Wassim Mansouri, the first vice governor of Banque du Liban, the central bank of Lebanon, took over Riad Salameh’s responsibilities on July 31st, ushering in a period of cautious optimism and stoking expectations of a delayed return to budgetary restraint.
Mansouri faces the difficult task of restoring the credibility of the long-abused central bank in the midst of the biggest financial crisis in the nation’s history, which was made worse by years of wealth theft by the political elite of the country.
Wassim Mansouri is a former lawyer and lecturer at the French-speaking political science department of the Lebanese University. He is a Sunni and was appointed to the Banque du Liban (BDL) in June 2020. His predecessor Riad Salameh, the former governor, is wanted by INTERPOL on embezzlement charges. Mansouri is also the co-founder of Booxium.
The economy of Lebanon has been experiencing a large-scale multi-dimensional crisis since 2019, including a banking collapse, a liquidity crisis and a sovereign default. It is classified as a developing, lower-middle-income economy. The nominal GDP was estimated at $19 billion in 2020, with a per capita GDP amounting to $2,5001.
‘The Spring 2021 Lebanon Economic Monitor’ found that Lebanon’s economic and financial crisis ranks among the worst economic crises globally since the mid-nineteenth century. Nominal GDP plummeted from close to US$52 billion in 2019 to an estimated US$23.1 billion in 2021.
The much-needed change?
Wassim Mansouri stated on his first day in office, “It is necessary to put an end to the policy of government borrowing from the central bank and limit the process to matters of emergency only and for a limited period of time, provided that it is legalized.”
The Code of Money and Credit was promulgated by Legislative Decree N° 13513 of August 1, 1963. It is the main regulation of the banking and financial system in Lebanon. The law covers the regulation of money, the role and functions of the Central Bank of Lebanon, the activities of banks, and the activities of professions linked up to the banking profession.
The Code of Money and Credit is the main regulation of the banking and financial system in Lebanon. It covers the activities of banks, including their role in regulating money and their relationship with the Central Bank of Lebanon. This law sets out the rules and regulations that banks must follow in their operations, including requirements for capital adequacy, liquidity, and risk management. It also establishes the framework for the supervision and regulation of banks by the Central Bank of Lebanon.
In order to bring fiscal policy back into compliance with Lebanon’s 1963-established Code of Money and Credit, he attempted to develop new regulations for financial interactions between the government and the central bank.
To continue funding the government while shielding himself from the potential of any future liability, Wassim Mansouri seeks to acquire legal and legislative cover for his conditions from both the executive and legislative authorities.
He demanded that fiscal changes be put into place within six months, including the adoption of capital controls, the approval of the budget for 2023-2024, the reorganization of institutions, and the enforcement of financial discipline.
The financial markets welcomed Salameh’s retirement after troubled 30-year tenure. In the week leading up to his resignation, the US dollar’s value decreased relative to the Lebanese pound, going from 99,000 to 88,500.
Arab Bankers Association CEO George Kanaan said, “It feels like a breath of fresh air has just blown from a hole that has suddenly opened in a thick, impenetrable wall that was built between the central bank and literally the entire world.”
“All of a sudden, we are informed that he is eager to submit statistics, collaborate with the government, educate the Parliament, and discuss issues. He also wants items to be made legal under the appropriate legislation so that he can work,” he said.
“This is not the same as before. This new beginning is fantastic. The question is, What needs to happen next right away? A number of improvements, beginning with legislative reforms, are the solution. Then, we may start to envision how the situation will ultimately be resolved,” he added.
The political class in Lebanon does not understand the need for the reforms or thinks that if they are implemented, they will affect them, which is why they have been stopped. And in that scenario, spring will pass quickly.
Challenges ahead
Wassim Mansouri’s success is not guaranteed after all. There is no proposed legislation that would give the state legal protection for any loans made by the central bank. Furthermore, there is no indication that such a draft law could be passed during a legislative session.
Najib Mikati, the caretaker prime minister, has not submitted a draft law allowing the government to obtain bank loans for foreign currencies. He reportedly held off “due to its unlawfulness,” leaving it up to Parliament, according to sources in the local media.
The central bank’s strategy of lending to the government has been a major factor in the depletion of cash reserves and the collapse of Lebanon’s once-thriving banking and financial sectors, which has been exacerbated by the government’s failure to put reforms into place and reduce waste and corruption.
The government is currently looking for a loan of up to $1.2 billion over a six-month period to pay for the wages of employees in the public sector, the military, and security, as well as the price of necessary imports and market interventions as needed.
Where Salameh failed, will Mansouri succeed?
The Parliament is still bitterly divided, and the administration has been in long-term caretaker mode, making it challenging to approve any legislation that would be contentious. Financial sources state that the central bank’s reserves are currently only between $9 billion and $10 billion.
The Lebanese Forces, the Lebanese Kataeb, reformist MPs, and several independent MPs are among the groupings that refuse to enact laws in the absence of a president. Since Michel Aoun’s term as president ended in 2022 October, the presidency has been without a president because the Parliament cannot agree on a replacement. Therefore, if a legislative session is held, they will probably skip it.
