Lebanon looking into floating currency and halving banking sector

Ghazi Wazni, who assumed his post in January, told AFP that Lebanon would also halve its banking sector in an attempt its worst financial crisis since the 1975-1990 civil war.
by Georgi Azar

15 May 2020 | 16:03

Source: by Annahar

  • by Georgi Azar
  • Source: Annahar
  • Last update: 15 May 2020 | 16:03

In this photo released by the Lebanese government, Lebanon's Finance Minister Ghazi Wazni speaks during a news conference, at the Presidential Palace, in Baabda, Lebanon, on Feb. 13, 2020.

BEIRUT: Lebanon's Finance Minister Ghazi Wazni said Friday that Lebanon would float its ailing currency after receiving foreign aid, days after kicking off discussions with the International Monetary Fund. 

Ghazi Wazni, who assumed his post in January, told AFP that Lebanon would also halve its banking sector in an attempt to stop its worst financial crisis since the 1975-1990 civil war.

Abandoning the decades-old 1507 lira to the dollar peg is a pre-requisite of the IMF, who has long called for Lebanon to float its currency. 

Advocates of the peg, including most of the political class, argue that the social impact of such a move would be cataclysmic. 

Lebanon is home to over 40 different commercial banks, including a dozen investment affiliates. 

Before contemplating slashing the banking sector, Lebanon's banks should first and foremost undergo a "clear and transparent assessment of their troubled assets," risk strategist Mohammad Fheili told Annahar.

"They should also asses their capital that is ready to absorb losses," he said, noting that more than half of the banks’ capital is stored at the central bank as a result of the financial engineering operations used to boost the latter's reserves.

As a result of these untraditional dealings, losses on them could reach around $53 billion in the wake of the government's default on some $30 billion of Eurobonds earlier this year. 

Lebanon's parliament should also enact a "capital controls" law to pave the way for any sort of restructuring or consolidation of the banking sector, Fheili said. 

"The concern of the monetary authority and government should be to preserve the integrity of the banking sector but not necessarily a single banking institution," he added. 

To effectively carry out a downsizing, the central bank along with the "healthier" banks should hold enough capital to absorb the losses of their less fortunate counterparts.

"To preserve depositors' money, healthy banks should have enough capital to absorb the losses of the weaker banks, including their liabilities and troubled assets," Fheili said. 

The International Monetary Fund on Wednesday said it has begun remote discussions this week with Lebanon, which is seeking some $10 billion of aid to help it out of the worst financial crisis in its history.

"We have an overpriced national currency which has to change," Fheili said, which has to be accompanied by a bolstering of Lebanon's safety net to support low to middle-income families. 

Lebanese are seeing their income disappear as well as their pensions at a rapid rate while the cost of living soars as a result of hyperinflation.

"There should be a system in place to control prices, especially those locally produced," Fheili told Annahar. 

To cut expenditures and fulfill one of the IMF's conditions, Lebanon should also decrease its imports in order to preserve its foreign currency reserves. 

"Lebanese should get accustomed to a massive drop in the variety of products they were used to buy," Fheili argued, noting that luxury products might become a thing of the past at least for the foreseeable future. 

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