Lebanon's central bank governor rejects criticism

BEIRUT - Lebanese Central Bank governor Riad Salameh defended his record on Wednesday, rejecting criticism from the prime minister that he was to blame for a financial crisis and assuring savers there was no need for a haircut on their deposits in order to cover the state's debts.

Salameh has come under fire from critics including the powerful, Iran-backed Shiite group Hezbollah in recent days amid a rapid decline in the pound currency that has fuelled new protests and threatens broader unrest.

In a near hour-long televised address, Salameh deflected the blame back towards Lebanese governments for the unprecedented financial meltdown. He said he did what he had to do to maintain Lebanon's monetary stability in the face of various crises over the past years.

"Yes the Central Bank financed the state but it is not the one that spent the money. There are those who spent the money," Salameh, in office since 1993, said. He said he was being targeted in a "systematic campaign" and blamed Lebanese politicians for failing to enact promised reforms.

Salameh was responding to accusations made by Lebanese Prime Minister Hassan Diab last week in which he held the governor responsible for the downward spiral and accused him of pursuing “opaque” policies that sent the pound crashing against the dollar. Diab urged Salameh to speak openly to the public about the financial crisis, hinting that the governor has intentionally engineered the crash of the pound.

Lebanon, one of the world's most heavily indebted states, defaulted on its foreign currency loans for the first time last month. The financial crisis which came to a head last October has led inflation and unemployment to soar. Savers have been frozen out of their dollar deposits amid a hard currency liquidity crunch.

Nationwide protests have rattled the country since October, with thousands taking to the streets to demonstrate against the country's hereditary political class because of widespread corruption and mismanagement of resources.

Salameh has been under intense scrutiny from both politicians and protesters for the Central Bank's policies of "financial engineering". The Bank boosted its reserves by offering commercial lenders bonds at above-market rates for deposits; Salemeh's critics say that policy contributed to dollarization and raised local lenders’ exposure to sovereign debt.

The Lebanese pound has been pegged at 1,500 to the dollar since 1997, a guarantee that meant pounds and dollars were both widely used.

Salameh said the Central Bank did not hide information and that policies of financial engineering have helped buy Lebanon time to enact reforms and finance critical imports. He said the Central Bank currently has 20 billion dollars in reserves and told the Lebanese that their bank deposits were safe and that the state would not intervene to take a cut of their money to cover its debts.

"There is absolutely no need for a haircut and a haircut should not be adopted," Salameh said. "We confirm to the Lebanese that their deposits are there and are in the banking sector and are being used."

Rumours of a reduction on holdings in bank accounts have been increasing fears that people’s hard-earned cash has evaporated. Banks have restricted the public's access to cash and banned international transfers since October.

The Lebanese pound has lost more than half its value since October, falling away from the pegged rate of 1,507.5 pounds on a parallel market. Its descent picked up steam over the past week, hitting over 4,000 pounds to the dollar. 

Prices have risen by 55 percent, while 45 percent of the population now lives below the poverty line, according to government estimates.

"We were not sitting watching," Salameh said of the currency crash. "We worked with the exchange dealers and tried as much as possible to control the movement of the (dollar) price."

The Central Bank is still providing dollars at the official rate for imports of wheat, medicine and fuel. Salameh said this helped purchasing power.

Salameh's speech came after a day of violence, when hundreds of protesters in the northern city of Tripoli clashed with troops until late Tuesday night, leaving several injured on both sides in some of the most serious riots triggered by the economic crisis spiraling out of control amid a weeks-long lockdown due to the novel coronavirus.

Diab's government was formed last January with the support of Hezbollah and has struggled to secure foreign financing tied to long-stalled reform measures. It has received IMF technical assistance but has not requested a funded programme.

The US State Department's top Middle East diplomat David Schenker said to secure international assistance Lebanon "must prove that it is ready to make difficult choices and decisions to show it is 100% committed to reform".