As angry protesters attack banks across Lebanon, the new government in Beirut and the central bank’s governor remain at odds over tackling the economic crisis.
Lebanon’s post civil war financial structure, described as one of the extreme neo-liberal systems, has been in the throes of an economic crisis since 2018. The crisis has led to a confrontation between the country’s financial elites and the new technocratic government.
One of the country’s top and most powerful bankers, Riad Salame, who has been one of the longest-serving central bank governors across the globe, and Hassan Diab, a computer engineering professor, who is now in the office of the prime ministry, are clashing with each other openly, evoking memories of Lebanon’s bloody history of civil war.
“Apparently, there is a war between the financial sector and the government in Lebanon. The central bank governor appears to be the official representative of the financial sector in a country, where too many banks function compared to the population,” says Gokhan Ovenc, an assistant professor of economics at the Istanbul University.
In March, the Diabi government defaulted on $90 billion of debt, signalling growing problems and divisions between the government - which wanted to default - and the central bank, which advocated to continue paying debts.
Last month, the International Monetary Organisation (IMF) announced that Salame’s central bank lost nearly $49billion, which is equal to more than 90 percent of the country’s total economic production in 2019 according to World Bank numbers. The losses also amount to “the total value of the deposits held by the Banque du Liban from the country’s commercial banks,” according to the Financial Times.
The central bank’s losses and the government default escalated tensions between Diab, who has instrumentalized street anger towards bankers, and Salame, a politically untouchable figure, facing as many as seven prime ministers before the current premier.
“The government is able to use middle class anger toward (Salame) because it has become poor since last year. The middle class lost at least half of its wealth in the past year, which is a significant loss for it,” Ovenc told TRT World.
The degradation of the middle class would be a nightmare for any country’s economy.
“The rich usually invest abroad or put its money in foreign bank accounts. The poor have no money to invest anyway. The middle class ensures the sustainability of the banking sector, investing in the country and putting its savings in the banking sector,” Ovenc says.
In Lebanon, lenders have imposed restrictions on withdrawals with growing protests, which began in October.
When the banking sector sinks in a crisis like Lebanon is experiencing now, the middle class, historically powerful in the country, shows its anger toward institutions they feel are responsible for the losses of its hard-earned financial earnings, according to the economist.
Salame vs. Diab
Salame has governed the Banque du Liban (BDL) since 1993, with an import-based financial model highly dependent on the country’s banking sector, where bankers earn heavily by lending to the government at high interest rates.
But the system, which has kept the Lebanese pound pegged to the dollar, is also able to attract foreign currency, particularly dollar deposits from commercial lenders to help pay back government spending and balance the trade deficit, ensuring monetary stability until last year.
With the growing protests, the flow of foreign currency, particularly from the rich Lebanese diaspora living in the US, Canada and Europe, has stopped. This has hit the country’s currency, whose pegged value to the dollar has not changed for a long time - this, a sign of monetary discipline.
In January, the Lebanese pound recorded huge losses from its pegged rate of L£1,507 to more than L£5,000, triggering various problems across the board from rising inflation, which has doubled food prices and caused high unemployment.
The worsening economic conditions sparked anger on the street towards banks as protesters began torching Lebanon’s famously glitzy-looking banks. Diabi, one of the less-corrupt political figures, demanded Salame reform the banking sector, which has accumulated record losses this year.
When things fall apart around Salame, his famous “financial engineering” appears to be a kind of Ponzi scheme, "which has benefited the banking sector and left the rest of the Lebanese to foot the bill," according to Triangle, a Lebanese think tank.
“Riad Salame has all the secrets of the republic,” a top executive told FT, referring to the fact that Salame has enough knowledge to end any high-profile politician’s career.
But Diab seems different.
“In a way he’s a time-bomb for [the politicians]. The only one who doesn’t care is Diab,” says an executive, who wants to stay anonymous, describing the temerity and decisiveness of the prime minister.
If the war between Diab and Salame continues, IMF aid could also be impossible to secure for the country, leading the top monetary organisation to assess Beirut as a divided state, which cannot implement any financial support program provided to it.
“Not accepting the diagnostic simply means that the IMF [will] walk away,” said Henri Chaoul, a banker who previously advised the Lebanese government in the IMF talks.