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04 December 2019

Banque du Liban plans to cut interest rates to ease crisis

The country’s debt risk, measured by credit default swaps, has surged to more than 2,500 basis points.

Bloomberg/Patrick Mouzawak

Banque du Liban (BdL) plans to slash interest rates in an attempt to ease the country’s economic crisis and is considering formalising temporary capital controls set individually by local lenders, reported Bloomberg.

Governor Riad Salameh told the Association of Banks in Lebanon that he will issue a circular within days to lower rates ‘to revive the economy’ and limit the increase in ‘doubtful’ loans.

The decision may buy much-needed time for Lebanon, which is reeling under its worst financial crisis in decades while authorities struggle to form a government after the resignation of Prime Minister Saad Hariri following weeks of mass protests against corruption and deteriorating living standards.

Salameh said that he is considering issuing instructions that would formalise recent restrictions on capital movements imposed by commercial lenders. In a statement, the central bank governor stated that the measures would be temporary until a government is formed and the financial and economic situation returns to normal.

The governor also said that LBP 165 billion ($109.2 million) had been withdrawn per day from BdL in the last two months, and that the central bank is waiting for a new batch of pound banknotes to arrive on 20 December 2019.

President Michel Aoun convened a meeting last week that brought together Salameh, the finance minister, the economy minister and the head of the Association of Banks. They tasked the governor with taking ‘temporary and necessary’ steps to protect the stability of the banking system.

The crisis has undermined confidence in Lebanon’s ability to repay its vast public debt.

Lebanese lenders have imposed restrictions on the movement of capital with some banning transfers abroad, freezing credit lines for businesses and setting a withdrawal limit of $400 to prevent a run on the banks. Officials, including Salameh, have repeatedly said that the country would not impose formal capital controls, which require a legal framework.

Three top banks in Lebanon were downgraded last month below the sovereign by S&P Global Ratings, which warned that the country’s economic crisis is draining liquidity from lenders. A week before the downgrade, BdL instructed local lenders to raise their capital by 20 per cent by next June 2020 and refrain from distributing dividends for 2019 to boost their liquidity and prepare for possible credit downgrades.

S&P said it would further lower the ratings should there be ‘additional pressure on banks’ liquidity positions or if the banks impose further restrictions on specific transfers and operations.

The central bank began rationing dollars even before the unrest ignited on 17 October 2019, pushing up demand for the foreign currency and creating a black market rate that is currently 30 per cent higher than the fixed exchange rate of LBP 1,507.50 to the dollar.


RELATED STORIES: Banque du Liban S&P Global Ratings Prime Minister Saad Hariri interest rate cuts





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