Governor of the Central Bank Riad Salameh has been widely credited with steering a prudent monetary course during his time in office, especially during moments of national crisis. Salameh talks to Executive about the outlook for GDP growth, Basel II compliance, the war on money laundering and the selling off of Central Bank assets, as well as the ongoing problems of convening a donor conference.
E Given the current political impasse, what is the Central bank’s outlook for GDP development in 2006?
Our economic research department, in compliance with the INSEE [National Institute for Statistics and Economic Studies], is predicting a growth rate of between 4% and 5% for 2006. Of course this can be altered if we have political or security problems.
E What is your view?
I have to go along with the statistics of the departments.
E The heady events of 2005 seem a distant memory. Did we make a mistake in not taking advantage of this period to gather a donor conference and can we realistically expect one in 2006?
The donor conference was on the table immediately once the parliamentary elections were complete. The delays in convening that meeting were related to an agreement on a reform program.
The reform program has been prepared and presented in an initial draft to the government, but it has not been approved. The backing is still on offer, but we haven’t agreed on a reform program that we can present to a donors’ meeting.
E What conditions need to be in place?
We need a political agreement on a program, because the idea, contrary to Paris II, is to have funding that is conditioned on the execution of structural reforms in the country.
E Do you think we can reach such a consensus in 2006?
This is a political issue that is beyond our ability to predict.
E There has been talk that the international community believes Lebanon will not reach a consensus and that the political gulf is too wide. What has the Central Bank done to allay these fears?
The international community has given its full backing to Lebanon. Two meetings have taken place involving participants from the major organizations and major countries, one in New York in September and one in April in Washington. The support is there and continues to be there. These organizations are waiting for us to present a comprehensive project. Their commitment and belief is still alive – the delay is from our part.
E What has the Central Bank agreed
with the BIS for Lebanon to ensure
that Lebanon fulfills all its
Basel II obligations?
The Central Bank has decided that the Lebanese banks should abide by the criteria of Basel II by January 2008. The standard approach will be adopted in the five years after 2008, by 2013. This can be absorbed by the banking sector according to the stress test that we and the IMF carried out. On the other hand, a circular was issued asking the banks to appoint a coordinator to work with the BCC [Banking Control Commission] on implementation. Lebanon is going to be compliant and has the capability to do it and we see it happening with no problems.
E There have been plenty of conferences on Basel II compliancy but do you believe that the sector is still not taking Basel II seriously?
By law they will have to abide by the circulars of the Central Bank. The fact that we have asked for a coordinator will improve the participation of any bank not yet prepared. In fact, it is not only a regulatory matter; if you want to expand internationally and keep up with your international obligations, adoption of Basel II criteria becomes a business obligation so I think this, and not regulations, will force the banking sector to follow and apply the criteria.
E Are there are any Central Bank assets that are ripe for privatization?
The Central Bank is independent of the government. The assets we hold are legally commercial asserts so we don’t need a law to dispose of them. We have successfully sold the BLC bank and now we are preparing to float 25% of the shares of Middle East Airlines. The Central Bank is also selling real estate. Given the positive momentum of the markets, the sales are going well.
E Why only 25% of MEA?
It’s a matter of strategy. We want to approach this as a sale to the people and have a real public issue traded in the market. We believe the value of the shares will be more in keeping with the value of the company if the market sees there is a strong shareholder still in the company.
E What’s MEA worth?
We are presently evaluating the company with three investment banks.
E A ballpark figure?
We will arrive at a figure as we have always operated in the previous sales. We are fully transparent and put the info in a prospectus available to the public. It’s our intention to announce an offering price and from there one can conclude on the value of the company.
E Were there any political obstacles in the selling of MEA shares?
Politically we have been able to gather a consensus on the operation. It is important, and this has happened in all countries that have gone through sales of assets that used to belong to the government, to communicate with and win the backing of the political groups. With the privatization of Japan Post the [Japanese] Prime Minister had to dissolve parliament and call elections on that issue. Therefore political discussion on these operations is a normal process that you can see in all countries.
E Around 80% of corporations are indebted. There has been a proposed debt for company share swap inspired by the article 41 debt for land exchange.
Our proposition is to amend the law in order to allow banks to appropriate shares provided they sell then seven years later and are on the board of these companies. We are talking about shares both private and public. They would turn them around and do IPOs. This would profit the economy, decrease the bank risk and enrich the capital markets, which we believe is essential for Lebanon. The idea is to capitalize the private sector which is handicapped in terms of returns and investment by debt. We believe that this will be good for the economy, although we would be departing from the traditional role of banking.
E How many developmental bank licenses are still dormant? Is the Central Bank planning to resurrect any of these banks and prepare them for sale?
No. No licenses are dormant or in our portfolio.
E Money laundering is still a hot topic. Would you agree with those who say it can never be stamped out especially in Lebanon, given the laws, and that there can be an acceptable level of money laundering in all economies?
Today there are criteria and standards set by the FATF [Financial Action Task Force] on money laundering. Lebanon has complied and we are considered a fully cooperating country in the fight against money laundering. We have received positive feedback from the FATF and the international community on our performance. This is our job.
Now I would not like to go into a subjective evaluation on the topic. Lebanon needs to preserve its reputation and I think that what we have done and what the SIC [Special Investigation Commission] has succeeded in doing has served this purpose.
E Can you bring us up to date on any rules and regulations the Central Bank is considering to boost the economy and the capital markets?
As you know, the Central Bank, through appropriate monetary policy, has been able to stabilize prices, create flexibility and with good [monetary] engineering has maintained confidence in the worst days of 2005. We have been instrumental in creating the appropriate environment to enhance investment and consumption. We are going to maintain these policies although there may be some regulations to help the extension of credit or help banks to participate in capitalization. But these will complement the essential and fundamental role of the Central Bank, which is to maintain price stability and confidence.
