It was remarkable in the recent statements of the Deputy Governor of the Banque du Liban, Salim Shaheen, that he talked about a tendency to abandon the “banking” platform in the period following the end of the term of the Governor of the Banque du Liban, Riad Salameh, and described it as “lacking transparency and governance.” While this controversial platform constituted the most prominent tools of the Lebanese Central Bank to deal with the ongoing financial crisis in the country since 2019.
This came at a time when the deputies of the Governor of the Banque du Liban are preparing to take over and conduct business in the Central Bank on the first of next August, the date for the end of Governor Riad Salameh’s term, which spanned 30 years, and will be concluded with international prosecution and local judicial investigations affecting Salameh on charges of embezzlement, money laundering, mismanagement, personal benefit, and others.
Shaheen had confirmed to “Reuters” that the Central Bank’s leadership is in talks with policy makers in the government and parliament, as well as with the International Monetary Fund, about the need to stop working on this platform due to its lack of transparency and governance.
This statement raised a lot of questions about what is meant by “Sarefa” lack of transparency and governance, and re-shed the light on the origin of this platform and its mysterious mechanism of action, as well as the results it achieved and its feasibility, leading to the question about the “post-Sarefa” stage and the fate of salaries, taxes and accounts associated with it.
How did you grow up?
Preparation for it began in 2020, and it was launched in May 2021, according to a basic circular on the Banque du Liban bearing No. 157, which obligated all banks to register on the platform, allowing them the freedom to trade, so that they conduct exchange operations for their customers and register them on the platform according to the exchange rate specified by the Central Bank.
Practically, through this platform, the Banque du Liban made it possible to purchase dollars from banks at a price lower than that offered in the “parallel market.” The aim was to control the large jumps that the dollar exchange rate was recording against the collapse of the Lebanese pound on the one hand, and to secure a certain level of support for merchants, importers, and major companies who were obtaining their hard currency needs from the parallel market, which constituted a significant increase in demand for dollars and raised its exchange rate.
The Central Bank sought, through money exchange, to limit trading in dollars to one official platform, with the aim of reorganizing the market, which was led by speculation and manipulation by money changers, which was reflected in certain stages of sharp fluctuations in exchange rates.
“Sareefa” played another role, through Circular 161, which was issued in December 2021, and stipulates that banks pay their customers the cash withdrawals that they are entitled to withdraw, according to the exchange rate on the exchange platform.
The most prominent beneficiary of this were public sector employees who were allowed to receive their salaries in dollars, in the context of the Banque du Liban financing the operating expenses of the Lebanese state, which was seeking to preserve the purchasing power of employees by providing them with dollars, while the Banque du Liban, in return, aimed to pump more dollars into the markets, and withdraw large quantities of the inflated Lebanese pound due to the continuous printing of the currency.
A move that many saw, including the expert in banking risks, Muhammad Fahili, as a “service to the political class”, in terms of satisfying public sector employees who are considered part of the system of patronage and political employment managed by the ruling authority in the country, to gain loyalty.
A tool for profit.. Has it achieved its goals?
However, the price difference between the dollar offered on “exchange” and the exchange rate in the parallel market turned the idea of “exchange” into a tool for quick profit for a wide segment of the Lebanese, headed by merchants, importers and financiers who had unlimited access to the platform, as well as individuals who benefited from the “quota” available to them, so that dollars were purchased from exchange at a low price and then exchanged from the parallel market for lira at a high exchange rate and profits were made from the difference.
Some people went as far as borrowing money in order to trade through “money exchange” and make profits, as a case was recorded in Lebanon described as “excessive importation” carried out by merchants and importers, seeking to make the most of the profit margin through “money exchange”, where huge import operations were carried out according to the low price of the platform, provided that goods are sold in the markets according to the price of the dollar in the parallel market.
And the World Bank had considered in its economic monitoring for the spring of 2023 that the “Sarafa” platform is not only an unfavorable monetary tool, but has also turned into a mechanism for making profits from the price difference, adding that dealers in “Sarafa” may have made profits amounting to $ 2.5 billion through pricing differences, without counting the payment of public sector salaries, describing the platform as “a model of weak and often useless policies.”
In this context, the economic journalist, Mounir Younis, states that “the exchange platform was supposed to maintain the exchange rate of the dollar at the limits of 12,000 Lebanese pounds at the time. However, over two years of its establishment, the exchange rate of the dollar reached record levels, with it recording 143,000 pounds in March 2023, while the exchange continued to keep pace with the parallel market by raising its exchange rate.”
Accordingly, the platform’s march was marked by “permanent failure,” according to Younes. It failed to control speculation, and failed to achieve monetary stability in the exchange market. Rather, the platform turned into “the largest speculator on the lira,” because the Banque du Liban is the one that prints the lira and increases the monetary mass that is used to buy dollars.
On the other hand, Fahili believes that the conditions that have passed on Lebanon from the establishment of “banking” and until today, and the financial developments that took place, should not be overlooked, the most prominent of which is the public budget for the year 2022, which “caused an economic, financial and critical earthquake”, after which the official price of the exchange of the lira from 1500 against the dollar increased to 15 thousand, and on the basis of it the “customs dollar”, and the ceiling of cash bes However, the price of a banking change. “
Where is the funding from?
