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17 December 2019

Lebanon steps up fiscal engineering to buy time in debt crisis

Lebanon, one of the world’s most indebted countries, has relied for years on remittances from its diaspora to keep public finances steady but months of political turmoil have undermined the confidence of depositors and bond investors.

Bloomberg/Sima Diab

Lebanon’s worst economic crisis in decades is forcing authorities to wade deeper into the kind of fiscal engineering that the International Monetary Fund (IMF) said risks undermining Banque du Liban (BdL) credibility, reported Bloomberg.

The central bank bought LBP 3 trillion ($2 billion) of Treasury bills from the government at one per cent well below market rates. BdL is expected to buy half as much again at the same rate by the end of the year to reduce the government’s rising debt costs.

The deal helps offset higher interest rates incurred by the finance ministry, which last month sold $3 billion in Eurobonds to the central bank at as much as 12 per cent.

The move is the latest sign of how the government, effectively shut out of bond markets amid a crippling political crisis, is increasingly relying on the central bank to prevent a financial meltdown. The country has been without a functioning government since Prime Minister Saad Hariri resigned in late October in the face of mass protests against corruption and inequality.

The turmoil has forced the government to indefinitely delay plans to tap bond markets for $3 billion. BdL also repaid maturing bonds this year on behalf of the government, including last month’s $1.5 billion eurobond.

The central bank intervention has drawn criticism from some local economists and even politicians, who say policymakers should use the country’s dwindling reserves to pay for vital imports instead of bonds.

Earlier this year, the IMF warned the central bank against subscribing to T-bill sales at below-market rates, saying that such ‘financial operations’ would erode its balance sheet. Lebanon sold 10-year bonds at a yield of 10 per cent in November 2019.


RELATED STORIES: Lebanon International Monetary Fund Banque du Liban Eurobonds





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