be asked here? One of the basic issues that must be addressed in the process of restructuring the Central Bank of Lebanon is the subject of its administrative structure, mainly establishing a strong divide between the executive, the audit and the governance issues Chambour believes.

In Lebanon, the Governor is appointed by the Council of Ministers, according to Article 7 which was originally drafted in French under the supervision of Mr. Joseph Oghourlian, who later held the position of the first deputy governor to the governor, is unusual in the management of private and public institutions and companies, especially joint-stock companies, and has raised several problems mainly the lack of governance, individual decision-making and unique powers globally and its deviation from the rules of good governance, which warn against combining the decision-making and executive powers in the hands of one authority. 

This is what happened at the Central Bank of Lebanon. The governor and his deputies are the ones who practically hold the decision-making power, according to Articles 17 and 33 of the Central Bank, and they are the ones who implement what they decide. The matter seems more evident for the governor, to whom Article 18 of the Central Bank reserves the authority to determine the administrative function of each of his deputies and the interpretation of the powers of the Central Council, the most important of which is the issue of problems of intervention in the foreign exchange market. Also according to Chambour the governor exercises monopoly over its management of a number of directorates such as the Directorate of Foreign Exchange and Operations and the Directorate of Inspection and Internal Audit.  

According to Chambour the political junta gave power to the governor to protect their interests. A reference to Baron Emerich Acton underlines: “Power corrupts, and absolute power corrupts absolutely” that’s the real function of the governor these days, he adds.

In Lebanon, it is clear that the political, financial and sectarian oligarchy that effectively controls the fate of affairs imposes, in order to protect its financial interests, a sharp concentration of powers in the Central Bank of Lebanon.

The governor has been entrusted with the presidency of the Higher Banking Authority, then the presidency of the Special Investigation Commission, and then the presidency of the Capital Markets Authority. The draft law on exceptional and temporary controls known as Capital Control which provides for the establishment of a special committee, practically headed by the governor, which enjoys and even controls arbitrary powers regarding withdrawals and restrictions on bank accounts.

To be noted that tasks of banking supervision were separated from the Central Bank of Lebanon following the Intra Banking Crisis of 1966 under pressure from Brigadier General Raymond Edde, who accused BDL of not using its powers to supervise the banking sector. The delegation of authority to conduct monetary policy to an autonomous and accountable central bank with clearly defined objectives can enhance both credibility and flexibility. As long as there is short-term price stickiness, it may be optimal to have a “conservative central banker” weighting price stability higher than the social objective function to neutralize the myopic behaviour of the government, and the ability to better utilize new information. 

In addition to price stability, financial sector stability – that is, a sound and stable financial system including an efficient payment system – is also important for a market economy to realize its full potential. An autonomous and accountable central bank may help prevent undue influence from adversely affecting the financial sector.


Governance and audit

One of the main modifications is focused on the supervision of the mission of the BDL governorate. The committee preserved the powers and function of the governor, but it also improved decision making control of its decisions. The committee thus introduced a new article (40 bis) which subjects the actions of the BDL to be audited by the government and by internal and external auditors.

The committee also provided for an article which requires the BDL to formally dissociate the banks’ compulsory reserve requirements – the funds in Lebanese pounds and dollars that they are required to keep at the Central Bank – from the rest of the foreign exchange reserves (Article 77 ). A measure which makes it impossible for the BDL to use them within the framework of its monetary policies.

On the composition of the board of the BDL, the current CMC does not ensure a reasonably well-informed and balanced view, but avoids conflicts of interest. Precisely what is reasonable is that the highest level board should include a majority of nonexecutive, non government directors. Indeed, direct government representatives should be eliminated from a policy board and probably also from a monitoring board.


Market operations

Another major change recommended by the new CMC is the modification of Article 2 of the Code which now obliges the Central Bank to allow market forces supply and demand to determine the exchange rate between the Lebanese pound and the dollar, as well as other currencies, and this, “via a mechanism” that it will have to put in place. The official rate must align with market forces. Articles 2 and 229 provide that, “pending” the establishment of the said mechanism as well as the implementation of the regulations intended to restore the banking sector and clean up the financial system, it is up to the Ministry of Finance to set the exchange rate on a proposal from the BDL.

To be noted, abolishing the official rate of the Lebanese pound and introducing a floating exchange rate system (such as the one proposed by a Bloomberg network) will forbid the Central Bank or other public institutions to intervene in current market operations. Market operations on granting loans by the BDL to the government requires now the promulgation of a law each time the government requests a loan from the Central Bank.

Consolidate governance in the management of the BDL, by underlining that monetary and banking policies are decided by the Central Bank’s Central Council, and by obliging the Governor of the BDL to publish and implement the Council’s decisions.

Create two new committees within the Central Council: the monetary policy committee and the risk management committee.

Establish an audit body responsible for monitoring compliance by the Governor and BDL entities with laws and codes of good conduct, and for ensuring the integrity of financial statements and audit procedures. 

Strengthen and modernize the government’s audit commission at the BDL.

Moreover, the new CMC prohibits the BDL from accepting foreign currency deposits from banks, with the exception of their required reserves. 

Finally, amended Article 90 of the ratified code considerably restricts the possibility for the BDL to finance the state or its institutions, by setting strict conditions, such as prior validation via a special law limited in time and relating to a specific amount.


Where do we go from here?

The Code of Monetary and Credit is the cornerstone of the legislation governing the Lebanese economy and the banking and financial system. It is above the laws, because it is more exhaustive and must be amended with prudence. What the new facelift underplay are the important prerogatives given through Article 70 which stipulates that the BDL’s mission includes maintaining the stability of the banking sector, the economy and the Lebanese pound.

It is to be seen whether the CMC provides for a complex decision-making process within the BDL, which is not limited to the powers of the governor, but includes a central council (including the directors-general of the two ministries of Finance and Economy), a government commissioner, the Ministry of Finance, etc.

But then, what is the objective of modifying this Code? Is it to learn the lessons of the past and proposing amendments that will prevent malfunctions from recurring in the future? Has the new facelift provided that? 

Still many questions remain answered on the post financial crisis BDL’s decisions. How did the former governor get to using depositors’ money and mandatory reserves so massively? How was the state able to draw so much on the BDL’s money, when Article 90 of the CMC does not allow it, and why does it refuse to cover the BDL’s losses when a very clear article, Article 113 of the CMC, obliges it to do so? What did the BDL’s auditors see? How, in thirty years, have there never been any formally and publicly expressed disagreements over the thousands of decisions taken at meetings of the BDL’s central council? What did the government commissioner to the BDL do, and what did the directors-general of the Ministries of Finance and Economy, ex-officio members of the central council, do? These are all questions whose answers must be sought both in the letter of the Code of Monetary and Credit and in the practice of its application.



Maan Barazy is an economist and founder and president of the National Council of Entrepreneurship and Innovation. He tweets @maanbarazy

The views in this story reflect those of the author alone and do not necessarily reflect the beliefs of NOW.