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French Version

Lebanese central bank retained credibility despite crisis

Salameh touts country's commitment to honoring its debts, maintaining stable currency

Editor's Note: Below is the full transcript of central bank governor Riad Salameh's remarks delivered Friday, at a conference addressing US-Lebanese trade relations.

As a central banker, I should not show emotions. Yet, let me admit that I feel happy and honored to be among you tonight. At a recent senate hearing, Mr. Alan Greenspan [former chairman of the US Federal Reserve] was talking about the future levels of interest rates. A senator understood what Greenspan was saying and told him that the rates would then be lower. Greenspan replied that if the senator had understood what he was saying, then there was something wrong with his language.

Central bankers like to have a complex language. Nevertheless, I will strive to be as clear as possible.

The central bank has operated in a difficult environment, especially in the past three years: assassinations, especially of Prime Minister Rafik Hariri, who was considered a pillar of financial stability in Lebanon; the Israeli aggression on Lebanon, the Nahr al-Bared conflict; street fights, car explosions ... all this, in a country with no growth except in its debt.

In this environment and as the results have shown, we have been able to maintain a stable currency and to develop our banking sector but more important, we have built up credibility and trust. Some would say that there is one way to build a reputation in the market place. Simply, do not pay your bills.

Lebanon chose another avenue and has never defaulted on its debt.

The central bank was instrumental in achieving this, by finding the means to procure the necessary liquidity in all currencies.

The government and the central bank have continuously rejected propositions to default in order to cancel the debt or to devaluate the currency in order to decrease the local debt. We stand committed to honor our debts and to maintain a stable currency. We have the means to do it. This policy, this commitment and these achievements, despite a difficult environment, helped the central bank develop its balance sheet and reach historical highs in its foreign currencies liquidity which today stands at around $17 billion.

If you add to that our stock of gold, our properties and our holdings in companies, our balance sheet would add up to approximately $27 billion, almost as much as our estimate for the GDP at the end of this year. Real growth will register [a] 5 percent [plus] with an inflation of 14 percent by year end.

This situation and the decline of interest rates on the US dollar triggered a continuous demand to buy the Lebanese pound, bringing the level of dollarization in deposits in the system from 79 percent in august 2007 to 73 percent currently.

The banking sector has seen its deposits grow substantially. Counting in its foreign branches, the size of deposits is today four times that of our economy.

Allow me to remind you that between 1995 and 2004, 33 banks were helped to exit the market through mergers or auto-liquidation.

The central bank had developed financial engineering to help the merging bank absorb the cost of the merger.

In this process, depositors' money was fully preserved.

The central bank will not let any bank fail. This statement is not new but in the past it used to draw some criticism based on the principles of "no intervention" as the market forces should correct imbalances.

Today, this statement will attract much less criticism as we have seen the US, the UK and other European countries prevent their banks from defaulting even when it necessitated the use of contributors or central-bank money, which we, in Lebanon, have never done.

Four years ago, a circular issued by the central bank prevented banks from investing freely in structured products. As a result, the credit crunch did not reach our banks as they have no positions and thus no losses in the sub-prime instruments.

Moreover, we have recently issued a circular limiting banks to lend only up to 60 percent of the cost of a real-estate project in order to pre-emptively protect the financial sector from excessive speculation that could end in a bubble with negative impact.

The prices of assets in Lebanon have appreciated substantially and on average by 40 percent since the beginning of the year. This was the result of real demand essentially from Lebanese working overseas.

The Lebanese stock market although small, advanced by 40 percent since the beginning of the year, and did not decline as much as other stock markets in the region, which witnessed sell-offs recently.

What Lebanon needs now is productive investments which can create more job opportunities and improve the level of salaries. Lebanon is renowned for quality in its human resources with competitive wages.

The government and the central bank developed many strategies to allow inexpensive credits and to enhance investments in productive or technological sectors.

Other initiatives have helped the banking sector and the country in general.

Lebanon is fully committed to fight money laundering and yet [determined] to preserve banking secrecy. The international agencies and the FATF (Financial Action Task Force) have accepted our law in fighting money laundering under these principles, and we shall continue our efforts to abide by the rules required to be more integrated in the world economy.

Lebanon ,which is abiding by the Kimberley agreement, which is about to vote a law to join the UN protocol on fighting corruption, has adopted the criteria of Basil II and the new principles on international accounting that will have to be applied gradually.

Winston Churchill once said that under capitalism, people have more cars while under communism, people have more parking spaces.

Obviously, from what you see in Lebanon, our country since its inception has opted for a market economy and is committed to free enterprise and the freedom to deal in any currency and has always respected the freedom of transfers and the private property.

These are principles that have unanimous adherence from all parties. The central bank has adopted and will continue to adopt pro-market policies and will ensure price stability with market tools without resorting to administrative measures.

This is essential to know and to believe in a country that enjoys yearly remittances amounting to $6 billion, the highest in the world per capita.

Our markets have shown resiliency in difficult times. They can do wonders in peaceful times and Lebanon could enjoy high growth rate which would decrease the debt to GDP ratio. Strong growth is the only remedy to decrease the vulnerability caused by our rising debt. The central bank will develop all its capacities to help such growth.

Churchill also said "savings is good, especially if your parents did it for you."

Politics and wars destroyed our savings but the successful expansion of the Lebanese abroad, their attachment to Lebanon and a good banking sector are reconstituting these savings quickly.

Beirut 15-09-2008
The Daily Star

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