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Govt must pass official, transparent capital control now

Some banks previously offered interest rates up to 14 percent on large dollar deposits and 17 percent on Lebanese pound deposits. (The Daily Star/Mohamad Azakir)

Lebanon’s Central Bank (BDL) recently issued a circular mandating a reduction in interest rates on deposits to a maximum of 5 percent on the U.S. dollar and 8 percent on the Lebanese pound. Depositors, used to double-digit rates on the dollar, at times reaching 15-20 percent, were outraged, threatening to pull their money out of the bank, until they remembered that they can’t, due to the informal (and illegal), yet surprisingly effective, capital controls, recently introduced by the Association of Lebanese Banks.

What’s even more surprising is that the average Youssef, for the most part, just accepted it, taking a number, standing in an organized, linear queue (something a typical Lebanese citizen never does), awaiting his turn patiently (for the most part), for two or three hours to get to a teller. At that point, he starts negotiating his weekly allowance, like a teenager - $100 or $200, depending on the liquidity of the particular bank, or the largesse of the bank manager, and the strength of the customer’s argument in justifying the withdrawal.

“I need $600 please not $200”

“What do you need it for?”

“To buy diesel for my home.”

“Where do you live?”

“Ras Beirut.”

“Come on. Ras Beirut isn’t that cold. Request denied!”

As far as I know, never in the history of mankind has there ever been capital controls decentralized to the bank branch-manager level, without any law justifying this practice. This might also explain why we haven’t had 24-hour electricity since the war ended in 1991, and simply accepted to just pay an extra bill for a private generator that covers our house - a monopoly in that neighborhood, I might add.

Of course, banks didn’t just do this for the hell of it. They introduced these capital controls because their liquidity precluded them from doing anything else, due to the negligence of the Lebanese government, in all its branches, legislative and executive, in taking the right measures to give them legal cover. According to the banking community, current problems were caused by a temporary liquidity crunch, due to a classic bank run. I beg to differ - it’s actually the unraveling of the largest government-regulated Ponzi scheme in the history of mankind - but that’s a discussion for another day and we’ll soon all find out who’s right.

BDL claims that it lacks the authority to introduce such a circular to give banks legal cover for their actions. I disagree. For one thing, its mission statement contains ample justification to initiate capital controls (to protect the stability of the currency and the banking sector). For another, even if it weren’t legal, it’s certainly more legal than the current informal capital controls, a view confirmed by the recent communique issued by the newly elected courageous head of the Union of Lawyers. Finally, even if it weren’t legal, BDL should allow the judiciary to decide on its legality, assuming any court case gets that far - if it’s overturned, at least BDL would have done its duty to protect the regular depositor without Wasta.

It’s pretty clear the final solution to this mess will involve a haircut.

In the meantime, what’s BDL to do to minimize damage? It should allow, even encourage, banks to break a term deposit early, if the purpose is to buy real estate (which the developer/seller can use to pay off a loan), since 90 percent of loans are directly or indirectly collateralized by properties. This reduces deposits and non-performing loans, lessening the ultimate haircut required. If the money’s locked anyway, what difference does it make if it’s in a current account or “mjammad” in a time deposit? This shrinks bank balance sheets and minimizes the final tally of losses, by netting off deposits and loans, diminishing the ultimate haircut.

BDL should also reduce interest on rotten (non-fresh) dollars (i.e. Lollar) deposits to zero, effective immediately, because it’s irrational to “pay your prisoner of war a salary.” It should keep interest on the liraira at 8 percent to discourage conversions. Simultaneously, it should reduce all dollar loan interest for individuals and companies to 3 percent, giving relief to struggling companies and reducing the acceleration in unemployment. On the other hand, it should keep lira interest on loans high to encourage prepayment (i.e. discourage a short position, or bet against the lira).

Dan Azzi is the retired chairman/CEO of a bank.

 
A version of this article appeared in the print edition of The Daily Star on January 10, 2020, on page 3.

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