The IMF has warned Lebanon that its central bank has accumulated losses of as much as $49bn, as divisions between the government and the Banque du Liban threaten to derail vital bailout talks with the multilateral lender.
The BDL does not publish profit and loss accounts. In recent years, it has used a complex series of sovereign debt and currency swaps with local lenders — what the central bank governor has called “financial engineering” — to shore up the banking sector, attract foreign currency and stabilise the Lebanese pound, which is pegged to the US dollar.
That activity, combined with the impact of Lebanon’s default in March on the bank’s sovereign bondholdings and a collapse in the value of the currency, has resulted in accumulated losses of about L£170tn ($113bn), the IMF has told the finance minister and central bank governor, according to people familiar with the matter.
Those losses equate to 91 per cent of Lebanon’s total economic output in 2019, according to World Bank figures, and are almost equal to the total of value of the deposits held by the Banque du Liban from the country’s commercial banks.
While the IMF’s assessment is broadly accepted by prime minister Hassan Diab’s government, the central bank and some members of parliament argue that the BDL’s losses are substantially lower.
The disagreement, which has pitched Mr Diab and the IMF against the country’s long-serving central bank governor, Riad Salame, is threatening to block the emergency financing Lebanon needs to stabilise its free-falling economy.
“Not accepting the diagnostic simply means that the IMF [will] walk away,” said Henri Chaoul, a banker who advised the government in the IMF talks before he quit last week.
The IMF directed the FT to a statement by an IMF spokesperson last week who tweeted: “Our estimates are broadly consistent with those in the government’s plan.” The government has said the central bank’s accumulated losses are about $50bn. But Mr Salame has contested that figure in a briefing to parliament, arguing that the central bank’s accounts show a surplus.
Mr Salame is one of the world’s longest serving central bank governors having led the BDL for 27 years. He is credited with maintaining financial stability in the country since the end of the civil war, by helping to finance government spending and a large trade deficit, while keeping the pound pegged to the dollar.
But in the past six months, following weeks of anti-government protests, Lebanon’s fiscal and monetary policy has come undone. Lebanon defaulted on about $90bn of debt in March and the Lebanese pound has fallen on the black market from L£2,400 to the dollar in January to more than L£5,000, versus the pegged rate of L£1,507.
The fiscal, economic and monetary crisis stems from an unorthodox financial system where the banking sector has earned high interest payments by lending to the government, and used dollar deposits from abroad to help finance outsized bills for imports and debt servicing.
The central bank did not respond to a request for comment. In a presentation of its accounts to parliament last week, seen by the FT, it said it would not obstruct “the potential involvement of the IMF”.
Central banks do sometimes operate at a loss, if, for example, their assets are revalued by a sudden currency shock. But IMF guidance advises against “ignoring such losses in the hope that they may be reversed”.
The parliament’s finance committee is seeking to mediate between the government and the central bank and has launched its own inquiry into the BDL’s finances.
Ibrahim Kanaan, head of the committee, said he supported the IMF talks but was uneasy with the government’s approach and had “intervened . . . to exercise our control on the government plan”.
Mr Chaoul accused parliamentarians of seeking to stall the IMF programme in order to delay fiscal and monetary reforms that might undermine their power. “IMF equals reforms,” he said.
Mr Kanaan dismissed such criticisms as “baseless”.