Thread by @EHSANI221

Thread on @BDL_Lebanon

Since the crisis began, R.Salameh has repeatedly told the nation that his Eco & currency policies were consistent with what has long been asked of him by the Government

Is this true? What does he mean by this?

Answer is Yes and No

Here is why ==>

Every Central Bank operates on the basis of a mandate / remit given to it by the Government

Different countries have given different mandates to their Central Banks

Such differences emanate from specific historical experiences each nation & society had experienced in the past

The U.S was scarred by depression & significant market swings in early 1900’s and when its Central Bank (Fed) was formed, congress gave it a dual mandate:

“Maximum Economic Growth and stable prices”

Note how there is no mention of currency stability in the mandate

As European Central Bank (ECB) was formed, mandate given to the institution also came from historical experiences of its core countries. Rampant Inflation during 1940’s was seared in the region’s DNA

ECB’s mandate was therefore “Price Stability”

Again, no mention of currency

@BDL_Lebanon was established through “Code of Money and Credit” that went into operation in 1964

The mandate / Remit given to the Central Bank by the Government is found in article 70 of the code

Unlike the Fed or ECB, framers of BDL’s code made currency stability a key pillar

Article 70 entrusted @BDL_Lebanon with

“General Mission of safeguarding the national currency in order to ensure the basis of sustained social and economic growth”

This 👆 is the significant pillar in the law that can explain the genesis of #Lebanon ‘s recent financial crisis

Coming out of the civil war, #Lebanon ‘s currency (LBP) had lost a significant part of its value

To rebuild post the war, Government needed to borrow and attract investments

Since borrowing was mostly in LBP, the currency had to stabilize to help lower borrowing risk premiums

If stabilizing LBP post the civil war was necessary, the Central Bank already had article 70 from 1964 to back the policies that it would follow since

Starting 1997, @BDL_Lebanon took the mandate of currency stability to its extreme

It totally fixed the exchange rate

Genius?

While article 70 entrusts @BDL_Lebanon with safeguarding LBP, note that this mission had to lead to the ultimate goal of ensuring

“Sustained Social and Economic Growth”

Currency stability therefore was not the ultimate goal but the means to ensuring Social / Eco growth

Important to note that the original framers of Article 70 told @BDL_Lebanon that

Achieving Social / Eco Growth was thought to consist of

“Safeguarding the soundness of Banking System”

This is the Legal / institutional backdrop to #Lebanon ‘s recent crisis

@BDL_Lebanon ‘s Salameh not only interpreted the general mission of “safeguarding the national currency” as giving him@mandate to totally Fix/Peg LBP

But, he also ignored the part to do with “Safeguarding the soundness of the banking system” which he was tasked to carry out

When Riad Salameh therefore points to the fact that he was carrying out his mandate of safeguarding the national currency, he ignores the fact that safeguarding LBP perhaps never meant fixing it at all costs

#Lebanon could simply not afford those costs that were to hit later

Truth is #Lebanon ‘s Eco fundamentals were completely inconsistent with a fixed exchange rate. The Govt always spent more than it collected. There were hardly any natural resources to sell and accumulate hard currency with (how Gulf countries can keep their own peg)

#Lebanon did however have one unique characteristic - rich reservoir of its own nationals living abroad

This diaspora would be used by the Trio of @BDL_Lebanon , local bank chiefs and connected Govt officials to embark on a 22 years of orgy in profiteering & excess

#Lebanon was classic case of too good to be true and for nearly everyone

Diaspora were making a huge spread on deposit rates over what they could get in their own countries

The Trio of @BDL_Lebanon , Bank chiefs / Govt officials had found an open spigot of $$$ dropping in

While some voices were early in sounding alarm bells, the longer the system stayed alive, the more such voices were seen as crying wolves

Since the breakdown of the peg & the entire system that used it as a linchpin, nearly every citizen has finally woken up

But what to do

Sadly, there is nothing that can be done. The money in bank deposits is gone. It financed all that excess of the Trio of bank chiefs / BDL and connected Govt officials and it also funded all the fancy imported goods that were a staple of #Lebanon over the past few decades

Lastly, no one in Govt or BDL is likely to tell the public the hard truth that their money is gone

The political ramifications call against such an outcome. There is no upside for them to do so

The Future instead is likely to feel like Chinese torture for years to come