The Lebanese Central Bank is moving to reduce interest rates to counter the economic crisis

The Lebanese Central Bank plans to cut interest rates in an attempt to ease the economic crisis in the country, and is considering formalizing the temporary capital controls that are set individually by local lenders.

The Governor of the Central Bank, Riyad Salameh, told his association of banks in Lebanon that he would issue a circular within days to reduce rates in order “to revive the economy” and curbing the increase in “doubtful” loans.

The decision may buy some of the much-needed time in Lebanon, which is suffering from its worst financial crisis in decades. While the authorities are struggling to form a government after the resignation of Prime Minister Saad Hariri after weeks of mass protests against corruption and the deterioration of living standards.

Salam said he was considering issuing instructions that would formalize the recent restrictions on capital movements imposed by commercial lenders. The measures will be temporary until a new government is formed and the financial and economic situation is back to normal. The governor also said that 165 billion Lebanese pounds ($109.2 million) were withdrawn daily from the central bank in the past two months, and that the bank was awaiting a new payment of banknotes that would arrive on December 20.

President Michel Aoun held a meeting last week that included the governor of the Central Bank, the Minister of Finance, the Minister of Economy, and the president of the Association of Banks. They instructed the central bank to take “temporary and necessary” steps in order to protect the stability of the banking system.

The crisis has undermined confidence in Lebanon’s ability to pay off its massive public debt. According to data compiled by Bloomberg’s agency, the country’s debt risk, compared to virtual credit exchanges, has risen to over 2,500 basis points, the second highest level after Argentina.

The lenders-imposed restrictions on the movement of capital by prohibiting some transfers abroad, freezing credit lines for businesses, and putting an end to withdrawals at $400 to prevent banks from operating. Officials, including the governor of the central bank, have said many times that the country will not impose formal capital controls, which requires a legal framework.

Three major banks in Lebanon were cut last month under sovereignty by the global rankings of the Standard & Poor’s Index, which warned that the country’s economic crisis is draining liquidity from lenders. A week before the cut, the central bank instructed local lenders to raise their capital by 20 percent by next June, and to refrain from dividends for 2019 to increase liquidity and prepare for possible credit cuts.

The union said it would reduce the ratings if there was “additional pressure on banks’ liquidity positions or if the banks impose further restrictions on specific transfers and operations.”

Lebanon relies on the influx of millions of its citizens who live abroad. However, the capital inflows required to finance the large current account and the fiscal deficit went down with decreasing confidence. The central bank began to ration dollars even before the turmoil erupted on October 17, which pushed the demand for foreign currency and created the black-market price, which is currently 30 percent higher than the fixed exchange rate. The move thwarted trade and imports in a country that relied almost entirely on foreign goods. The central bank said it would supply fuel, wheat and pharmaceutical importers with most of their dollar needs.

As the crisis deepened, the president has yet to set a date for parliamentary talks to nominate a new prime minister. Hariri, who resigned in October to counter escalating protests, said he would no longer be prime minister and would prefer to form a government of experts.

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