Governor of the Central Bank Riad Salameh has been widely credited with steering a prudent monetary course during his time in office. Now with Lebanon on the verge of a new chapter in its history, Salameh talks to Executive about his confidence in people power, the outlook for interest rates, Basle II compliancy, and the continued stabilizing role of the central bank in a period of national change. He also warns that it is too early to predict a contraction in Lebanon’s economic growth

The IMF readjusted its GDP growth expectation for Lebanon to 4% in 2005 and even less (3.5%) in 2006. What is your expectation for GDP development in 05 and 06?

It is unrealistic to base expectations on the past two months. These were crisis months and any attempt to read into them future predictions might give the wrong picture. We need to wait for the summer season. INSEE [the French National Institute for Statistics and Economic Studies] will make a proper assessment and then release figures.

So the IMF was hasty in its forecasts?

As I said, these were devastating months for the country. The Central Bank needs time to really know what weight to give this period?

In February 2005, gross public debt increased by 5.9% in comparison to Feb 2004. Can one even dare to envision an end to the debt spiral?

One area in which Lebanon is vulnerable is in the growth of its debt. This and other matters of fiscal reform are the priority of the government. It is feasible that debt growth can be contained. There is $20 billion in Lira and other currencies and $10 billion in debt held by the central bank. Paris II is holding $2.5 billion. Any improvements in the management of the public entities will lead to more rational interest rates for the country.

Given the increased confidence in Lebanon will we see another donor conference?

We have heard that statements that there will be international, economic support for Lebanon but in what form we don’t yet know?

What would Riad Salameh like to see?

I guess one could use the same structure as Paris II and by that I mean long-term loans from other countries. With the IMF, Lebanon has a small quota and the process takes too long.

What have we learnt from the lessons of Paris II? Why should the international be convinced of Lebanon’s willing to comply with loan obligations third time around?

Many of our [Paris II] obligations were let down by a lack of political support. Today, the government is under pressure to create a modern economy and generate employment. There is power from the people. They have the awareness. They have demonstrated and they have ambition and politicians are sensitive to the needs of the people.

In theory

[Laughs]Yes. In theory

While understandable giving the current situation, the current high interest rates are affecting banks’ profitability and damaging to debtors? When can expect a drop in rates?

Interest rates are dictated by the markets and have increased in a rational way. Global rates are rising and are not the same as four years ago. They will come to a more realistic level when the international markets develop more confidence in Lebanon. What we need to do is reduce the premium by improving our economic performance by improving our country rating, which will allow us to bring interest rates on our debt down. For the moment we are paying a premium over Libor of 5% and we need to decrease it to 2%. In terms of the outlook, I can say that rates will remain stable or decrease mildly.

What has the central bank agreed with the BIS for Lebanon to ensure that Lebanon fulfills all its Basel II obligations? Are we on course for parallel development with the rest of the G10 nations?

We will comply with Basle II but the only criteria with which there is a question mark is the Lebanon’s dollarization and the weighting on foreign exposure, which does not apply [to Lebanon] and the Bank of International Settlement needs to understand the realities of this. We can be integrated into Basle II with these exceptions. Today, in the Lebanon we have a high capital adequacy and exposures in terms of mis-matching has progressively improved.

In the absence of a Lebanese equivalent of the US Chapter 11, local banks often take advantage of struggling businesses. Can we expect our own Chapter 11 anytime soon? 

There is no law and I am not sure that the Lebanese culture could bear such a law. However, the central bank recently issued Circular 41, which addresses those companies with doubtful debt and allowed them to repay with real estate or have a structured debt repayment for up to ten years. As a result $1 billion of the doubtful debt has been resolved and by 2005 the debt portfolio will be in a perfect situation.

So there is no need for a Chapter 11 style law? The current situation is satisfactory?

Yes especially since Circular 41

Do you foresee any changes in the role of BDL in the “new Lebanon”?

The law that created the central bank is 40 years old but it was a modern law for its time and is still relevant. The changes that are likely to happen in Lebanon in the coming months will be political and the central bank will continue to perform independently of this and continue to do its job.

Did you think that the cover of the April issue of Executive accurately captured the mood of the month?

The Superman cover? [laughs] in my opinion it was better than any interview. But we held out, didn’t we?