The IMF and “international standards” classify Lebanon in the category of “hyperinflation”: a new blow for the banks!

Leah Azzi

The Lebanese economy, according to international accounting standards and the International Monetary Fund, is in a state of “hyperinflation”. International organizations officially embrace this and hope that this situation will last for several years, which means that all institutions in Lebanon that adopt international accounting standards must establish new budgets for the year 2020 that take into account the collapse of the currency and the presence of excessive inflation, otherwise these budgets will not be recognized internationally, and among them are commercial banks!

The financial statements of banks and finance and insurance companies, and all institutions that adhere to international accounting standards in Lebanon, are worthless! It is the second “accounting blow” that Lebanese companies receive, after the financial audit firms prepared reports for the year 2019 to the banks and indicated that all of them did not provide sufficient figures to carry out an accurate analysis of their liquidity, solvency and cost effectiveness. level, with doubts about its viability (Al-Akhbar, number 9 November 2020, www.al-akhbar.com/Politics/296199). The reason this time is to add Lebanon to the list of countries that “exceeded 100% of the inflation rates accumulated for three years”, and now classify their economies as “hyperinflation”, which forces to reformulate the financial statements for the year 2020. based on the consumer price index (CPI), otherwise they are not The profit and loss figures are “real”.

The term “hyperinflation” economically means that prices in a country rise more than 50% per month, and the purchasing power of the local currency decreases, and the economy often suffers from several financial problems that “explode” at a time, causing the exchange rate to collapse. The head of the department of economics at the Lebanese-American University, Ghassan Dibeh, insists that “the Lebanese economy is in a state of high inflation, not excessive inflation.” He explains that the economic rule specifies that if inflation were registered at 50% per month, “that is, more than 1000% annually, then the economy would be in a state of hyperinflation.” We are still far from that. Dibeh uses the consumer price index issued by the Central Bureau of Statistics, “If we go back to June 2020, the percentage was 20%. In July, it decreased to 11.3%, and in August 3.61%, to rise in September to 5.34% “. %, then fell to 3.9% in October. ». This “tactical” decline is due to “declining demand and declining spending by the population as a result of their lack of money, the lack of an increase in wages and the collapse of the exchange rate of the Lebanese pound almost constant at a certain level for some time, but it is also an indication that the Lebanese economy is not experiencing excessive inflation. “
The problem is that economic rules differ from accounting rules. The “International Training Working Group – IPTF”, which specializes in accounting and financial reporting issues, which met in November, had a different opinion. In accounting, countries whose inflation rates have exceeded 100% for three consecutive years are monitored until they are “marked” with excessive inflation, based on data received from the International Accounting Standards Board, in addition to other indicators, among which highlights the population’s preference for having paper money and investing their money to maintain its value or exchange the local currency for a relatively stable foreign currency.
At the last meeting of the “IPTF”, Lebanon and Iran were added to the list that includes Argentina, South Sudan, Sudan, Venezuela and Zimbabwe. The international accounting standard on the basis of which these countries were classified is “IAS 29”, in this case it is assumed that all companies and institutions that apply international standards will once again modify the data for the financial year ending on December 31 December 2020 or later. It is imperative that the Banque du Liban and the Banking Control Commission ask the banks to modify the circulars and ask the banks to establish their balances with the dollar to prepare financial statements that reflect the real financial reality of the institutions.
The International Monetary Fund has joined the “chorus”, stating that these countries must present financial statements that take into account the “IAS 29” and “IAS 21” standards. In the same context, the financial audit firm PwC issued a report calling on all institutions in Lebanon and Iran to “implement IAS 29 as if the economy has always been in a state of hyperinflation.” In the Lebanese case in particular, the company believes that “the inflation rate until 2019 was less than 10% per year, but since the beginning of 2020 it has increased dramatically, and according to the data, the accumulated inflation of three years exceeds the threshold of 100 %, and this is expected to continue in the coming years due to the economic deterioration and the collapse of the currency.
An official from an international auditing company explains that “the budget of any company in Lebanon no longer reflects reality after the large margin between the real dollar and the dollar in banks, and the collapse of the currency exchange rate, for so budgets must be reassessed to reflect inflation in the market. ” What if banks, financial institutions, insurance companies and others do not comply with the standard application? “The audit firms will be obliged to refrain from issuing financial reports or declaring in the reports that the organization in question did not comply with the standards. However, frankly, the impact of the issue on these institutions will be moral, because the problems facing the Lebanese economy and its finances are much more difficult and complex than not applying an accounting standard ”. He noted that “this rule will particularly affect entities that own fixed assets, because the revaluation does not include monetary items.”
Inflation is a basic economic indicator and mainly affects the decisions made by central banks within the framework of monetary policies. When PwC expects the Lebanese economy to suffer from excessive inflation in the next few years, this “means that we have to change the accounting rules and unify the dollar exchange rate in order to establish accurate budgets,” says a former member of the Oversight Committee. Banking.

The most affected by this classification will be the Lebanese banks, especially after the Banque du Liban asked them to increase their capital by 20%, which must be recorded in the 2020 budget. The same source indicates that “the 20% increase it is no longer important, because after the implementation of IAS 29, the value of private funds (capital) in banks will decrease, and therefore it has been necessary to compensate them before the 20% increase “. in them. “Likewise, the Banque du Liban allowed banks to re-estimate properties and provide new properties to increase them to private funds, within a period that expires on December 31, 2021.” This means that the 2021 budgets will also be seen affected, and it is necessary to know what is really equal to the private funds of the banks before achieving the increase. ”The domino stones will also sign Memorandum No. 15/2020 addressed to the banks by the Supervisory Committee, specifying the solvency ratios to be approved, and asking each bank to present its “strategy and business plan, development of its financial position and profit.” … and the bank’s self-assessment of any additional provisions / losses that may arise. ”But what What happens if banks do not comply with IAS 29? According to Circular 140 issued by the Banque du Liban, “Banks and financial institutions operating in Lebanon must comply with the application of international standards financial reporting “, however, the existence of a circular does not mean that banks are” obligated “to it, as previous experiences indicate. The Banque du Liban had previously initiated the “breach” of its circular, when it set the ratios of calculation of solvency and provisions of the banks in contravention of international accounting standards, so that they would not collapse completely. And because the Lebanese crisis is very complex and unclear, the International Audit Company official says that “we have advised the Ministry of Finance to request that Lebanon be removed from the hyperinflation list by 2020 so that things clear up, to no avail. The most important criterion is that the Ministry of Finance issues uniform and precise figures, which determine the real exchange rate and the inflation rate. Even if institutions wanted to adhere to international standards, the numbers are not there.