The Platform

Activists throw stone at Lebanon’s central bank in Beirut to protest rules that prevent depositors accessing their savings.

The economic recovery of Lebanon depends on allowing banks to do what they do best.

After decades of mismanagement and systemic corruption, Lebanon fell deep into the worst economic crisis the Lebanese have ever come to know. The deliberate failure of the Lebanese government to implement necessary reforms has poured fuel onto the fire of the economic crisis. If you are Lebanese, you have so many normals to return to, and the pandemic is the least of your worries.

The corrupt political class destroyed much of Lebanon’s economy. The bankrupted government swallowed the nation’s savings rendering the banking sector, households, businesses, and the central bank of Lebanon victims of its evil deeds with little hope for recovery.

Riad Salameh, the head of Lebanon’s central bank, gave up on the bank’s independence in return for professional longevity. That made it so easy for the corrupt political class to blame him for Lebanon’s economic misfortunes. Salameh spent decades enjoying well-deserved fame; however, now he is being blamed for his country’s economic crisis. Lastly, the August 4th explosion in 2020 destroyed over half of Beirut with damages in the billions of dollars.

No wonder why the Lebanese pay little attention to COVID safety protocols. We have been trying to weather one crisis after another, and all have been derivatives of the lack of conduct by the political class, and the politically driven conduct of the monetary authority. Despite all that, I strongly believe that there is a glimmer of hope if we turn to the private sector for a genuine rescue and recovery plan.

This is not to downplay the importance of what needs to be done by the government to secure a full or partial recovery and help the economy move toward sustainable economic growth. However, it is time we move forward, and give up on just waiting for any good to come from the political class. The pathway to this must be through the banking system. I know countless economists and the Lebanese blame the banks for contributing to the pains we are in today, but that does not make their role in an economic recovery any less important. I am talking about banks, not bankers.

In a free-market economy, banks are the providers of essential services to individuals, households, and businesses, and they play a critical role in holding the economy on its own feet in good times and in times of crisis. Regulators around the globe understood the challenges and have already relaxed much of the rules that could bind banks from serving their economic roles.

Straight to the point, the main objectives of monetary policy are controlling inflation, managing employment levels, and maintaining long-term interest rates. In short, providing an environment that is conducive to financial stability and economic growth.

The crisis in Lebanon calls for loose monetary policies, fewer guidelines to follow and to comply with. That is, let financial intermediaries do what they do best, bail out distressed clients. With resources running short here in Lebanon, policymakers must discriminate between financial institutions based on their capacity to serve. That is, provide support for banks to use their capital to lend and undertake other supportive actions in a safe and sound manner. Any measures which can enhance banks’ capacity to continue to serve households and businesses must be embraced by the regulatory authorities. Unfortunately, this has been nothing more than wishful thinking since most regulators have been forcing banks to deploy resources in tasks that are at best administrative and serve no purpose in rescue or recovery efforts.

Riad Salameh, pressured by corrupt politicians and bound by the central bank’s limited resources, embarked on several actions with ill-defined outcomes. The Lebanese economy has been mismanaged by regulators. Regulators have been treating banks indiscriminately assuming that they all share the same strengths and weaknesses, while the reality is that there is nothing but the crisis which banks operating in Lebanon have in common.

The sharp economic slowdown and the equally sudden interruption to core banking functions posed a legitimate threat to banks’ ability to effectively help delinquent customers; a true economic risk. Most banks have appropriately acted to try and contain virus spread and protect their employees’ and customers’ health. Albeit necessary, it is not sufficient. Each bank must’ve done the assessment for its own clients since there can’t be a one-size-fits-all remedy. The severity of the crises is likely to lead to larger-than-expected drawings on credit lines. Can banks in Lebanon deliver? Unfortunately, little we know, so far, about the answer to this question.

Despite the good intentions behind the actions of the Lebanese central bank, they all have been driven by the failure of the political class to act to soften the impact of the economic pains. All that is required of policymakers is to introduce measures that strengthen banks, and banks will deliver. Banks play a vital role in the functioning of the economy. Their health, and that of their workforce, the continuity of their operations, and their safety and soundness are therefore critical. That should be at the heart of every decision and measure policymakers put forward. I am confident that banks have learned their lessons though very late. Better late than never. However, Riad Salameh continues to send mixed messages to economic agents as he, at one time, attempts to weather the mounting blames, and, at another, rescue the ailing ruling class. There must be an end to such conduct and behavior.

Mohammad Ibrahim Fheili is currently serving as an Executive in Residence with Suliman S. Olayan School of Business (OSB) at the American University of Beirut (AUB), a Risk Strategist, and Capacity Building Expert with focus on the financial sector. He has served in a number of financial institutions in the Levant region. He served as an advisor to the Union of Arab Banks, and the World Union of Arab Bankers on risk and capacity building. Mohammad taught economics, banking and risk management at Louisiana State University (LSU) - Baton Rouge, and the Lebanese American University (LAU) - Beirut. Mohammad received his university education at Louisiana State University, main campus in Baton Rouge, Louisiana.