By Elie Azar - 

When Rafic Hariri was named Lebanon’s Prime Minister in 1993, following a “white revolution” and during the Syrian occupation, the Lebanese bought into his vision when he brought his own team to “improve” the economy. That was apparently an arrangement reached with the Syrians, whereby the Syrians would be in charge of security and Hariri would control the economy. Hence, he named Riad Salameh as the Governor of Lebanon’s Central Bank.
In developed countries, central banks are typically headed by learned economists who possess a distinguished education and stellar experience in economics and monetary policy. For instance, US Former Chairman of the Federal Reserve Alan Greenspan had a Ph.D. in economics from New York University and decades of experience as an analyst at The National Industrial Conference Board- a business- and industry-oriented think tank before his appointment by President Reagan in 1987. Hariri, on the other hand, appointed his own broker who only held a bachelor’s degree in economics and no experience in monetary policy. Mr. Salameh was simply a financial advisor, who had done well for himself and his client, but should not have been entrusted with this sensitive position.
Rather than acting as an independent leader who cared about the interest of Lebanon and his people, Mr. Salameh acted as a broker who chose to exercise a monetary policy in accordance with Hariri’s vision, which revolved around the idea of the “inevitability” of a peace deal in the Middle East. Even though a peace agreement was unlikely and never materialized, Salameh kept relying on the same detrimental policies. In fact, to ensure that he remains in that position as long as possible, he was submissive to the political allegiances rather than dictating and implementing a sustainable monetary policy
for the benefit of the country.

Mr. Salameh’s first damaging decision as Governor of the Central Bank was to support the issuance of government bonds at a 40% interest rate, which doubled the national debt in two years. He continued to yield to the political authority and its strategies, helping politicians to carry out their personal and one-dimensional agendas. PM Rafic Hariri had based his economic vision on a farfetched peace process in the Middle East; therefore, he did not alter his policies, which were unequivocally destined to fail. Towards the end of the twentieth century, the economic situation wasn’t promising at all, and Lebanon, like now, was in dire need for fresh money (because of the consistent deficit in the budget and trade balance). This should have been a wake up call for all of the politicians in that era. However, rather than altering the monetary policy, Lebanon relied on borrowing and grants. As such, in 2000, after winning the parliamentary election, Hariri sought the help of (then) French President Jacques Chirac who in turn organized the Paris I Summit in 2001, followed by Paris II in 2002, and Paris III in 2007.
The Lebanese public ignore the fact that certain events after 2006 helped the trade balance and financed some of the government “expenditure,” but, unfortunately, these events were not the product of a sound economic plan. Simply stated, the increase in oil prices allowed Lebanese expats in Gulf countries to transfer large amounts of foreign currency to Lebanon, to be saved in Lebanese banks, which were paying interests higher than most banks in the world. In addition, money poured in from Iraq, the 2006 Qatar donation (following the Israeli invasion), and money that Saudi Arabia and Iran sent to fund the parliamentary elections. Although Paris III saved Lebanon from bankruptcy, all other monies went to waste as Mr. Salameh continued to use the same policy by encouraging banks to buy Lebanese government bonds at high interest causing them to be exposed to the risk of government default.

A couple of weeks ago, Mr. Salameh went on TV to defend himself and deny any involvement in a Ponzi scheme. What is a Ponzi scheme? “A Ponzi scheme is a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors” (Investopedia). This is exactly what Mr. Salameh was doing in the last three decades. To attract money from abroad in order to finance government debts, Mr. Salameh raised interest rates on dollar deposits very high, reaching at times 14%, while the equivalent international interest rate averaged between 1% and 2%. Additionally, he pegged the currency to the dollar and reassured people that the debt is internal giving the impression that it was not very risky, while in reality it certainly was (and still is). All this instead of diversifying banks’ investments to protect the depositary money. Salameh’s reckless actions put the banks at high risk against the government default. This constituted a Ponzi scheme.

Furthermore, since assuming his role in the 1990’s, Salameh adopted Hariri’s policy in concentrating on tourism and real estate to encourage the flow of foreign currency to the country, instead of encouraging agriculture, new industries, manufacturing, and entrepreneurship opportunities, which makes the economy diversified in order to flourish. The façade he created concealed a crumbling financial system engineered to justify and defend an obsolete currency peg and inflated banking sector profits.

Given the current banking crisis that might bring devastating consequences to the Lebanese, and as a governor of the Central Bank, rather than using his independent power to work closely with the finance minister to create a task force and find solutions to Lebanon’s current financial problem as well as save the banks (regardless of their mistakes and based on my belief that there is no economy without banks), Riad Salameh only focused on his TV appearances to justify his shortcomings and whitewash his tainted reputation. In reality, his actions and lack of experience simply worked to postpone the implosion of the financial meltdown. Also, when he blamed the political authority for his mishaps, he inadvertently demonstrated his own failure. As it is a known fact that the governor of the central bank is an independent official because the BDL does not fall under the jurisdiction of any state body, except for the finance minister who can ask to look into the accounting.

Resolving Lebanon’s financial crisis starts with identifying the primary problem: Restoring confidence in the banking system. It will undoubtedly take time and serious effort to persuade people to start depositing money back into the banks. Additionally, a comprehensive and long-term economic reform must include drastic measures to a) protect the banks by ensuring limited capital control, b) instating taxation laws on luxury items, c) revamping the economy by encouraging expatriates to re-invest in Lebanon and d) establishing research and development centers.
The road to economic recovery is long and strenuous, but definitely achievable with the right professionals in charge; individuals who possess the adequate experience and education to formulate, implement, and independently manage economic policies.

With a master’s degree in Business Administration from the San Diego State University, Elie Azar started working in 1988 as a trader at New York’s SBC, then at Bank of America Capital Markets as Vice-President, and later as the Managing Director of Foreign Exchange Options at BMO Capital Markets, specializing in Derivatives Trading. He has over thirty years of experience in banking and economic policies. In 2018, he was elected President of the Lebanese American Commission for Democracy.