Lebanon has taken a major step towards resolving its economic ills following a deal reached late May by rival Lebanese leaders to end 18 months of political conflict that had pushed the country to the brink of civil war, the country’s central bank chief has said.
“This agreement leaves no opening for more dispute,” Riad Salameh told Emerging Markets in a telephone interview. “The resumption of constitutional institutions is now possible. Through these institutions Lebanon can now address the major economic issues facing the country, namely debt and inflation.”
His comments came as Lebanon's new president Michel Suleiman has started consultations with lawmakers on forming the country's national unity government, agreed to under an Arab League-brokered deal that resolved a prolonged political crisis.
The governor added the agreement had been “well received” by domestic and international markets. While he admitted that parliamentary elections – tentatively scheduled for May 2009 – might divert politicians from economic issues in the near term, “generally the expectation is that [economic] reforms will go through,” he said.
“The focus on the economy is a major issue since it has been the biggest casualty of the past three years of political instability,” Salameh said. His optimism echoed that of finance minister Jihad Azour, who said he had confidence in Lebanon’s economy and “the Lebanese have proved that they could tolerate difficulties.” He added: “Our economy has so much potential, and the Lebanese are eager to see economic movement again.” The May 21 agreement ended a standoff with Hizbollah militia that paralyzed government and boiled over into the worst violence in Lebanon since the 1975–90 civil war, leaving at least 67 people dead.
Salameh said that throughout the recent stand-off, there had been no significant capital flight from Lebanon. He said there should be no concern about the national currency because Banque du Liban (central bank) has more than $14 billion in gross foreign currency reserves. He said that “the level of credibility” in the central bank had remained “strong” throughout the conflict.
There has been little excessive demand for dollars in the market – a reflection of a highly dollarized economy, with more than 77% of bank deposits denominated in the US currency. As a result, the Lebanese are not excessively concerned about their savings.
Lebanon rolled over $875 million of Eurobonds in April despite the difficult political and security conditions, and analysts remain upbeat about the economy’s chances of withstanding another political crisis.
The central bank also issued a $1 billion, five-year certificate of deposit “to assure the market that if the government had need for foreign exchange, borrowing was available”, Salameh said.
“There was no panic because the majority of Eurobonds are held by local players who are very familiar with the Lebanese situation,” said Nassib Ghobril, head of research at Byblos Bank. “There’s no pressure of material significance on the currency, and the fixed income markets are stable.”
The market is highly attuned to political developments. The resumption of talks on May 16 gave a kick to the Beirut Stock Exchange, with the bellwether Solidere stock rising by 12% in a single day. Following the announcement of a deal between rival factions, the yield on five-year Eurobonds dropped to 8.6% from 9% in secondary markets, Salameh said.
He said the nation’s main economic tasks are to ease unemployment and combat inflation, which has hit “10–12% year-on-year”. But he added that rising inflation will help cut Lebanon’s $43 billion debt burden, equivalent to nearly 175% of the GDP.
Yet doubts remain about the ability of a new government to push through vital reforms: the May agreement was widely seen as a victory for Hizbollah, giving it veto power over all government decisions. The group in effect operates a ‘state within a state’ in key parts of Lebanon with its own police, army and social services.