The Governor

Riad Salameh has the toughest job in Lebanon at the moment — dealing with the economic fallout of former prime minister Rafik Hariri’s death. But the governor of the Central Bank of Lebanon tells Massoud A. Derhally he is optimistic that fiscal maneouvres will help steady the ship.

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By  Massoud A. Derhally Published  March 20, 2005

The Governor|~|WORRY-200.jpg|~|WORRY: Salameh’s concern is the economy.|~|Riad Salameh has the toughest job in Lebanon at the moment — dealing with the economic fallout of former prime minister Rafik Hariri’s death. But the governor of the Central Bank of Lebanon tells Massoud A. Derhally he is optimistic that fiscal maneouvres will help steady the ship. AS WELL AS once being his private banker, Riad Salameh was a close friend of Lebanon’s former prime minister, Rafik Hariri. The Central Bank governor’s sense of loss at Hariri’s brutal assassination last month is still clear to see. “I miss his absence,” the silver-haired Salameh says, as he mulls over the memories of the man he first met almost two decades ago. “He was a statesman, a man of moderation. He was a builder and a man convinced by globalisation and opening Lebanon to the whole world. I met him in 1986, at that time Merrill Lynch had a mandate to privatise Paribas and he was interested. A friend introduced me and there started the relationship. It’s a big loss for the country. I am sad to have lost a friend in that way — he didn’t deserve to end that way.” Now, Salameh faces the unenviable task of steadying the country’s economy in the wake of his friend’s death. Everything had been going right for Lebanon on the economic front at the turn of the year, after Hariri had succeeded in resurrecting the country out of the ashes of civil war. He had a vested interest in the reconstruction of Beirut’s central district — known as Solidere after the company he set up to spearhead the country’s rebuilding. But turmoil almost always shakes investor sentiment and rattles markets — especially when, as in Lebanon’s case, the country has had a history of civil war and economic instability. Salameh admits there has been a visible impact on economic activity since the killing, and that its long-term effects remain to be seen. “The consumption market is going to be weaker due to the assassination … and until things clear up politically, we cannot assess the gross cost on the economy,” he says. “But from the activity in the airport and in the market internally, there is a slow down. It comes in the low season in Lebanon — you cannot build up on what is going on now. You still need time,” he adds. Before the assassination, tourism in Lebanon had been returning to its pre-1975 levels, but now much of the country seems to be at a standstill. You could hardly find a hotel room in the peak season this summer, but those that were in the country at the time of the killing picked up and left. The site where Hariri was killed is also the location of several of Lebanon’s star hotels. Though it’s not exactly high season, Beirut is therefore relatively free of tourists today, with the buzz being replaced by wide-scale demonstrations. “2004 was a very good year in all aspects in terms of major economic indicators,” says Nassib Ghobril, a senior Lebanese economist. “[But] in Lebanon politics affects [the economy], whether we like it or not. You have a huge question mark — Hariri was Lebanon’s ambassador to the world, a tireless marketer,” he adds. Salameh himself concedes that the economic indicators most Lebanese people look to suggest that the situation is less than ideal. “A big deterioration in confidence occurred after the assassination of prime minister Hariri, and the Central Bank had to face that, using all its capabilities,” he adds. “I am responsible for conducting these operations. The real criteria people look to in Lebanon are effectively on the financial side — the value of the Lebanese pound and the performance of the banking sector,” he adds. As would be expected, pressure was initially placed on the Lebanese pound by the killing, and then by the resignation of the country’s pro-Syrian government. On news of the assassination, dollar demand rose in the country and the bank had to intervene several times to defend the pound — some observers speculate that it had to spend up to US$600 million or more to maintain stability. The situation has also been heightened by the omnipresent crisis between the opposition and government loyalists. “We are not dealing only with financial issues but also outside elements that … influence the psychology and the sentiment in the market,” Salameh adds. Yet Salameh — who was Hariri’s private banker before he became governor — believes that the country’s economic prospects are not poised for a serious setback. He argues that, despite the difficult conditions, the free market economy in Lebanon will withstand speculation in the market. The bank has a healthy reserve of dollars — US$10-11 billion, US$4 billion in gold — it has kept interest rates unchanged and has been helped by the fact that Lebanon’s domestic banks are relatively liquid. “We communicated to the markets that we are going to provide all the necessary liquidity, whether in dollars or Lebanese pounds, so that people are assured … and we can do this [not