There has been no consensus on a specific candidate for the governor of the Central Bank of Lebanon. Stakes are high for those who want a Salameh 2.0 or a real reformist of the banking and financial system.
In Lebanon’s grand banking halls, hawks and doves converge, to debate the IMF’s counsel, a spectacle to observe. Hawks clutch their ledgers, feathers bristling with disdain, “Debt forgiveness? A flight of fancy, an economic stain!” In short, the Hawks don’t want to allow for a measure that will return deposits of more than Usd100,000 and are in favor of a 10 years plan to install those.
The list of candidates includes Camille Abu Suleiman, Jihad Azour, Karim Said, Henry Chaoul, Issam Abu Suleiman, and Firas Abi Nassif. Sources also mentioned a proposal to establish a committee to review the candidates’ files and possibly conduct interviews to assess their vision and reform plans.
Green Light in Advance
In the grand theater of Lebanese politics, the finance minister must present a list of candidates to the cabinet for a vote, requiring a two-thirds majority if there’s any disagreement. But this time, the plot thickens. A nail-biting showdown is on the horizon. On one side, we’ve got the valiant warriors of transparency and justice, demanding a governor of the Central Bank of Lebanon who will shine a light on the murky depths of financial misdeeds. On the other, the suave defenders of the status quo, rallying behind a governor who will bury the skeletons and protect the mafia’s interests. Who will seize the throne: the champions of integrity or the guardians of corruption?
The decision won’t be made solely within the hallowed halls of government. According to a well-placed source, the nominations will undergo the meticulous scrutiny of the US Treasury, whose approval will be the ultimate decider. “Like it or not, this reality is asserting itself,” the source quipped, noting that the list of candidates will first need the US stamp of approval, which might exclude some names before they even reach the cabinet stage. A year into Wassim Mansouri’s role as Lebanon’s central bank governor, reform promises are still unmet and depositors remain frustrated. In short, Mansouri failed his task to sue culprits of corruption and manipulation as underlined by the BDL Alvarez Marchall report.
For Washington, the future governor of the Central Bank of Lebanon ( BDL ) must provide serious guarantees in combating money laundering and terrorist financing, as Lebanon seeks to get off the Financial Action Task Force (FATF) gray list. Distinguishing between legitimate deposits and suspicious funds in the banking sector is a major priority. These pressures are increasing with the close monitoring imposed by the US administration on Hezbollah’s financial activities and its persistent push – as demanded by several international parties – to close the Al-Qard Al-Hassan institution. The ongoing crisis has led to growing calls for reforming the central bank and ensuring its true independence. This includes amending laws to reduce political influence, enhancing transparency, and holding central bank officials accountable for their actions. Without these reforms, the BdL’s ability to navigate the economic challenges facing Lebanon will remain compromised.
Washington also recognizes that the next governor will play a pivotal role in negotiations with the International Monetary Fund, in close coordination with the government, to avoid the fragmentation that has characterized discussions since 2020, when the Central Bank of Lebanon, in cooperation with the banking sector, adopted a position different from that of the government, hindering any progress toward an agreement with the Fund.
Importance of Central Bank Independence
Lebanon’s Central Bank, Banque du Liban (BdL), has faced numerous challenges over the years. While it theoretically operates with a degree of independence, the practical application of this independence has been questionable. The economic and political landscape in Lebanon presents unique difficulties that have undermined the effectiveness of BdL’s independence.
Despite its theoretical independence, the BdL has faced significant political pressure. Successive governments have often leaned on the central bank to finance budget deficits and support unsustainable fiscal policies. This has led to a situation. An independent central bank need to make decisions based on economic indicators rather than political agendas. This helps in maintaining price stability, controlling inflation, and managing interest rates effectively. Political interference often leads to short-term gains at the expense of long-term economic health.
The new governor needs its independence to boost the credibility of the central bank. When markets and investors trust that monetary policy is free from political manipulation, they have greater confidence in the stability of the economy. Independent central banker can implement policies that are strictly aimed at controlling inflation. Politicians might be tempted to stimulate the economy before elections through loose monetary policies, leading to inflation.
Lebanon’s severe economic crisis, characterized by a collapsing currency, hyperinflation, and a banking sector in turmoil, has highlighted the limitations of BdL’s independence. The central bank’s policies have been constrained by the need to navigate a complex web of political and economic interests.
Under the leadership of former governor Riad Salameh, the BdL engaged in controversial financial engineering practices. These practices, aimed at stabilizing the currency and supporting the banking sector, have been criticized for their lack of transparency and long-term sustainability. The absence of strict oversight and accountability has further eroded the BdL’s independence and credibility.
