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Banks look to protect dollar, raising pound interest rates

Lebanon s Central Bank building in Beirut, Friday, March 16, 2018. (The Daily Star/Mohammad Azakir)

BEIRUT: Commercial banks are resisting the requests of customers to convert their deposits in Lebanese pounds to U.S. dollars by offering them lucrative interest rates on the national currency, bankers and economists said Monday.

“Many banks try to dissuade their customers from shifting their Lebanese pound deposits to dollar accounts by offering them higher interest on the national currency.

“This approach has succeeded to some extent but I am not sure for how long can banks play this game.

“Banks are also keen to prevent the massive outflows of funds from Lebanon,” one banker told The Daily Star on condition of anonymity.

The phenomenon of higher interest rates on the Lebanese pound, which have reached up to 16 percent for five-year deposits, started two years ago to preserve the existing dollar liquidity held at correspondent banks.

Banks had previously offered up to 7 percent interest on dollar deposits at one point for large amounts, if they noticed that their customers insist of withdrawing the foreign currency deposits from Lebanon or place it in another bank.

But still the average interest rate on the dollar deposit is around 4.5 percent, compared to an average interest rate of 7 percent on Lebanese pound deposits, depending on the size of the amount and maturity period.

According to official estimates, the dollar liquidity of Lebanese banks through the foreign correspondent banks is close to $10.3 billion. The Central Bank, with gross foreign currency reserves of over $43 billion, has maintained its monetary policy in a bid to protect the Lebanese pound.

Central Bank governor Riad Salameh has repeatedly assured that there is no immediate risk to the national currency thanks to the massive foreign currency reserves and Banque du Liban’s prudent monetary policy which has safeguarded the economy.

A source close to the Central Bank stressed that BDL has sufficient reserves to protect the pound, denying any suggestion that the national currency is under threat.

“”We have enough reserves to protect the pound for two to three years if the economic situation and political paralysis persisted. But the image will change immediately once the government is formed and once the reforms are fully implemented,” the source told The Daily Star.

He added that among the available tools at the disposal of banks are the higher interest rates on the pound. “The maturity of the deposits has been extended from the average of 45 days up to 13 months thanks to the higher interest rates.

“The customer is now demanding longer maturity for his deposit to benefit from the better interest rates. All these factors show that there is no need to panic,” the source said.

But he acknowledged the biggest risk Lebanon is facing is the slow economic growth and high public debt which is no longer sustainable.

The source said Lebanon passed through more difficult and dramatic times in 2005 (the assassination of former Prime Minister Rafik Hariri) and 2006 (the Israeli war on Lebanon), and yet the country managed to overcome these crises.

“It sounds odd to say that the monetary situation is stable despite the demand for the dollar. Even this demand has not reached alarming levels,” he added.

The source added that Lebanon has not exploited its full potential, noting that the GDP growth should reach 4-6 percent a year if reforms are implemented.

Another banker said the local lenders are discouraging customers from buying dollars. “Some banks may not have sufficient dollars at their disposal to meet the demands of their customers especially if the demands are very substantial.

“There is shortage of dollars in the market and for this reason some banks offer higher interest on these foreign currency deposits to encourage the clients to keep their money in the bank,” the banker explained.

He added that many banks have opted to raise the interest rates on the pound in order not to exhaust the dollar liquidity.

“The Central Bank is intervening in the market, but not as it used to in the past,” the banker said.

All bankers and economists agreed that the monetary situation will be under control for the next two years even if the status quo in the country remains the same.

They are argued that as long as customer deposit growth is around 4-5 percent each year, then the banks can comfortably meet the needs of the public sector.

Economist Ghazi Wazni said the Finance Ministry agreed to subscribe to treasury bills at 10.50 percent instead of 7.50 percent, adding that these rates reflect the market rates.

“But of course this will negatively affect the budget deficit in 2019 which may reach LL11 trillion [$7.3 billion] if the reforms are not implemented very soon.

“Banks can roll over the $500 million of Eurobonds in 2019, but no one knows for sure what will happen after this year,” Wazni said.

 
A version of this article appeared in the print edition of The Daily Star on December 11, 2018, on page 4.

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