Lebanon central bank satisfied with FX reserves after operations to boost them

Lebanon's central bank chief said he was satisfied with the country's foreign currency reserves, which have been boosted to record highs by months of financial engineering, and had no plan for further operations to boost them. "Today we are at a historical, record high," Bank of Lebanon Governor Riad Salameh told the Reuters Middle East Investment Summit.
Foreign currency reserves excluding gold rose to $41 billion by mid-October from around $35 billion before the financial operations involving the Ministry of Finance, central bank and local banks began in June. "We are at a satisfactory level which will allow the country to fund its needs for the public and the private sector," Salameh said. "The engineering we are talking about has achieved its purpose and has been now ended."
Asked if there were plans for further such operations, Salameh said: "There are no projects." Lebanon is a net importer with no hydrocarbon industry and high government debt. Its main sources of foreign currency since its 15-year civil war ended in 1990 have been tourism, foreign investment in real estate and remittances sent home by the huge Lebanese diaspora, based largely in the oil-producing Gulf. But tourism and investment have been under pressure since 2011 when the war in neighbouring Syria began. Lebanon now relies more heavily for foreign currency on remittances, which, although so far stable, are risk-prone as low oil prices have hurt Gulf economies and political tensions have caused some Lebanese workers to be expelled from Gulf states.
The central bank's operations aimed to preserve stability without having to use emergency measures at the last moment, said Salameh, who took office in 1993, making him the world's second longest-serving central bank head, after Uzbekistan's. "In the whole region the liquidity in foreign currency is low. You can see that from the situation in other Arab countries. Most of them are having to recourse to the IMF (International Monetary Fund) to support the foreign currency situation," Salameh said.
The financial operations carried out between June and August brought dollar liquidity into the central bank from local banks and also boosted local banks' reserves of the Lebanese pound, which is pegged to the US dollar. First, the central bank exchanged some of its holdings of pound-denominated debt for dollar-denominated Lebanese Eurobonds from the Ministry of Finance, a central bank official said.
Second, private banks were asked to transfer dollars to the central bank and in exchange were given the Eurobonds and newly issued certificates of deposit in dollars. In addition, the central bank bought pound-denominated bonds held on local banks' books from them for the full principal amount in addition to the interest that the banks would have made if they had held them to maturity, instantly boosting their local currency reserves.
"The liquidity that came out of this engineering in Lebanese pounds has strengthened the balance sheet of the banks to meet their future regulatory obligations ... without having to shrink their balance sheets. So they can continue to extend credit to the economy," Salameh said.
He is encouraging banks to make local currency loans, especially to technology business start-ups, in order to stimulate the economy, which he predicts will grow between 1.5 and 2 percent in 2016. That is well below the 8 to 9 percent growth rates seen in the years before the Syrian war. The war has affected Lebanon's foreign reserves, Salameh said, partly because the more than one million displaced Syrians in Lebanon send dollars back to Syria.
"The balance of payments of Lebanon turned negative with the start of the Syrian war A major part of it was due to this movement of funds between here and Syria." However, there has been a "drastic improvement" in Lebanon's balance of payments in recent months. It is now running at a positive $350 million, up from a negative $2 billion before the operations to boost reserves, Salameh said. "We have witnessed demand for Lebanese Eurobonds from foreign institutions because they are more at ease now with Lebanese papers," he said, adding that parliament had approved a new $3 billion Eurobond issue which he expects to happen next year.