(Corrects paragraph 9 of Tuesday’s story to say “specific Lebanese pound deposits”, not “their dollar deposits”)
By Lisa Barrington
Dec 4 (Reuters) - Lebanon’s central bank said on Tuesday the government would start issuing local currency debt at market rates to encourage banks to buy the debt, rather than putting their money in the central bank for more attractive rates.
“The state now will issue bonds as the central bank does, with rates similar to those of the central bank,” Central Bank Governor Riad Salameh told Reuters, adding that the Bank of Lebanon’s benchmark ten-year rate is 10.5 percent.
Highly-indebted Lebanon’s financial system has encouraged commercial banks to place foreign currency in the central bank for high returns, as Salameh seeks to maintain high foreign reserves to defend the Lebanese pound’s peg to the dollar as the economy stagnates and a political stalemate drags on.
As a result, commercial banks have gradually stopped subscribing to weekly treasury bill auctions.
This means the central bank has been left to buy up government debt - incurring losses on the difference between the interest it receives on this and the high interest rates it pays out to commercial banks to keep money flowing in.
Salameh said he and Finance Minister Ali Hassan Khalil had on Tuesday agreed a plan to attract funding for government debt issuances and said Lebanon’s banking sector is capable of financing the state’s foreign and domestic debt in 2019.
“We agreed this system for paying foreign and domestic debts is within our capabilities and within the capacities available to the banking sector,” Salameh said in televised remarks after meeting Khalil.
He said the banks were in a position to fund government debt because of the financial engineering and operations which the central bank has carried out over the past three years.
Under the plan, banks will exchange specific Lebanese pound deposits at the central bank generated from the financial engineering - on which the central bank was paying 10.5 percent interest - for Lebanese pound debt earning similar, market rates. “These will not be short-term issues, but issues of 10, 15, 20 years,” Salameh said.
“Therefore the situation will continue to be stable, be it on the level of the Lebanese pound’s exchange rate or credit in Lebanon,” he said.
Lebanon has the world’s third highest debt-to-GDP ratio and stagnant growth. The International Monetary Fund said in June that reforms are urgently needed to put the debt on a sustainable footing.
But almost seven months since the parliamentary election, Prime Minister-designate Saad al-Hariri has hit a wall in efforts to form a national unity government as political factions jostle for positions in a new cabinet. (Reporting by Laila Bassam; Editing by Kevin Liffey)