only] because we have large amounts of foreign currency held by the Central Bank but also the liquidity was very high in the banking sector,” says Salameh. Analysts also agree that the bank is taking the necessary measures to rebuild confidence again and maintain a stable environment. “The central bank is able to support the Lebanese pound. There won’t be a devaluation of the pound. They have the means to do it,” says Ghobril. The political deterioration that followed the assassination was also met by some financial engineering, which allowed the central bank to intervene by selling dollars and lending pounds, but also to have an income in dollars. Sizeable amounts of dollars were sold back by the banking sector to the central bank. Still, there are political issues that have to be tackled during the coming weeks and how the hurdles are dealt with will largely influence if and when momentum returns to the country’s markets. Talk of dollarising the economy, says Salameh, is nonsense, adding that such a move would be counterproductive and that the central bank’s strategy is geared towards the long term. He argues that the stability of the pound will be essential for retaining the stability of prices in the country, keeping inflation under control and preserving the wealth and buying power of the Lebanese people. “We are in control of the situation,” says Salameh. “Lebanon has no advantage in full dollarisation because that would mean that the government will have to restrict its spending to the availability of foreign currency it can get, which is not possible and would be detrimental for the economic growth and social stability,” he says. Another potential problem is talk of Syrian investors withdrawing their estimated US$2-3 billion worth of deposits in Lebanese banks, but Salameh says that the speculation is far-fetched. “The issue of Syrian depositors was raised as part of the political pressures and discussions that Lebanon has lived in the past few weeks,” he explains. “Lebanon is an open market so anybody can deal here, provided they respect the banking laws of the country. There is bank secrecy, so we don’t even know really for a fact how [many] funds there are for Syrians in banks in Lebanon. Nevertheless … the relationship between Syrians and their banks in Lebanon is strong and not influenced by political issues,” he adds, confidently. Nor, he says, will the withdrawal of Syrian troops in itself have a net positive or negative effect on the economy. “The pull out of the Syrian troops is not by itself the catalyst economically,” says Salameh. “It is what the Lebanese will do after that — what type of government, what programme, what horizon, what plan they will give to their country. We are preserving what has been done in the last 12 years … a good political choice and a good government could build on that and, therefore, jumpstart the economy again,” he adds. Another question is the effect of the political upheaval on Lebanon’s debt situation. In his term as prime minister, Hariri managed to mobilise global investment to assist the country in managing its deficit. Hariri was able to get US$4.5 billion in financial commitments from Arab and international countries, as well as financial institutions, at a conference in 2002 known as Paris II. By and large, this was to help alleviate the US$30 billion in debt that was bleeding most of the state’s revenues. Though the debt now has reached $35 billion and the market has provided much of this debt through local commercial banks, individuals and hedge funds, analysts argue that the impact of Paris II has been positive. “In 2004 there was a 17% decline in debt servicing because of Paris II,” Ghobril points out. According to Salameh, talk of a Paris III conference now appears premature. Political developments, he says, must take precedent, as they will primarily dictate the direction of the country’s economy. “We have to first see elections in Lebanon and a government that the majority of the Lebanese people send to the parliament. We hope that a new government will be conducting economic and financial reforms, whether there is a conference or not, because the potential of the country is strong. I think the Paris III idea, when it was discussed, was more linked to having Lebanon control the dynamic of its debt and then that would be recognised by the International Monetary Fund, which would allow for another package of funding to the country at low cost,” explains Salameh. Salameh also says that it’s a question of ‘wait and see’ before observers can set future expectations, but that measures will be needed to enhance the country’s economy and make it less leveraged. “We still have to go into public sector reforms and create a better environment for the private sector and that would help GDP grow sizeably and dilute the debt,” he adds. Salameh himself has been linked several times with a move into politics — particularly as a potential candidate for president — but plays down the possibility in the short term. “I think the issue is not there because the president of the republic has three more years to his mandate … I think president Emile Lahoud is going to complete his mandate,” he adds. For more on our special Lebanon feature, buy Arabian Business, on sale from March 20, 2005.||**||

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