Lebanon needs solution in days to avoid economic crisis – Central Bank governor

Lebanon’s central bank governor warned on Monday that a political solution was needed within “days” to avoid economic collapse and restore public confidence after 12 days of anti-government protests that have forced banks to close.

In an interview with CNN, Riad Salameh said that a change in government was needed to restore confidence and ensure that financial inflows — which have already slowed this year — do not dry up.

“It’s a matter of days because the cost is heavy on the country but more important we’re losing every day confidence, more and more confidence. And finance and economy is all about confidence,” Salameh said.

Prime Minister Saad Hariri’s trying “to get consensus on a new government or changes in the present government in a way to satisfy the people of Lebanon and to regain a certain trust. For the time being, there is no progress.”

Hundreds of thousands of protesters have been on the streets for over a week, demanding the resignation of the political elites they blame for endemic corruption and falling living standards. The country has been paralyzed as protesters block major highways, forcing banks, schools and many businesses to shut down.

Hariri has hinted that some change to the cabinet lineup was being considered and has said he was ready to submit to popular demands for early elections. However, the pro-Iranian Hezbollah group, which has immense sway over Lebanese politics, opposes both moves.

The armed group has accused the demonstrators of receiving foreign funds and its supporters scuffled with anti-government protesters last week in the capital.

The Association of Banks in Lebanon has said lenders will not reopen their doors until a political solution is found to the crisis but the closures have increased uncertainty and fed worries that an financial crisis is looming.

The government unveiled last week an emergency package of measures that seeks to reduce the budget deficit to zero and expedite reforms that could unlock billions of dollars in much-needed international aid. But the measures were dismissed as too little too late by protesters who insist the government resigns.

In separate comments to Reuters, Salameh said there was no plan into impose capital controls and the central bank remained committed to a U.S. dollar peg in place since 1997.

Lebanon’s Debt Plan: Credible Reforms or Fiscal Engineering?

To keep its lenders stable and defend the dollar peg, Lebanon relies on inflows from the millions of Lebanese living abroad. However, capital inflows needed to finance the large current account and fiscal deficits — including non-resident deposits — have slowed as confidence has dwindled.

The growth in banks’ deposit base broadly stagnated throughout September, according to the Institute of International Finance. The dollarisation of deposits “may have increased to as much as 79 per cent of total deposits in recent weeks,” the IIF said.

The shortage has forced importers to buy dollars from exchange bureaus leading to the emergence of a parallel rate that is hovering around 1,650 per U.S. dollar compared to the official rate of 1,507 to the dollar.