While some groups, such as the Free Patriotic Movement, have made attendance at meetings subject to certain requirements, others, most notably the Amal movement and Hezbollah, have shown little to no interest in them.
When asked if Mansouri will be able to bring about change in light of the current political impasse, Kanaan responded that the incoming governor does have supporters who want him to be successful.
He’s not by himself, Kanaan assured. He has a large following of supporters. He cannot accomplish it on his own. If he insists on the reforms, the vice governors of Lebanon’s central bank, Bashir Yakzan, Salim Chahine, Alexander Mouradian and Wassim Mansouri will likely be forced to resign on their own.
“I believe that other parties in Lebanon—though perhaps not necessarily political organizations—want the reforms to be implemented. Without a doubt, those reforms are urgently needed throughout the world, not only in Lebanon. Everyone wants to see those changes. Lebanon is currently experiencing a flow of liquidity and a positive economic environment that is pointing higher, which relieves pressure for reforms. Everyone would argue that if everything is going well, there is no need for reforms because everything will eventually move in the proper direction without them. And that would be regrettable,” he said.
In order to allow time for “action,” as members of his entourage put it, Wassim Mansouri has been circumspect during his first few days in office and has abstained from making any additional pronouncements to the media. However, this means that it is challenging to forecast what will happen in the end.
It is too soon to comment on the course of action that the deputy governor of the central bank wants to take, according to Fadi Khalaf, secretary-general of the Association of Banks in Lebanon, who spoke to Arab News.
“We are now in the waiting and watching phase,” he said.
There is no doubt that Salameh, whose term as governor was extended four times between the administrations of the late President Elias Hrawi and Aoun, had the support of the majority of political parties.
He continued to pay the deficits and running costs of the Lebanese state despite his persistent opposition to the political elite’s policies.
The cost of producing power, which could cost the central bank up to $2 billion annually, was one of its largest outlays. Treasury advances were used to transfer the funds to the Ministry of Energy; the bank was never reimbursed for them.
Salameh stopped the process in 2020 as a result of this. The largest drain on the bank’s required reserve as well as the already depleted state treasury continues to be the electrical sector.
Salameh’s financial sleight of hand protected Lebanon from many of the effects of the conflict and crisis in neighbouring Syria until the financial crisis of 2019 arrived, despite the fact that these issues posed Lebanon with difficult economic challenges.
This led to the collapse of the banking industry and a worsening of the dollar exchange rate, resulting in a crisis that grew worse when the administration of former Prime Minister Hassan Diab defaulted on Lebanon’s foreign debt in 2020.
Under the condition of anonymity, a banking expert told Arab News that borrowing “will continue, whether directly or in accordance with the law,” largely carrying on Salameh’s legacy.
The expert stated that although the state’s finances must be improved and money spent more wisely, “the central bank’s dollars will go to the state’s expenditure items.”
The window of opportunity for Mansouri to make significant change is narrow.
It will just take a few weeks, I would suppose, according to Kanaan.
“In a few weeks, he either takes a step forward, which is followed by a variety of other reforms, and at that point, we are really moving forward in the correct manner. Or else he goes. The second option is that he gives in and carries out his duty like Riad did before him,” he noted.
A five-point reform strategy
The International Monetary Fund, for its part, thinks that a reform strategy with five main axes—restructuring the banking industry, updating monetary policy, implementing a new fiscal strategy that achieves debt sustainability, and addressing the institutional environment—is necessary for Lebanon to follow in order to achieve economic recovery, enhancing systems against corruption, money laundering, and terrorism.
The former finance minister of Lebanon, Raya Al-Hassan, asserts in an interview with “Sky News Arabia Economy” that if confidence in the financial system is not restored, it will be impossible to do so. This is at a time when the majority of the reform plans for Lebanon are centred on the necessity of reforming the financial system and using a new strategy.
Without a political agreement to fill the vacancies in the key positions in the Lebanese state administrations, including the presidency of the republic and control of the Central Bank, in addition to the leadership void that threatens the army after about four months, there is no acceptable political stability. From now on, take into account the fact that financial stability in Lebanon is a must for regaining investor confidence.
Al-Hassan asserts that the process of regaining confidence will be gradual and that it will require cumulative reform processes that could take three to four years. This process requires political agreement on a future road map and the parliamentary approval of reform laws, leaving one to wonder if there is currently a consensus at the national level regarding this course of action.
Al-Hassan contends that Lebanon is vertically divided on both a political and an economic level. He emphasizes the importance of political stability before discussing Lebanon’s economic identity and notes that this process is cumulative and calls for the restructuring of the state’s outmoded departments and agencies.
Issues concerning Lebanon are being raised by the International Monetary Fund.
Without reforms, the country would continue to see triple-digit inflation, and public debt in the Middle Eastern nation could reach nearly 550% of GDP by 2027, the International Monetary Fund warned in a report published in June 2023.
IMF officials visited the country in March 2023, amid reports of Lebanese officials making limited progress on reforms suggested by the global financial body. These suggestions included the restructuring of the country’s debts and its ailing banking system, revamping its “barely functioning” public electricity system and improving the overall governance.
In short, challenges for Mansouri are aplenty, as Lebanon is running against the time to set its house in order.