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French Version

What's the future for Lebanon's Central Bank ?

Changes need to be made to reflect developments in economic theory

Analysis by Dr. Louis G. Hobeika

The Lebanese Central Bank has been operating efficiently for many decades. Changes however, have to be made soon to reflect developments in economic theory and in applied central banking in Lebanon and internationally.

Lebanese laws granted the Central Bank independence within government, and not from it. Independence should be however, strengthened, in practice, to minimize all external influence on its decisions. Central Banks, around the world, differ quite remarkably in functions, size, efficiency and status. Could we learn anything from these rich experiences?


Of the original G7 Central Banks, only four have responsibility for monetary policy decisions (U.S., U.K., Japan and Canada). There are five, including the European Central Bank (ECB), which have interest rate setting powers. Of those five, two are responsible for both defining price stability and maintaining it. All seven banks are lenders of last resort, while the ECB is not. All have some kind of financial stability responsibility. Four of the G7 Central Banks are not the statutory authority for banking supervision. As for note issuance, three issue notes in their own names. The U.S. Federal Reserve Board issues notes in the U.S. Treasury's name. Three European Central Banks issue notes in the name of the ECB. The Lebanese Central Bank issues notes in its own name but has been trapped in an imposed pegged exchange rate policy. It has effectively linked our monetary policy to that of the U.S. In fact, economic policy tells us that we cannot have in an open economy simultaneously exchange rate stability, monetary policy autonomy and freedom of capital movement known as the "impossible trinity." Lebanon lost the second criteria to preserve the other two. Shifting to a different anchor than exchange rate, such as an inflation target would restore the needed autonomy of our monetary policy.

Size and Efficiency

The Economist magazine regularly publishes a list of number of employees of Central Banks per 100,000 inhabitants. The U.K. is between two and three, Australia and Japan are at around four, the U.S. is at around eight and the euro area is at 17. [The figure for Lebanon is 32.] Lebanon's indicator surely beats western standards and could imply that a disguised unemployment policy is being implemented by all public sector institutions. Central Banks differ too on the pay of their governors. Alan Greenspan departing chairman of the Board of Governors of the Federal Reserve of the United States has an annual salary of $180,000, Jean-Claude Trichet of the ECB gets 585,000 euros while Italy's new governor Mario Dragui earns $700,000. Clearly the salaries in the Lebanese Central Bank are far higher than those of other civil servants and reach, or go beyond international standards. Lebanon should review these salaries and generous benefits in this period of very tight national financial constraints. [The current salary of the governor of the Central Bank, Riad Salameh, is close to LL15 million or $10,000 a month. Up to five years ago, the package was worth LL40 million ($26,666) a month but Salameh voluntarily cut his own salary. Several of his subordinates earn much more than the governor.]


According to Howard Davies, director of the London School of Economics, Central Banks status is changing in four directions:

1. Introduction of inflation targets, beginning in New Zealand in 1989. Indeed 22 countries have now adopted inflation targets. Ben Bernanke, who is to replace Greenspan at the Fed, has written extensively on the topic. Worldwide now, it is the regime to beat and we should seriously think about it in Lebanon.

2. The changes in the organization of financial regulation. The most radical change has been the establishment in several countries (e.g. Norway, Sweden and Denmark) of integrated financial regulators outside the Central Bank. In fact, the financial sector has become more interdependent with the growth of financial supermarkets. In Lebanon, and as a first step, we should set banking supervision outside the Central Bank to avoid any negative effects of possible laxity in supervision of the health of the Lebanese pound. As a second step, the integration of supervision of all financial sector institutions outside the Central Bank should be implemented.

3. The development of new definitions of the Central Bank's financial stability role. It is difficult to be both an objective independent supervisor of financial institutions and a promoter of their competitiveness. Central Banks can no longer maintain that financial stability is only about banking supervision. They need to have a broader perspective. For Lebanon, coordination meetings between the Central Bank and the Finance Ministry should continue in order to strengthen financial stability at all times.

4. The growth of public expectations of Central Banks especially in relation to their accountability and transparency. Governors speak now regularly in public, publish financial stability reviews and face legislators for questioning about their work and objectives. "Decent obscurity" is an attitude of the past. Lebanon's Central Bank should clearly explain to the public what caused the Al-Madina collapse, as well as the real reasons behind the many banking mergers and acquisitions over the last ten years. We require the strengthening of the transparency of the Lebanese Central Bank. The strong links between large banks and the Central Bank could imply some conflict of interest and therefore should be avoided by making the process of selection of governors more transparent. Any governor, in any country, should not act only in the large banks' financial interest. Charles Calomiris, finance professor at Columbia University wrote that Greenspan supported the two most important reforms in U.S. banking, i.e. interstate consolidation and expansion of bank powers which effectively favor large banks. In his words, Greenspan was however a skilled economist, a tactician and a rhetorician which helped him preserve the independence of the Fed. Clearly, Greenspan's qualifications are well needed all over the world.

Dr. Louis G. Hobeika is professor of economics and finance at Notre Dame University - Louaize. He wrote this analysis for The Daily Star.

Beirut 01-02-2006
Louis G. Hobeika
The Daily Star

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