Economy
Lebanon Takes Emergency Measures to Ease Economic Crisis

(Bloomberg) –Lebanon’s central bank took emergency measures Wednesday in an attempt to ease the worst financial crisis the country has faced in decades.
Banque du Liban, as the central bank is known, imposed a temporary interest-rate cap of 5% on dollar-denominated bank deposits and 8.5% on local-currency deposits received or renewed after Dec. 4, according to a circular posted on its website. It said the decision must be reflected in the pricing of benchmark lending rates by local banks.
The central bank also said it would temporarily pay 50% of the interest it owed banks for dollar deposits and dollar-denominated certificates of deposits in Lebanese pounds. Banks will also be paying 50% of interest on foreign currency deposits in Lebanese pounds. The measures will be in place for six months.
Read: Cash-Strapped Lebanon Turns to UAE for Financial Support
Lebanon has been convulsed by weeks of nationwide unrest that’s toppled a government and raised investor concern that the country, one of the most indebted in the world, might struggle to pay bondholders.
Banks have already imposed a ban on transfers of money abroad and a strict cap on cash withdrawals in dollars. As it seeks to preserve its dwindling stockpile of foreign currency, the central bank is rationing supplies of dollars to cover the import of fuel, pharmaceuticals and wheat. A parallel exchange rate surfaced after the shortage of dollars forced importers to turn to money changers for cash to finance their shipments.
The central bank is also considering issuing a circular that would formalize the restrictions set by banks, primarily the ban on money transfers, according to a document seen by Bloomberg.
Reducing Liabilities
“The circular effectively reduces the growth of U.S. dollar liabilities of the central bank and commercial lenders,” said Jihad Hokayem, an economist and university lecturer.
Central bank reserves dropped by nearly $800 million in the first two weeks of November alone. Lebanon’s usable reserves are projected to drop to $19.2 billion by end-2019, from $25.5 billion a year earlier, according to S&P Global Rating, far below the threshold it says is the generally accepted minimum adequacy requirement.
Banks are crucial to the country’s financial model. To keep its lenders stable and defend the dollar peg, Lebanon relies on inflows from the millions of its citizens living abroad. However, capital inflows needed to finance the large current account and fiscal deficits have slowed as confidence has dwindled; outflows have gathered pace.
As the crisis deepens, the president set Monday for the start of formal consultations with parliamentary blocs to name a new prime minister. Saad Hariri, who resigned in October in the face of mounting protests, has said he would not return as premier and favors a government of experts.
Read: Meet the economy that the IMF sees growing 86% in 2020
The Iran-backed Hezbollah movement and its allies have been pushing for political representatives in a future cabinet alongside independent experts to appease the protesters. Signs of an agreement among political parties on businessman Samir Al-Khatib to form the next government have emerged in recent days.
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