As the Central Bank of Lebanon, BdL has been a key actor in the unfolding of the crisis, by funding an insolvent state, trapping depositor reserves and enabling an unsustainable Ponzi scheme.
While the Parliament is empowered to determine the official Lira rate (Code of Money and Credit (CMC) Articles 2 & 9), the BdL is entrusted to ensure monetary stability and has the right to use means needed to keep the peg – as per Article 70(1).
The peg policy choice placed BdL in a spot that justified high deposit interest rates to attract capital inflows and fund the current account deficits, given the reality of currency and credit risk premia.
Over the years, the BdL expanded its balance sheet by accumulating claims on the government and liabilities to banks. BdL used unconventional measures to sustain the currency pegs amidst persistent balance of payments deficits, earning a lot of praise in the process prior to the crisis.
BdL’s lending to the state exceeded the authorized limit of 10% of the state budget revenue of last 3 years (Article 88). Article 91 elaborates that, only in cases of absolute necessity and unusual seriousness, could a process be initiated to lend to the state beyond that limit, a mechanism not respected by BdL.
After remittances dropped in 2015, BdL’s financial engineering (FE) helped the government issue $3bn eurobonds in 2016, and $10.2bn eurobonds in 2017 and 2018.
With the FE, BdL paid banks effective interest rates of about 15% to fund LBP-debt and BdL CDs. Banks made windfalls from these round-trip deposits, with theoretical exchange rate risk covered up by the unsustainable pound-to-dollar peg.
The FE was intended to provide FX liquidity for the BDL, enable the government to continue spending, and sustain short-term bank profitability. While the FE didn’t in and of itself cause the crisis, it delayed it and ultimately caused larger losses on commercial bank reserves at BdL.
Today, the BdL claims to have hard currency reserves of roughly $16bn. When approximately $60bn of unpayable dollar-denominated deposits from commercial banks are taken into account, the BdL is insolvent.