Lebanon has seen its share of hardships, from civil war to conflicts in neighbouring countries. Over the past two and a half years, tensions in Syria have seen Lebanon absorb 1.2 million refugees and have affected its economic growth. This year, GDP will expand by 2%, up from 1.5% in the previous couple of years but still a far cry from 2010’s impressive growth rate of 7%.
Central bank governor Riad Salameh – one of the longest-serving central bank governors in the world, having held the position since 1993 – has steered the economy through the consequences of external conflicts but also through a domestic political crisis. The Lebanese government resigned in March and elections, which had been scheduled for June, were postponed to November 2014. President Michel Sleiman has called for a national unity government to be formed, but so far political struggles continue.
Angus Blair, president of Signet Institute – a think-tank providing information about the business environment in the Middle East and North Africa – praises Salameh’s skill at navigating the difficult waters of the internal and external crisis. “Through all of this, he’s done a tremendous job. In the end, if you want to recognize someone, it is to recognize that they’re doing a damn good job in a tough situation,” says Blair.
“They’ve had the most difficult circumstances: a very high budget deficit, continuing political problems, and it’s the only real state institution outside the army that people believe in. And it’s always been the case, since the Civil War. Throughout the Civil War, the central bank governor used to sleep most of the time in the central bank building.” —Antonia Oprita
EM INTERVIEW The launching of a stimulus package to boost housing and student credit as well as lending to small and medium enterprises, to research and development and to environmentally-friendly sectors is what governor Riad Salameh sees as the central bank’s main achievement this year. “This stimulus package was successful and helped the economy maintain positive growth despite an adverse political and security climate. Lebanon should have a real growth of 2.5%,” he tells Emerging Markets.
The turmoil in the Arab countries, the “deep divisions” that led to the government’s resignation and security incidents like car explosions and street fights are among the difficulties the economy has had to face in the past year, according to Salameh.
“At the same time, our banks that have expanded in Syria, Egypt and Cyprus were exposed to the risks of these countries that underwent economic and financial crises,” he says. “However, the central bank was able to maintain markets’ confidence, while the Lebanese pound and interest rates remained stable.”
Salameh says the conservative banking model in Lebanon – where retail and commercial banking is separated from investment banking and where banks have a liquidity ratio of 30% of deposits – as well as steps taken by the central bank to improve the quality and liquidity of its balance sheet were the main tools that helped overcome economic difficulties. The main challenge going forward is maintaining economic growth, especially if fighting in Syria continues.
“Lebanon is a small country, yet it has to cope with a large number of refugees,” Salameh says. “The GCC countries’ ban on travel to Lebanon adversely affects consumption and investment in Lebanon and thus lessens employment opportunities and worsens the social climate. The central bank will have to face a continuous challenge: that of enhancing local demand without causing inflation.”
Inflationary risks “are real”, he warns, and major global central banks will have to raise interest rates and launch new tools to neutralize the effects of the liquidity they injected in the world markets to combat the financial crisis, he says.
For Salameh, the biggest source of insecurity facing the global economy today is the Federal Reserve’s plan to diminish its quantitative easing programme. “The Fed tapering can engender liquidity problems for countries and banks in emerging markets. It can lead to currency volatility and to higher interest rates, thus worsening the economic situation,” he says. —A.O.