The decision to place restrictions on lira withdrawals sparked a popular and sectoral storm, and the Bank of Lebanon, despite its initial adherence to the decision, was forced to soften its position undeclared, which allowed the banks to reassure people that liquidity in LBP would be secure without adequate clarifications.
What were the circumstances that compelled the governor of the Central Bank to take such a step, given his prior knowledge of the size of the objections that he would face, and the damage that the move would inflict on the economy?
It is clear that Riad Salameh realized, after feeling the pulse he made regarding the issue of stopping the support, or gradually reducing it, that the political system is not ready to participate with him in any decision. In the manner of Capital Control, the authority has evaded its responsibilities, as if to say to Salameh: “Hold your thorns in your hand.”
At this point, the governor of the Central Bank realized that he would be faced with all difficult choices, and that entail risks with uncertain consequences. There is no doubt that he thought about stopping the support, and pressed the authority to push it to make a decision, either by supporting the new measure, or by asking him to continue support, and for its responsibility. But he realized that power would not be squeezed, and that it would seek to put him in the face of the people. The General Labor Union’s moves in the street came to provide it with a model for the method that will be adopted to confront the decision to stop subsidies.
The other option that Salameh might have considered is to continue with the support and start spending from the mandatory reserves. However, through his knowledge of the style of political power, he knew, or so it is assumed, that the authority would sleep on the silk of 17 billion dollars, and the money might be depleted, and we would reach the hell that would burn everyone, especially since the Central Bank is preparing itself for the next phase in February 2021 (after 4 months) Only), as he will start the workshop to rehabilitate the banking sector, and he may have to put his hand on more than one troubled bank, so how can he do if his financial potential has declined by additional rates than it is today?
Hence, the central governor considered that the lesser of evils lies in reducing withdrawals in pounds from banks, so that a step of this kind contributes to reducing spending from the mandatory reserves, without having to raise subsidies and face the anger of the people and the anger of the economic sectors on their own. And he considered that with this decision, more than one bird is hit with one stone, as restricting the withdrawals leads to the following things:
First – The decline in consumption, and consequently the decline in imports and the reduction of the level of expenditures from the funds deposited in the Central Bank of Lebanon.
Second – Reducing pressure on the lira on the black market to prevent an additional rise in the dollar’s exchange rate.
Third – Take out some of the dollars hidden in homes, to ease the exchange market.
Fourth – Stopping the phenomenon of Swap checks, which adopts the principle of replacing liquidity in pounds with a dollar check, which is withdrawn from the price of the platform, which secures speculative profits that further aggravate the financial scene.
Fifth: Reducing the process of printing the lira, especially as the demand for the national currency is increasing. The state finances its spending from printing, and the central bank secures the withdrawal of dollar deposits in pounds, also through printing. It is estimated that 4 thousand billion liras move in monthly withdrawals from banks.
However, these “advantages” that may be provided by the decision to restrict liquidity in the LBP are matched by facts whose results cannot be underestimated, the most important of which are:
First – Rapid economic downturn resulting from the decline in consumption due to the scarcity of liquidity. This means the closure of more institutions, the increase in the number of unemployed, the decline in the size of the economy (GDP), and the high proportion of bad debts, which leads to increased pressure on banks, and difficult solutions when the time comes to devise a plan to exit the hole.
Second – The loss of consumer materials in the market, and the scarcity of other materials, especially since the Central Bank stipulated obtaining cash liquidity from importing companies in exchange for opening subsidized credits at the exchange rate of 1507 or 3900 pounds.
Third – Obstructing the industrial sector, which may lead to a decrease in the volume of exports, and a decrease in the amount of hard currency that the sector brings into the country.
Fourth – The return of tension in the relationship between banks and customers, and this matter is not in the interest of anyone, especially since banks, especially small ones, will be faced with two options: Either it is satisfied with the low ceiling of withdrawals set by the Central, which means an increase in the intensity of confrontation with customers, or dispense with the benefits of certificates Deposit, which means increasing the size of its losses and the risk of arriving next February to the stage of surrender, and handing over the bank’s keys to the Central Bank.
In the comparison between the “advantages” of imprisoning the pound and its “damages,” it is difficult to conclude which is less harmful than the other, but what is certain is that the harm occurred in both cases. If the radical treatment is to be delayed, the country will face additional difficulties, as there are no solutions outside the comprehensive treatment, which cannot begin before changing the political scene, which means that the story is “lengthy.”