The platform’s financing mechanism is still shrouded in ambiguity and ambiguity, in terms of the size of its reliance on the funds of Lebanese depositors that banks have employed in the Banque du Liban, known as the “mandatory reserve”, while the Banque du Liban says that it collects dollars offered on the platform from the parallel market and finances supporting the exchange rate through profits made from trading.
In this part, Fahili distinguishes between the current transactions according to Circular 157, which the Banque du Liban pays to banks from their investments with it, that is, the funds of depositors with banks, and between financing the disbursement of current public sector salaries according to Circular 161, whose dollars are secured by the Banque du Liban from the parallel market.
What the Banque du Liban did in this context is that it used the large monetary mass that it owned as a result of printing the currency, to finance the state’s expenses, according to Fahili, and in order to avoid large inflation, the bank bought a large monetary mass in dollars, equivalent to the monetary mass in pounds, so it began selling dollars through an exchange and buying dollars from the parallel market, thus maintaining control over inflationary pressures and exchange rate jumps.
For his part, Yunus explains in his interview with Al-Hurra that the monetary and credit law in Lebanon allows the Bank of Lebanon to intervene in the currency market according to certain conditions, “especially if it has its own net reserves, not the dollars of depositors.”
However, in reality, the platform was defending the exchange rate from the funds of banks and depositors, according to Younis’ assertion, because the dollar reserves owned by the Banque du Liban come from compulsory bank investments and certificates of deposit, and not special reserves, “and therefore the platform, with its establishment, was in violation of the monetary and credit law.”
What about transparency?
Transparency has always been required on a banking platform from various parties, including the World Bank, and the deputies of the Banque du Liban themselves, who have expressed on more than one occasion their opposition to the way “banking” works.
The most prominent manifestation of the lack of transparency is the inability to know the parties using the platform. When there is a platform for trading or a stock exchange, it is assumed, according to Younes, that “it will have records recorded in a clearinghouse, showing who bought and who sold, with access to these transactions, and a clear display of the identity of the accounts in the event that they are requested by the supervisory authority, which is not available on” exchange “.
Known among the users of the exchange platform are public administration employees and owners of deposits in banks. As for the rest of the merchants, speculators, and banks, their identity is unclear, as well as the size of their benefit, while the platform lacks transparent restrictions proving who sold and who bought.
This reality, according to Yunus, resulted in the possibility of profiting from certain groups over others, as nepotism plays a prominent role in benefiting, especially in terms of financiers, banks, companies, and speculators.
Fahili, in turn, confirms that all trades that take place in accordance with the provisions of Circular 157 have witnessed “excessive discretion” on the part of the banks. In all operations according to Circular 161, the error was that the state resorted to the Banque du Liban to finance its deficit, as was the case in the past.
The expert in banking risks indicates that the hidden stitch, due to the absence of oversight on the platform, was in the banks’ conduct of their operations in accordance with Circular 157 and recorded as circulation of depositors’ funds, and then passed them under the provisions of Circular 161 to preserve their assets with the Banque du Liban, so that they do not decrease, in a step that “lacks professionalism and morality,” according to Fheili.
The two economists agree that, as a result of all of this, the “sarafa” platform has turned into a mysterious and “black box” that needs scrutiny, “and perhaps a criminal scrutiny,” according to Younes, who stresses the right of the “crippled Lebanese” to know who benefited from the profits of the $2.5 billion.
What after exchange?
And while the news of the trend to abandon “money exchange” constituted a glimmer of hope for many aspiring to unify the exchange rate and liberalize it in Lebanon, in order to stop the bleeding occurring in the reserves of the Banque du Liban, others fear the financial implications of the possibility of abandoning the platform, especially since it is the only regulator of the dollar price.
In this context, Younes believes that there will be no repercussions for the suspension of “banking” if this is accompanied by a set of financial and banking reforms, the approval of the Capital Control Law, the restructuring of banks, a balance with good tax returns, and a return to paying in lira in the markets instead of dollars, “then the free platform can succeed in liberalizing the exchange rate and achieving a certain stability.”
However, without that, major political obstacles remain, represented in the lack of the possibility of parliamentary legislation in light of the presidential vacuum in Lebanon, and the inability to launch a governmental reform plan, given that the current government’s role is limited to conducting business until a new president is elected for the country.
In light of this reality, “we will be facing an explosion in the exchange rate of the dollar,” in the words of Younes, who places the responsibility in this case on “the elected political parties that the Lebanese people chose to protect their interests and did not,” considering that the exchange rate explosion should move people to accountability.
While Fahili asserts that no one is talking today about canceling an exchange platform without the existence of an alternative, including the deputies of the Governor of the Banque du Liban, ruling out that this would lead if it happened to a major economic shock, “given that there is no significant difference between the exchange rate and the black market price today,” stressing that the main concern lies in avoiding inflationary pressures that would re-strike the purchasing power of employees’ salaries, especially in the public sector.
2023-07-24 17:00:14
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