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Analysis: Lebanese united in rejecting sale of state’s gold

BEIRUT: To find consensus in Lebanon, look no further than the gold. Despite persistent paralyzing political and popular quarreling, when it comes to Lebanon’s gold reserves, valued at around $17 billion as of Aug. 19, Lebanese economists and policymakers agree they best remain untouched.

“The presence of gold is important given the current political system and the global financial and debt crises, so in my view, it is not a good idea to sell any of Lebanon’s gold,” said Dr. Simon Neaime, chair of the economics department at the American University of Beirut in an interview with the Daily Star.

In addition to historic capital inflows and record-low interest rates on sovereign debt, shaken global capital markets have been handing Lebanon a consistent rise in the value of its gold reserves, more than doubling in the past three years and quadrupling since August 2005.

Yet with a $52 billion public debt eating up half of government revenues every year and given favorable gold prices, a liquidation of the golden egg could relieve Lebanon of 31 percent of its debt, and release an estimated $1.3 billion annually in public funds for general spending.

The size of Lebanon’s financial and gold arsenal in relation to its domestic economic woes highlights the severity of the confidence crisis, especially as the country prepares to enter the oil-producing league.
Alternatively, Lebanon could theoretically channel some or all of its gold returns into badly needed infrastructure which in turn promotes economic growth. After all, although Lebanon’s gold per capita holdings are second only to Switzerland, its power, information technology, health care, and water infrastructure lag several poverty-stricken countries.

But according to Georges Nehme, economist and Antonine University professor, “the gold issue is not purely financial. You can indeed sell gold worth a couple of billion dollars and pay off some of the maturing debt, but in the absence of confidence in policymakers, the money could be wasted.”

Furthermore, Neaime points out that the country’s gold reserves were never meant to be used to pay off debt or to promote economic growth. “There is no doubt that the debt is problematic for the economy, but the gold was accumulated to increase confidence in the Lebanese pound and you can’t find a modern case where gold was used to pay off national debt,” explained Neaime.

***Indeed, after Lebanon gained its independence in 1943, the Bretton Woods agreement was signed, linking European currencies to a gold-backed U.S. dollar. As a result, the forefathers of Lebanon’s gold were concerned about the value of the young local currency, so, to protect the pound, they engaged in a systematic purchase of the metal, most likely at the then-artificially set price of $35 per troy ounce.

In the early 1970s, the United States marked the end of Bretton Woods by delinking its currency from gold, prompting Lebanon’s Parliament to prohibit the sale of gold without its direct approval. Parliament’s decision was soon confirmed in 1987 when a proposal by acting Prime Minister Salim al-Hoss to sell 20 percent of the gold reserves at $800 million to prop up the lira was shunned by Parliament.

As a result, war-torn Lebanon’s currency witnessed a precipitous decline in the late 1980s, dropping from an average of LL5 per $1 in the early and mid-80s to almost LL3,000 at the end of the decade, while 9.22 million ounces of gold, equivalent to 268.8 tons, sat idle in the vaults of the Central Bank because of fears of corruption.

Nevertheless, according to Neaime, “the presence of the gold helped Lebanon avoid a more significant decline in the exchange rate,” arguing that today as well, gold plays the role of preventing a run on the Lebanese pound, given the current rigid fixed exchange rate system.

But nearly two decades later, the Lebanese are just as suspicious of their politicians as they were then.

Although the current wealth can be easily erased by a decline in gold prices, economists advocate a comprehensive fiscal reform strategy and a flexible monetary policy before the gold can be liquidated.

“Without a comprehensive plan, any gold we sell would dissipate and we would return to the same debt levels, but next time without the gold,” said Neaime. “I would sell some gold only if I have the right austerity measures in place and an accommodating flexible monetary policy to ensure a new accumulation of debt is prevented,” he added.

With austerity measures or a comprehensive economic growth plan far from reality in today’s Lebanon, observers wonder how much of the gold is in fact necessary to support the currency, and whether some, if not all, can be directed toward useful infrastructure spending. Ironically, since the recent $1.2 billion electricity plant debate erupted at the end of July, Lebanon’s gold has appreciated by almost $1.4 billion, tempting some to call for alternatives to the rigid long-standing gold policy.

According to Neaime, the answer lies in the risk of a sudden demand for dollars by lira depositors. “If all the domestic currency reserves at commercial banks were to be converted to dollars tomorrow, would the central bank be able to meet the demand?” he asked.

By the end of June, total Lebanese pound deposits reached LL55,852 billion or $37 billion according to Economena Analytics calculations, while foreign assets at the Central Bank totaled $31.4 billion, which in addition to gold, far surpass the needs of the central bank in the event of a run on the currency.

The size of Lebanon’s financial and gold arsenal in relation to its domestic economic woes highlights the severity of the confidence crisis, especially as the country prepares to enter the oil-producing league. Alternative gold strategies, which include lending it to China for a fee or using the gold to establish a diversified sovereign wealth fund, all go unnoticed because of the missing confidence.

Even under the framework of the current fixed exchange system, questions remain over the credibility of the gold in protecting the Lebanese currency. In particular, would the parliament ever authorize a partial or full liquidation of the gold to protect the currency or prevent a government default, especially given the political system and the lack of historical precedence?

“Under the worst case scenario, we are better off defaulting on our foreign debt than selling gold to pay it off,” said Neaime, citing many other countries who have defaulted before and returned to normalcy, a currently unlikely scenario for Lebanon.

“More importantly” he added, “we should not disregard the possibility of a more significant global financial crisis than the one in 2008, so we should save the gold to protect the lira during these tumultuous times.”

 
A version of this article appeared in the print edition of The Daily Star on August 22, 2011, on page 4.

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