Central Bank Governor Riad Salameh has been widely credited with steering a prudent monetary course during his 13 years in office, a period that has seen growth stagnation, revolution, war and political uncertainty. Throughout all these challenging times, his calm management of the nation’s money has ensured Lebanon’s economic survival and fiscal integrity and has been an example to central bankers the world over.
Salameh sits down with NOW Lebanon to discuss the state of the Lebanese economy, describing how the sectarian system affects Lebanon's productivity, how the Central Bank can protect the Lebanese economy – and his reaction to being suggested as a candidate for Lebanon's next president.
NOW Lebanon: What is the general state of Lebanon’s economy? Do you have any predictions for GDP growth this year?
Riad Salameh: According to the IMF, the GDP growth in Lebanon has been 4% in 2007. The inflation was around 7%, according to the IMF. For 2008, the IMF is betting on growth around 3%.
The Central Bank does not have estimates so far. We do not have estimates because of the volatility of our economy, due to the political and security developments in the country. These can alter any estimates, so we prefer to wait before we give our estimate of growth.
NOW Lebanon: A study at the American University of Beirut Institute of Financial Economics, titled “Trapped by Consociationalism: The Case of Lebanon,” showed that Lebanon’s confessional system, and vulnerability to outside intervention, has cost the country tens of thousands of dollars in foregone income, per capita. Do you think the sectarian system hurts Lebanon’s economic productivity?
Salameh: I think the productivity in Lebanon is hurt by the divisions that are neutralizing the possibilities of modernizing and reforming the economy in the country. These divisions have a background that is related to sectarianism. I cannot put a figure on the damage caused, because it is all hypothetical.
Nevertheless, Lebanon is missing opportunities. This is especially true because our region now, due to high oil prices, is witnessing record levels of liquidity. This could have led to profitable investments in our country, if the situation was stable.
NOW Lebanon: What plans does the Central Bank have to protect the economy, if there is another war? Can the Central Bank take any lessons from the 2006 war?
Salameh: The Central Bank is always preparing for worst-case scenarios – those related to war and severe internal political tensions. We are also always watching what is happening in the region, on the financial side, and worldwide also. The Central Bank has been successful so far in maintaining stability in difficult times.
As you know, the past few years have seen tragic events, among them the assassination of former Prime Minister Rafik Hariri and the assassination of other leaders in the country. We have seen the war of 2006, and we have seen even fights in Palestinian camps. And yet we have been able to preserve a stable monetary environment. That is because we do anticipate, and we are prepared.
In 2007, and so far in 2008, the country has seen an improvement in its monetary figures, and that is due to the fact that the markets are confident that we have things under control.
NOW Lebanon: Some of the states in the Gulf Cooperation Council have recently held discussions regarding depegging their currencies from the dollar. Would you ever recommend this path for Lebanon? What is the effect on Lebanon from the recent devaluation of the dollar?
Salameh: The nature of Lebanese markets is different, in that the markets are free to keep their deposits in the currency of their choice. The Central Bank has diversified our portfolio: we have gold, Euros, and dollars. But we are still predominantly holding dollars, because this is the currency that the market asks to buy from us when they are short of foreign currency, or when there are conversions from the Lebanese pound. So we are not changing anything on that level.
The weakening of the dollar confers more competitiveness on the Lebanese economy, because we are dollarized. 77% of our transactions are in US dollars in the country. And all the costs of the country are related to the value of the dollar. So a weakening of the dollar makes all Lebanese sectors working with external markets more competitive.
Lebanon would have seen much higher growth, due to a resurgence of consumption and tourism, if we didn’t have this political and security situation. But a weak dollar is still helping the Lebanese economy.
NOW Lebanon: There has recently been a rise in the price of basic necessities. Would you recommend a rise in the minimum wage, to offset some of the deterioration of the value of salaries?
Salameh: We think that the purchasing power in Lebanon has decreased by 10% to 15%. Although inflation is still contained, we nevertheless have to watch the purchasing power. Much more than an increase in the minimum wage, there is a need to increase the efficiency in the Lebanese economy. It’s only through real growth that you can fight inflation, which has become a worldwide concern due to an increase in commodity prices.
We have seen that all Central Banks in the world are worried about the increase in prices, in oil and essential foodstuffs. Therefore, the government should address that problem to preserve the purchasing power, but without creating more inflation. That’s why we need more efficiency in our economy. If you do not raise efficiency, the raises in wages will be wiped out by even higher inflation.
NOW Lebanon: Lebanon’s banking sector has been making substantial profits. However, they only contribute to the government’s fiscal returns marginally, because they are taxed at a low rate. Is this a good thing?
Salameh: Well, the tax system in Lebanon applies to all sectors. The banking sector has nominally high profits, and this is made known because we require transparency in the balance sheets of banks, and they are under the monitoring of the banking control commission. Every three months, they have to publish their balance sheets.
Nevertheless, if you look at the return on equity and the return on assets, banks in Lebanon are still below the average of the region. The growth in profits came from the growth in their balance sheets, but the spreads they maintain are still the same.
I think one should not tax a sector because it is successful, or because it is transparent. I think the tax system should apply to all sectors. We should try to implement more transparency on other sectors because maybe you can see more profits in certain operations in the country, but we do not know about it.
NOW Lebanon: Saudi Arabia has injected funds in the Central Bank. Is this of any practical help?
Salameh: Saudi Arabia has a deposit with the Central Bank. I can talk about it because they declared it. That deposit is a billion dollars, which was placed there during the July 2006 war. After that, we did not have any other deposits from Saudi Arabia. But Saudi Arabia has also been backing the Lebanese government after the July 2006 war, in order to indemnify the victims and the destruction and to finance reconstruction.
We do highly appreciate the backing they give Lebanon. The market takes it as a sign that increases confidence, and we hope that they will always be looking to Lebanon not only for this type of operations, but for investments as well.
NOW Lebanon: You are the longest serving Central Bank governor in Lebanon’s history. What’s your secret?
Salameh: I think we have been able to perform well. That has played a part. But it also happened that at the end of my first mandate, there was a need for continuity, because there was a change in government. At that time, it was the election of President Lahoud and the exit of Prime Minister Hariri. And, that played in the decision of the government, and my decision, to remain serving the country. And during the second term, there was the assassination of Prime Minister Hariri, and there was a need for continuity to keep a stable situation. And that was my duty, also, to continue as they asked me to do it. So there are circumstances, but there is also the good achievement from the Central Bank.
NOW Lebanon: You must have heard that your name was raised during the discussions for the presidential elections. What was your reaction at the time?
Salameh: First, I am honored to be thought of for such a high position. But my main concern was to preserve the independence of the Central Bank. And therefore, I took it with a certain distance, and did not really campaign on that issue. So we will see – what is best for Lebanon should be done. And I hope, now that there is a compromise candidate, things could be finalized and we can resume normal political life in the country.
NOW Lebanon: If General Sleiman falls through, would you still be willing to be that compromise candidate?
Salameh: We’re not going to speculate. For the time being, there is an Arab initiative, and they are backing General Sleiman.