Taming the central bank

There is a deep rooted intuition or cultural knowledge that monetary power is extremely risky. Long before things like fiat money and central banking made their first appearances, this cultural DNA has come to expression in both prescriptive behavioral myths — such as Aristotle’s telling of Midas’ self-destructive fixation on the exchange value of everything instead of the use value.

There are enough indications to suggest that the power of central banks has been on a stiff growth trajectory. Testimonials, data points and indirect indications for this stretching of central bank mandates can be found aplenty — just a look at the rise in diverse central bank balance sheets in absolute numbers and in ratio to GDPs is enough to cause some wonderment. Central bank media coverage, academic papers and speeches by central bankers themselves provide ample corroboration.

Even assessing the idea from the opposite perspective is viable. In his recent work “The End of Power”, scholar (Carnegie Endowment), political figure (one-time government minister in Venezuela), editor-in-chief (Foreign Policy), former World Bank executive director Moisés Naím argues that the power of mega-players in the realms of politics, religion, business, culture, union labor and media is weakening. One subset of institutions that is not mentioned once in Naím’s book for weakening of its power are central banks.

Lebanon’s Banque du Liban (BDL) fits the pattern of central bank power growth in both a general and a very peculiar sense. The size of BDL assets at the end of May 2015 was LBP 136.8 trillion ($90.74 billion) — not far from twice the country’s estimated GDP. When compared with five years ago, end of May 2010, the BDL balance sheet ballooned by almost 60 percent. And when compared with the same month in 1995, the increase was in excess of 1,100 percent.

A hint of more peculiar growth comes from BDL lending to investment banks and financial institutions in 2014. From LBP 102.6 billion ($68M) at the end of 2013, this infusion of funds shot up to more than LBP 580 billion ($385M) at the end of 2014.

Of course, my dear Oliver Twist, money doesn’t simply grow on trees and the money to finance economic growth in Lebanon must come from somewhere. The national government has been totally consistent in not incentivizing growth. Thus it is nothing but logical that BDL has been growing its reach into the economy.

As politically thinking economists in the conversations about monetary policy for this issue of Executive tell us, the largest current danger is not actually the dollar peg but the nation’s outsized expansion of debt when compared with Lebanon’s economic growth. There is a relationship of dangerous credit growth with the country’s imported monetary policy but, as the economists in our conversation also agree, the lever Lebanon has to seek is the one of economic growth.

The diagnosis is that the central bank was right to enter the arena of economic policymaking and fiscal incentive packages because the government had backed down from making its stand in this arena. BDL was right in stepping into the fray because in the presence of such perils as Lebanon faces today, not doing anything is a greater risk than the risks that are represented by doing something without following standard procedures and the protocols regarding the institutional division of labor.

It does not surprise us therefore that the World Bank just published a mid-June valentine to BDL. If there ever was a multilateral agency declaration of love to any partner institution, this paragraph on page 57 in the World Bank’s new Systematic Country Diagnostic on Lebanon must qualify: “Institutions in Lebanon are extremely weak, characterized by both inefficiency and corruption. [… However,] Banque du Liban stands out as an effective and respected institution, because its considerable powers are legally ringfenced, including being financially independent of the government.”

[pullquote]We are still not absorbing the burden of the debt[/pullquote]

But this to us means also that it is time to bark, and bark insistently, at the tallest and strongest cedar in the national institutional forest. Because there is quite a bit to bark about — and because there is nobody else in the public space worth barking at. And so we want to share our barking space in the confidence that Lebanon’s one institution with a “ya Habibi” declaration from the World Bank will become more interactive with the Lebanese sovereign.

We agree that, as the World Bank says, BDL’s financial independence from the government is all fine but isn’t the real scenario, and problem, that the Lebanese government appears dependent on the central bank? As economist Ghassan Hasbani tells Executive, the bank “becomes an operator of the sector and starts replacing the ministry of finance as an executive power and that’s a concern.”

Central bank management of Lebanon’s economic growth efforts is not providing sufficient results to put concerns over the balance of payments at ease, economist Sami Nader adds. “We are still not absorbing the burden of the debt,” he cautions.

In another concern we share, long term recipes for growth cannot be delivered by a central bank. But structural reform is the central need, as economist Joseph Gemayel highlights. “The solution would be to enhance our competitiveness and increase our exports by way of structural reforms, which would require that we reduce our cost of production and/or become more competitive via higher quality or other measures.”

For economic and political thinker Roger Eddé, the situation needs drilling down to the fundamentals of the Lebanese system. “The worst thing that is happening in this country Lebanon, this failed country Lebanon, is that everything is political. That spoils the very idea of independent central bankers. We need not only an independent central bank but we need every appointment to be non-political,” he says.

We have concerns, from both practical and principled economic perspectives, that rigid currency pegs are costly and ultimately unsustainable. We want to keep talking about ways to loosen the total dollar dependency. The country is entwined in more than enough other import dependencies. But we acknowledge that doctrinal purism has no space in the management of serial emergencies, which describe Lebanon.

In agreeing that there is a faint chance for Lebanon to switch to a domestically engineered monetary policy, and in consciously adjusting our metaphors to include both our environment loving and our car-hugging readership segments, we accept that the Lebanese pound will have to tailgate the dollar in convoy driving at least for several further quarters. Yeah, we are stuck with driving according to the Fed’s cruise control.

But then we want to have a cleaner windshield and a better conversation with the team that drives BDL. What BDL communicates today is better than what it used to provide 10 years ago. Forward guidance on monetary policy is not the only thing worth hearing from a central bank but even when there is not too much to say, such a conversation will be useful to keep the information juices flowing.

Knowing full well that transparency in central banking is not a panacea and can even become an obstacle to decision processes, we still call for a new constructive dialogue and for broadening the stakeholder base in dialogue with BDL. This dialogue, if it engages political economists, academic economists and analysts on a regular basis, including intellectual and social interactions, can for example be a starting point for the formulation of economic platforms and visions by one layer of public interest organizations that Lebanon sorely lacks — political parties that could get into habits of thinking macroeconomically by informed and interactive communication.

We call for more transparency at BDL, because there are still deficits in information flows to analysts, media and the interested public — some of these lacks are extremely basic, such as real time provision of authorized translations of new intermediate circulars or even posting of the Code of Money and Credit with good visibility beyond Arabic speaking stakeholders.

We call for pit stops with the BDL departments, for regular power breakfasts with the vice governors and for High Economic Tea with the governor.