Overview of the Recent Monetary, Banking, and
Financial Developments in Lebanon
The Lebanese economy continued to expand at a fast pace
in 2010 backed by growing confidence and large capital inflows. Real growth has
recorded impressive rates of 9 and 8.5% respectively in 2008 and 2009, and has
remained within the expectations of 7 to 8% in 2010. Inflation has been
contained at around 4.5% and BDL's target is to keep it below 5%.
BDL's continuous commitment to the stability of the
Lebanese Pound’s exchange rate against the U.S. dollar plays a pivotal role in
maintaining financial and price stability.
Its strategy of preserving a high stock of assets in foreign currencies
as a precautionary measure proved to be essential in dealing with any crisis
that may hit the economy. The BDL is
currently holding around USD 31 billion in foreign currency assets. This figure
does not include gold reserves which are approaching USD 13 billion at current
prices. Lebanon
is the second-largest holder of gold in the MENA region.
While complying with market tendencies,
interest rates are maintained at appropriate levels to spur capital inflows,
rapid dedollarization and a strengthening of the external position. The massive
cash injections into the Lebanese market over the past three years have helped
the interest rate structure in Lebanon to
decline. The interest rate differential in favor of the Lebanese Pound has
brought the level of dollarization from 77% at end-2007 to 69% at end-2008,
reaching a low of around 63% at end-2010. The World Bank has increased its
estimate of remittances into
Lebanon
for 2009 to USD 7.6 billion, and estimated they would reach USD 8.2 billion in
2010, which is around 20% of GDP. Annual remittances from the Lebanese Diaspora
represent an important and continuous source of external funding that spurs the
Lebanese economy. The Balance of Payments
has also recorded a cumulative surplus of USD 3.5 billion
for the year 2010.
As for the banking sector, it is keeping its robust
performance by remaining profitable, highly liquid and well-capitalized. Banks
in Lebanon
have clean balance sheets as the BDL has forbidden them from making subprime
investments since 2004. Bank deposits, which grew by 10% on an annual basis,
have exceeded USD 110 billion at end-2010. Lebanon has attracted the largest
share of bank deposits in the MENA region in 2010. Despite global credit
tightening, credit to the private sector has reached a historical level of USD
36 billion in 2010, recording a growth rate of around 22% which is the highest
in the region. The average capital adequacy ratio of banks in Lebanon has exceeded 12% with banks
fully abiding by Basle II standards. As a matter of fact, Lebanese banks have a
high level of liquidity and the structure and quality of their capital is
generally in line with the outlook of the Basle III standards. Each bank will be
assessed on an individual basis. BDL is also planning to set a target for banks'
top-quality capital reserves that is bound to be higher than the level agreed
upon in Basle III.
Supported by BDL, Lebanese banks are still seeking new
growth opportunities outside of Lebanon. Further
consolidation is encouraged in the Lebanese banking sector except for the top 11
banks. BDL also emphasizes the clear distinction between the role of commercial
banks and investment banks, which will protect both banks and customers'
interests.
BDL has also created incentives in order to secure
adequate financing in the economy. It has issued circulars aiming at encouraging
lending in Lebanese pounds at a lower cost by setting new exemptions from
mandatory reserve requirements. Such credit incentives includes loans to
productive sectors (e.g. Agriculture, Industry, Tourism, Information
Technology…), housing loans, high-educational loans and environmentally-friendly
projects such as renewable energy, waste management, waste water treatment and
recycling.
The main challenge in Lebanon, however, remains not so
much with its high indebtedness but with the increasing yearly deficit in the
budget of the government. The public debt does not pose a threat to the economy
as long as the flow of funds to
Lebanon
remains high. The main challenge in the future is to reduce the size of the
deficit by maintaining high growth rates which depends heavily on the
improvement in infrastructure and the introduction of reforms in vital economic
sectors. With the liquidity available, privatization programs can be successful
and the government should make greater use of the private sector to implement
new projects especially in the field of energy.
