Red Flags for the Local Financial System - Lebanon will soon be out of the global financial system if no corrective measures are implemented

Opinion Analysis by Yara Dally, Visiting Contributor

April 21st, 2021

Lebanon will soon be out of the global financial system if no corrective measures are implemented. 

Correspondent banking relationships (CBRs), which enable the provision of domestic and cross-border payments, have almost been terminated in Lebanon. Lebanese Central Bank’ governor Riad Salemeh expressed in a memorandum on March 31 to the Public Prosecutor, Judge Ghassan Oweidat “Negative Shocks” prevail within BDL and foreign lenders Relationship. 

Some of the correspondent banks are closing. Big names such as United States based Welles Fargo, United Kingdom based HSBC, and Denmark based Danske Bank had stalled dealings with BDL by closing Central Bank’ accounts in dollars, British sterling, and Danish krona, respectively. The Canadian Imperial Bank of Commerce also handed back BDL’ deposits and ceased further transactions. While the Central Bank of Lebanon still has correspondent banks in the European Zone and America, there no longer exists correspondent bank dealing with the Swedish Krona.

This implies that the Lebanese Central Bank will no more be able to import fuels, food, drugs and pharmaceuticals among other things, given that correspondent banks execute payments in foreign currency on behalf of the Central Bank of Lebanon. 

In figures, Lebanon’s total imports as reported by Customs Higher Council had declined by 46.6% from being USD19,239 million in 2019 to USD10,078 million in 2020. Followed by this discontinuation of the relation between BDL and the corresponded banks, surely imports will decrease further. 

Banque du Liban will no longer be able to perform its foreign transactions. Taking into account that foreign currencies transfers are exclusively done by correspondent banks, individuals, investors, traders and so on will not be capable of executing any international transfers. 

While transfers could be done via alternative indirect institutions, it would be expensive to achieve, and it would be a heavy burden on the imports, investment or money transfer.   

In Lebanon’s case, investors and traders will always find a way to fund their expenditures as alternatives are present.  In case of BDL, it’s opening LCs for ministries and governmental bodies such as Ministry of Energy and Water and EDL. BDL has international obligations to pay like payments for ambassadors, and the United Nations membership. 

Governor Riad Salemeh emphasized in his memorandum that JP Morgan is still offering, for now, letters of credit to finance BDL’s imports. Yet, it rejects to open a credit ruling in favor of the German Company “Combilift” for the removal of containers that includes life-threatening chemicals. Citi bank, Commerzbank and New York Mellon are still in business too. 

 “Letters of Credits issuances had been diminishing from 2017. Vendors were unable to access to their foreign currency deposits, in which some foreign merchants demand payments in advance that could not be done unless depositing fresh US dollars to their accounts,” a trusted source within the foreign banking industry tells The Phoenix Daily. 

He adds, “This drop in the banking activity aside from the reputation risk and the accumulation of economic, banking, and political crisis had contributed to lessening relationships between the Central Bank of Lebanon and correspondent banks.” 

According to Bank Audi’ report; documentary L/Cs for funding import activity had decreased massively with 93.9% in 2020 to becoming USD324.9 million from being previously USD5657 million in 2019. By the same token, documentary collection, which is a document issued at the request of the exporter from his bank, had decreased by 62.2% in 2020 to becoming USD308.8 million from being previously USD814.1 million. As of 2019, documentary letters of credit are considered one of the financial means in banks. They are defined as a paper issued by the bank at the request of the importer to pay an amount within a certain period of time, in exchange for obtaining services or accepting the bank’s acceptance of payment in cash or bank papers.

As per the Governor, three cardinal reasons had brought to the disconnection of these agreements. The first being the sovereign default on March 9th, 2020 where Lebanon did not repay it’s USD1.2bn Eurobonds. As well, the deleterious political campaigns with intention to ruin BDL reputation along with the ruinous juridical allegation that raised fuss on a national and international level. The latter elevated the doubts among correspondent banks and urged them to cut the relationship with the Central Bank of Lebanon. 

It’s also worth noting that the relation with commercial banks is not steady either. Bank of America and Deutsch Bank have previously reduced their activities with local banks.

Lebanese banking sector is threatened by high risks as a result of a series of downgrades by all major sovereign credit rating agencies, accusations from the international community for money laundering and juridical allegations. Lack of confidence in the Lebanese Republic has increased upon failure of government formation and in fear of imposing more US sanctions on political parties.