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The governor of the Banque du Liban denied his intention to reduce the mandatory reserves to which Lebanese banks are subject, after some sources leaked the existence of this trend, in an attempt to free up some of this liquidity and use it, to continue supporting the importation of vital goods. However, instead of addressing the concerns raised by the leaks, the governor’s denial raised more questions and concerns. Especially since the alternative to reducing reserves is nothing more than the lifting of subsidies, while reducing the mandatory reserve, which the governor denied, is not in practice the only way to dispose of the liquidity that banks deposited in the Banque du Liban as mandatory reserves. In short, in the coming days, Lebanon will be between the hammer of the possibility of lifting subsidies and the consequent social and life disasters, and the anvil of damaging the last remaining funds of depositors in the Banque du Liban, with the pretext to continue providing support.
Thus, the Banque du Liban is situated between two bitter options, taking into account that the central banker will be able to balance the idea of rationalizing the support to the maximum and continuing to provide a little liquidity, even from the mandatory reserve. Among all these options, the governor of the Banque du Liban is on his way to resolve his decision quickly, no later than next week, especially since the remaining liquidity that can be used, before reaching the stage of damaging the mandatory reserve, does not it is enough for more than a month. This, given that the governor was very interested this time in including all the members of the Central Council in the deliberations he carries out, before making a sensible decision, knowing that this type of decision will need a cover of a very heavy caliber, so any of the options presented will lead to confusion that is difficult to understand quickly.
And they are mandatory reservation
From a legal point of view, the Currency and Credit Law does not establish any mandatory reserve necessary to maintain it in all circumstances. Rather, article 76 of this law gives the Banque du Liban the authority to take such “measures as it deems appropriate” at its discretion, and this article also gives it the option of considering banks’ investments in public debt. as part of this reservation. In other words, the mandatory reserve is only a percentage determined by the Governor and the Central Council with a pen stroke, and this percentage can be set to zero, for example, if the public interest so requires.
From the financial point of view, there is no difference between the mandatory reserve and the rest of the funds that the BDL made available during the last period to support imports. All of this money goes back to the banks, who ultimately owe it to the depositors. Note that the law did not specify any control over the Central Bank, in terms of how to dispose of this reserve or the possibility of lending it to the state. If logic calls for preserving this mandatory reserve as collateral for depositors’ money, then the same logic applies to all bank investments in the Banque du Liban, which were used to finance and support imports.
For all these reasons, there are those who today consider that Salameh has set the mandatory reserve as a threshold, at which point the method of supporting the import of vital commodities will be reconsidered. Especially because the ruler knows that the political authority will not initiate a support review by itself under any circumstances, given the sensitivity of the issue at the popular level. Thus, the issuance of reserves is merely a media outlet in front of public opinion, pointing out that reconsidering subsidies is today a basic condition for all donors, among which the International Monetary Fund stands out, since it is part of the road map required to reunify the multiple exchange rates in the market. In all cases, it is known that the issue of lifting subsidies or modifying the way they are granted represents one of the few points where the vision of Riad Salameh intersects with that of consultants close to the IMF. This makes this step easier today.
Deposit funds fly
Reconsidering the support, with the proximity of the stage of violation of the mandatory reservation, will not mean that this reservation will not be completely affected. In practice, and according to all the proposed plans, what is being done is not completely stopping the support, but rationalizing it and gradually reducing it, and changing the way it is provided. Especially since the total cessation of subsidies will mean a great social upheaval, the consequences of which no one will be able to bear, either in terms of the cost of basic materials or in terms of the exchange rate. Therefore, the mandatory reserve threshold will be used to impose a reconsideration of the subsidy, without this meaning that this reserve is not completely affected, especially since the remaining usable reserves before the “mandatory reserve” is affected do not exceed the level of 800 million US dollars, which will be enough until the end of next month.
The idea of reducing reserve requirements has already been raised, but it is unlikely. Especially since removing the mandatory nature of this reserve logically requires releasing it and allowing banks to use it in any way they wish. That is precisely what the Governor indicated in his denial, when he said that reducing the reserve requirement requires that it be in favor of the owners of these deposits, that is, the banks themselves. And since the option of releasing the reserve and allowing banks to use it is not proposed at all, the Central Council is expected to completely bypass the use of this option, in exchange for considering other methods of tracking usage. of the remaining reserves in the Banque du Liban.
The alternatives in this case would be to maintain the mandatory reserve ratio imposed on the banks as they are, and preserve these deposits as obligations imposed on the Banque du Liban in favor of the banks, in terms of liabilities, as is the case with the rest. of bank deposits in the Banque du Liban in hard currencies, which are not La Banque du Liban has the ability to pay it. However, in terms of the remaining liquidity in the possession of the Banque du Liban, the bank can grant part of this liquidity as temporary loans to the government for use in specific sections, or use it to support imports after their rationalization. In this case, the Banque du Liban will continue to account for these credits that it granted to the state in the section of the assets it owns, even if these assets are not really liquid money, as is the case with the treasury bonds it owns today, the central bank has always counted as part of its hard currency reserves. , Without being liquid or liquid assets.
There will simply be a set of formal accounting engineering, with the result that the rest of the depositors’ money will be used again, even if the mandatory reserve is not nominally reduced. According to observers, the Authority and the Bank of Lebanon will not have alternative options, especially since the state will have a set of commitments in hard currency, such as paying the cost of fuel for power plants and the cost of renting floating plants, in addition of the cost of subsidies after rationalizing them, while the remaining liquidity is insufficient. Pay these fees soon.
Next support format
Until now, it is certain that the first sectors to be affected by the lifting of subsidies will be the hydrocarbon sector, especially given the high cost of this subsidy to reserves. Regarding the support for the importation of medicines, rationalization will be carried out specifying the classes of medicines that can be replaced by “generic” medicines, that is, medicines that have the same formula but with different brands. Since the rationalization of subsidies to the food basket has started in the first place, the Central Bank of Lebanon will continue on this path by gradually reducing this subsidy, which will lead to its complete elimination.
In conclusion, the Central Bank will gradually lift the subsidies, in an attempt to reduce the magnitude of the social shock resulting from this decision, and reduce the large demand for dollars that will shift to the black market once the subsidy is lifted.
The alternative form of support continues to focus on the idea of ration cards, which will be delivered to the neediest families, according to data being prepared by the government. Regarding the safe issue, the government has not yet been able to prepare the adequate mechanism for these cards to be distributed to the most needy families, without being subject to the rules of patronage and favoritism. In all cases, the problematic issue here remains the inability of the interim government to make a decision of this size, as it involves large financial obligations for the state, while constitutionally it is not authorized to make such sensitive decisions. Therefore, this idea reinforces the belief of most observers that the gradual process of lifting subsidies will take longer, which in turn reinforces the belief in the inevitability of committing the remaining reserves of the Central Bank, even of according to crooked formulas.
In the face of all these events, it was clear that the danger facing the Lebanese people came from two aspects: the lifting of subsidies and the scourge of life that would result, and the elimination of the remaining bank deposits. The truth, so far, is that both imminent dangers lie ahead. But the question will be about the size and weight of each of the two hazards and how to balance them. As for the paradox here, it is the absence from the stage of all the balanced political forces of the country, and their ignorance of great dangers of this magnitude, which today demand the acceleration of the formation of the government, so that there are at least those responsible for the actual situation.
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