---

Lebanon is striving to select a Central Bank Governor, desperately seeking to appoint someone to help restore the financial system that has collapsed under years of corruption and mismanagement in a country where its currency has almost lost all value. The once stable banking sector, which was the backbone of stability, now faces losses nearly three times the size of the economy.

According to the U.S. agency “Bloomberg,” the successful candidate must navigate through a complex political maze and traditionally has been a Maronite Christian. Adding to the complexity, the Shiite Hezbollah militia, classified as a terrorist organization by the United States, holds crucial voting power in the appointment process.

Years of corruption

The U.S. agency noted that it would be fair to say that the new Central Bank Governor in Lebanon, the first in 30 years, will have more on their plate than just monetary policies. With only four days left before Riad Salameh steps down – who some blame for the chaos and the red Interpol notice regarding money laundering allegations in Germany and France – there is no successor in place yet.

Lebanon has been spiraling into an economic downfall since the 2019 financial crisis, resulting from a slowdown in remittances from Lebanese abroad and a decline in Gulf aid, leading to a sharp decrease in foreign inflows of dollars.

Salameh has become the face of the crisis, as protesters nationwide accuse politicians of plundering the state’s treasury for their friends. They view the veteran governor as an enabler who bought time for the political class by adopting risky measures that only led to an economic catastrophe, eradicating over half of the country’s GDP over the past three years, causing the currency to lose around 90% of its value.

The agency noted that Lebanon’s debt reached nearly $100 billion by the end of 2022, including defaulted Eurobonds. The country is being run by politicians who have failed to reach an agreement, let alone implement a recovery plan. Last year, Lebanon signed a preliminary agreement for a $3 billion rescue plan with the International Monetary Fund, but it requires reforms as part of the deal, which have yet to be implemented.

A failed state

The U.S. agency stated that some critics believe Lebanon is on the brink of becoming a failed state in a turbulent region. It is bordered to the south by Israel and to the north and west by Syria, whose 12-year civil war has driven over a million people to seek refuge in Lebanon, putting pressure on an economy that supports 5.4 million people. Moreover, the explosion at the Port of Beirut in August 2020 shook the capital and claimed hundreds of lives, destroying the vibrant city center and its surrounding neighborhoods.

Nassim Nicholas Taleb, a distinguished professor of risk engineering at New York University and a Lebanese-American commentator, said, “What we need is more transparency and accountability; otherwise, it won’t make a difference who replaces Salameh.”

Taleb pointed out how companies are adapting to a life without imports in a country whose foreign reserves have declined to less than $10 billion.

Politicians have been discussing the replacement of Salameh – whose term ends on July 31 – for months, and those discussions intensified last Wednesday when French President Emmanuel Macron sent his personal envoy to Lebanon, Jean-Yves Le Drian, to Beirut in a final attempt to impose an agreement between the warring factions on filling the vacant presidency of the country, which is seen as one of the obstacles to appointing a new Central Bank Governor. French officials also met with their counterparts in Saudi Arabia to discuss the potential power vacuum in Lebanon.

Sadeq al-Shami, Deputy Prime Minister and chief negotiator with the International Monetary Fund in the country, said, “The person who assumes the presidency of the Bank of Lebanon, in this difficult juncture, must be willing to make personal sacrifices and bear a heavy cost. We need someone with sound integrity who is ready to detach from the political class and act independently, focusing on the key tasks of monetary policy without getting involved in areas outside the scope of the central bank.”

Intentional Recession

In a report issued in 2022, the World Bank described the financial crisis in Lebanon as an “intentional recession by the ruling elite in the country, which has controlled the state for a long time and lives off its economic resources.”

The American agency confirmed that Lebanon relied primarily on US dollar inflows from its extensive diaspora to maintain its connections and finance the massive deficit in the current account and budget. Therefore, when deposit growth began to decline in 2015, coupled with instability internally and the neighboring Syrian war, the Central Bank initiated what it called financial engineering operations, which the International Monetary Fund repeatedly described as “unconventional,” and urged the Bank of Lebanon to stop them.

These operations offered high returns for local investors to invest in dollar-denominated deposits with the Central Bank. In doing so, banks had to attract new inflows with profitable interest rates. A government rescue plan in 2020 revealed that commercial banks – lured by the high returns – parked around $70 billion of their assets in the Central Bank.

The crisis wiped out individuals’ savings and eroded public trust in the Central Bank. In May of last year, hundreds of protesters, mostly retired security personnel, attempted to storm the parliament buildings in central Beirut while deputies were in session, after the pound exceeded 140,000 against the US dollar, reaching a record low. Some even resorted to bank robberies to retrieve their own money.

European authorities accused Salameh of indirectly benefiting from the sale of international bonds through a brokerage company owned by his brother, Raja. Both men denied the allegation, and European investigators questioned Riad Salameh and others in Beirut multiple times this year. The red Interpol notice – a request to law enforcement authorities worldwide to locate a person and provisionally arrest them pending extradition or a similar legal action – followed arrest warrants issued by both France and Germany over fraud and money laundering allegations after the central bank governor failed to appear for questioning in Paris.

Jean-Michel Saliba, the economic expert at Bank of America Corp, said, “I think the successor will need to engage with the political class and the public and ensure their support to build new walls of trust. More traditional accountability will allow for a better understanding of the public finances of the Bank of Lebanon and its income.”

The Vacant Position

The American agency revealed that officials have been in contact with several candidates regarding the presidency of the Central Bank, but many of them are hesitant. Some have demanded guarantees from politicians, including Hezbollah, which possesses political and military power to obstruct any appointment, that they will accept tough choices that come with an agreement with the International Monetary Fund, such as more auditing of government accounts and taxes.

Others simply fear taking up the position in a country that has witnessed dozens of political assassinations, as people who participated in the discussions about Salameh’s replacement said.

The agency also reported that Jihad Azour, the Middle East director at the International Monetary Fund and former Finance Minister of Lebanon, appears on the wish lists of candidates, where he was briefly described last month as the next president of the country – a position vacant since October because politicians have been unable to agree on a candidate – but Hezbollah prevented it. Others on the wish list include HSBC advisor and General Atlantic senior Samir Assaf and Kamel Abu Suleiman, a lawyer for corporate finance and international capital markets at the law firm Dechert, and a former labor minister.