The IMF and “international standards” classify Lebanon in the category of “hyperinflation”: a new blow to the banks!

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Leah Azzi

The Lebanese economy, according to international accounting standards and the International Monetary Fund, is in a state of “hyperinflation”. International organizations officially embrace this, and expect that this situation will last for several years, which means that all institutions in Lebanon that adopt international accounting standards must set new budgets for the year 2020 that take into account the collapse of the currency and the presence of excessive inflation, otherwise these budgets will not be recognized internationally, and from Among them are commercial banks!

The financial statements of banks and financial and insurance companies, and every institution that adheres to international accounting standards in Lebanon, is “worthless”! It is the second “accounting blow” that Lebanese companies receive, after the financial audit firms put in place reports for the year 2019 to banks and indicated that all of them did not provide sufficient numbers to carry out an accurate analysis of their level of liquidity, solvency and profitability, with doubts about their viability (Al-Akhbar, Issue 9 November 2020, www.al-akhbar.com/Politics/296199). The reason this time is to add Lebanon to the list of countries that “exceeded 100% of the cumulative inflation rates for three years”, and now classify their economies as “hyperinflation”, which necessitates re-formulating the financial statements for the year 2020 based on the consumer price index (CPI), otherwise they are not Profit and loss figures are “real”.

The term “hyperinflation” economically means that prices in a country rise by more than 50% per month, and the purchasing power of the local currency decreases, and the economy often suffers from several financial problems that “explode” at a moment, causing the exchange rate to collapse. The head of the economics department at the Lebanese-American University, Ghassan Dibeh, insists that “the Lebanese economy is in a state of high inflation, not excessive.” He explains that the economic rule specifies that if inflation is recorded at 50% per month, “that is, more than 1000% per year, then the economy will be in a state of hyperinflation.” We are still far from that ». Dibeh uses the consumer price index issued by the Central Bureau of Statistics, “If we go back to June 2020, the percentage was 20%. ». This “tactical” decline is due to “the decline in demand and the decline in the population’s spending as a result of their lack of money, the lack of a wage increase, and the collapse in the exchange rate of the Lebanese pound almost constant at a certain level for some time, but it is also an indication that the Lebanese economy is not undergoing hyperinflation.”
The problem is that economic rules differ from accounting rules. The “International Training Task Force – IPTF”, which specializes in accounting and financial reporting issues, which met in November, had a different opinion. In accounting, countries whose inflation rates have exceeded 100% for three consecutive years are monitored until they are “stamped” with excessive inflation, based on data received from the International Accounting Standards Board, in addition to other indicators, most notably the population’s preference for disposing of paper currencies and investing their money. To maintain its value, or exchange the local currency for a relatively stable foreign currency.
At the last meeting of the “IPTF”, Lebanon and Iran were added to the list that includes Argentina, South Sudan, Sudan, Venezuela, and Zimbabwe. The international accounting standard on the basis of which these countries were classified is “IAS 29”. In this case, it is assumed that all companies and institutions that apply international standards will re-amend the financial year data ending on December 31, 2020, or later. It is imperative for the Banque du Liban and the Banking Control Commission to request banks to amend circulars and to ask banks to set their balance sheets using the dollar to prepare financial statements that reflect the real financial reality of the institutions.
The International Monetary Fund has joined the “chorus”, stating that these countries must submit financial statements that take into account the two standards “IAS 29” and “IAS 21”. In the same context, the financial audit firm PwC issued a report calling on all institutions in Lebanon and Iran to “implement IAS 29 as if the economy had always been in a state of hyperinflation.” In the Lebanese case in particular, the company believes that «the rate of inflation until 2019 was less than 10% per year, but since the beginning of 2020 it has increased dramatically, and according to the data, the cumulative inflation for three years will exceed the threshold of 100%, and it is expected that this will continue in the coming years due to the economic deterioration. And the collapse of the currency ».
An official in an international auditing company explains that “the budget of any company in Lebanon no longer reflects the reality after the large margin between the real US dollar and the dollar in banks, and the collapse in the currency exchange rate, so the budgets must be reevaluated to reflect the inflation in the market.” What if banks, financial institutions, insurance companies, and others do not comply with the standard application? “Audit firms will be obliged either to refrain from issuing financial reports or to state in the reports that the institution in question did not comply with the standards. However, frankly, the impact of the issue on these institutions will be moral, because the problems that the Lebanese economy and its finances are going through are much more difficult and complex than not applying an accounting standard. ”He pointed out that“ this standard will particularly affect institutions that own fixed assets, because the re-evaluation Does not include monetary items ».
Inflation is a basic economic indicator that mainly affects the decisions made by central banks within the framework of monetary policies. When PwC expects that the Lebanese economy will suffer from excessive inflation for the coming years, this “means that we have to change the accounting rules and unify the dollar exchange rate in order to be able to set accurate budgets,” says a former member of the Banking Supervision Committee.

The most affected by this classification will be Lebanese banks, especially after the Banque du Liban asked them to increase their capital by 20%, which must be recorded in the 2020 budget. The same source indicates that “the 20% increase is no longer important, because after the implementation of IAS 29, the value of private funds (capital) in banks will decline, and therefore it has become necessary to compensate them before the 20% increase in them.” Also, the Banque du Liban allowed banks to re-estimate real estate and provide new real estate to increase it to private funds, within a deadline that expires on December 31, 2021. “This means that the budgets of 2021 will also be affected, and it is necessary to know what is really equal to the private funds of the banks before achieving the increase.” The domino stones will also sign the Memorandum No. 15/2020 addressed to the banks by the Supervisory Committee, specifying the solvency ratios to be approved, and asking each bank to present its “strategy and business plan, development of its financial position and profit … and the bank’s self-evaluation of the additional provisions / losses that may arise.” But what if banks do not comply with IAS 29? According to Circular 140 issued by the Banque du Liban, “Banks and financial institutions operating in Lebanon are required to adhere to the application of international standards for financial reporting,” however, the existence of a circular does not mean that banks are “obligated” to it, as previous experiences indicate. The Banque du Liban had previously initiated the “breach” of its circular, when it set the ratios for calculating solvency and provisions for banks in contravention of international accounting standards, in order not to collapse completely. And because the Lebanese crisis is very complex and unclear, the official at the International Audit Company says that “we have advised the Finance Ministry to request that Lebanon be removed from the list of hyperinflation for 2020 so that things become clearer, without result. The most important criterion is that uniform and accurate figures are issued by the Ministry of Finance, which determine the actual exchange rate and the rate of inflation. Even if institutions wanted to adhere to international standards, the numbers are not present.

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