Depositors first
The new Central Bank Governor will have to deal with the issue of restructuring the Lebanese banking sector, which has been frozen for more than five years due to deep disagreement over the distribution of losses in the financial system. The muddled saga of Lebanon’s commercial banks has reached an even deeper level of confusion. Back in August 2020, Governor Wassim Mansouri and his colleagues ordered every bank to draft a plan to resume operations and present it to the Banque du Liban (BdL) for approval. Any bank unable to comply faced the grim prospects of enforced management, judicial liquidation, and asset seizure. To address this, a BdL committee was formed to restructure the banks. Fast forward five years and, unsurprisingly, meaningful progress remains a distant dream. Responsibility for compliance has now been tossed to the politicians, thanks to an ingenious idea from the Association of Banks in Lebanon. This industry body suggested that the crisis was systemic, effectively passing the buck and avoiding any real action.
In the midst of this chaos, there was also utter confusion over depositors’ dollar withdrawals. To add insult to injury, the deposits left behind after the limit was lowered were used to cover the costs of yet another set of revised withdrawal arrangements. These new rules were crafted to benefit account holders who had converted deposits from LBP to USD after 17 October 2019, right as the financial crisis emerged. The idea was to fund these arrangements from dollar deposits at the BdL made before that fateful date.
Of course, these mandatory deposits from commercial banks to the BdL were made at the behest of the BdL itself. In effect, this meant that account holders’ funds were seized and funneled into state funding, in a manner that can only be described as flagrantly illegal. Hopes that Mansouri’s legal expertise would lead to the restitution of these dollar deposits have been thoroughly dashed. The proper course of action would have been to restore these funds to depositors on record before 17 October 2019. The correspondent banks that facilitated the transfers to the BdL should have supported any such restitution, if only to avoid being complicit in the grand scheme to seize account holders’ dollars. Mansouri often talked about the need for legal accountability to end Lebanon’s economic crisis, proudly stating that he has provided everything requested by the judiciary from the central bank. Yet, he conveniently overlooks one crucial detail. As BdL governor, Mansouri is legally authorized to file charges through the public prosecutor against alleged wrongdoers. Specific names even appear in a forensic audit prepared by consulting firm Alvarez & Marsal, but he has taken no such action. It will be up to the new Governor to address the issue.
Liquidation of the Salameh Legacy
On the legal front, a delightful set of reforms is necessary to meet the IMF’s ever-so-demanding requirements. Most notably, we need a shiny new amendment to the banking secrecy law and a thorough review of the Monetary and Credit Law. Riad Salameh, in his infinite wisdom, has relied on these laws in the past—according to neutral legal experts—in an utterly unjustified manner to justify state financing in the most crooked ways and manage deposits in the most wasteful ways imaginable.
The new governor of the Central Bank of Lebanon will have to swiftly decide on liberalizing the exchange rate and launching the Bloomberg platform. This may constitute a daring break with the stabilization policy pursued by Wassim Mansouri, whose continuation requires additional strict austerity measures that the country simply cannot bear.
Meanwhile, the calls for transparency and combating conflicts of interest are growing louder. Some ministers insist that the next governor must declare all his assets and interests, whether in Lebanon or abroad, and prove that he is not linked, directly or indirectly, to local banking and financial circles. This is essential to restore the credibility of the monetary institution, which has been severely eroded by the delightful overlapping of financial, monetary, and political interests over the years.
These reformist voices also demand the resumption of the forensic audit of the Central Bank’s accounts, which was oh-so-partially completed by Alvarez & Marsal in 2023 without obtaining all the required information from the Central Bank. This audit is supposed to shed light on the many ambiguities that still surround the real cost of the exchange rate peg policy, which lasted for three glorious decades and was estimated at more than $30 billion by the Central Bank of Lebanon—without the latter providing any accurate accounting refutation of that huge figure. Additionally, the audit of the financial engineering, estimated to cost $76 billion according to the Alvarez & Marsal report, is crucial, knowing that this engineering allowed the banks to achieve massive profits.
This audit may also help uncover details of suspicious transactions being investigated by the judiciary, particularly those related to Fawry and Optimum (more than $8 billion) in addition to some controversial debts, such as the alleged $16.5 billion loan that the Central Bank of Lebanon confirms it provided to the state, while the Ministry of Finance denies its existence at all.
What’s next?
While central bank governors share the mission of ensuring economic stability and managing monetary policy, their degree of independence and the nature of their relationship with government authorities vary. Central banks like the Federal Reserve, the Bank of England, and the Deutsche Bundesbank emphasize independence to shield monetary policy from political pressures. In contrast, central banks like the Bank of Japan and the Banque de France engage in closer cooperation with their governments, aligning their policies more closely with national economic strategies.
This variation in independence and cooperation reflects the unique economic contexts and historical experiences of each G7 nation. However, the overarching goal remains the same: to foster economic stability, ensure financial system integrity, and support sustainable growth. In this intricate dance between central banks and governments, the mission of central bank governors is crucial in navigating the complex landscape of global economics. Where will Lebanon settle?
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
