A public fight between Lebanon’s new prime minister and its once untouchable central bank governor is jeopardising the state’s efforts to secure badly needed international financial support as it grapples with the worst economic crisis in decades.
The dispute came to a head this week after prime minister Hassan Diab, a former computer science professor, had lambasted governor Riad Salame’s handling of the country’s monetary crisis. Mr Salame, the dominant figure in Lebanon’s finance sector since its civil war, hit back on Wednesday, implying that there was a political campaign to undermine him.
In an hour-long speech, Mr Salame argued that the central bank had for years propped up the government to buy time for reforms, which never came. Accusations that he was solely to blame for any monetary policy mistakes were part of a targeted “campaign” against him, Mr Salame said.
Lebanon is at a critical juncture, having defaulted on about $90bn of debt in March, and the government and the central bank need to be working together to renegotiate with bondholders and ease the crisis, economists said.
Instead, the country’s two most important men are at loggerheads, exposing the factionalism and personal animosities that have dogged Lebanese politics and blocked reform for decades. Neither responded when the Financial Times sought comment.
“I am watching . . . the whole system, throwing fireballs like in Harry Potter,” said Roy Badaro, a Lebanese economist. “I don’t know who is Harry Potter and who is Voldemort.”
On the parallel market, the value of the Lebanese pound against the dollar has fallen almost 50 per cent since late January and food prices have doubled since October. Protests have reignited and rioters torched dozens of banks earlier this week.
“[Mr Diab and Mr Salame] should be working hand in hand to do the maximum possible to salvage the country,” said Sibylle Rizk, public policy director of Kulluna Irada, a Lebanese lobby group. “But clearly the governor of the central bank is not on the same wavelength as the government.”
Hassan Diab, Lebanon’s prime minister, criticised Mr Salame’s handling of the country’s monetary crisis © Nohra/Reuters
The parliament has approved an economic rescue plan and Mr Diab and the finance minister on Friday signed a formal request for IMF support. But the failure of the central bank and the government to work together puts “at risk potential external funding and support by development partners,” said Alia Moubayed, MENA chief economist at Jefferies.
The rift began this year when the new government decided to default on its foreign obligations, bankers and government officials said. Mr Salame was opposed to halting the repayments, preferring to keep using foreign reserves to pay interest to international creditors.
Instead, Mr Diab decided that Lebanon would restructure its debts and overhaul the sprawling banking sector, which the government says has accumulated $83bn of losses.
At the same time, the finance ministry pushed the governor to provide more detail on the state of the central bank’s accounts. According to two bankers and two officials, Mr Salame was slow to comply with the requests for additional disclosures and the government has now ordered independent audits.
Years of lending to the government and attracting dollars to the import-dependent economy with high interest rates, have left the central bank with “embedded losses” of $40bn, according to the government’s economic plan prepared in collaboration with the investment bank Lazard.
Mr Salame says the central bank is transparent but insists on its independence from government. As one of the world’s longest-serving central bank governors, he was credited before the current crisis with maintaining the stability of the local currency peg for two decades and using rounds of what he called “financial engineering” to shore up the country’s commercial banks.
On Wednesday, he said he always made the government aware of his plans and actions but emphasised that he was not required to ask the government’s permission.
Mr Salame “acts like an emperor,” said one government official, who asked not be identified by name. “[Mr Diab] is a professor who wants to tell him what to do. [Mr Salame is] not going to take that.”
The prime minister, a former education minister and vice-president at Lebanon’s premier university, was catapulted into the top job in December after former prime minister Sa’ad Hariri resigned in the face of mass anti-government protests. Although Mr Diab formally sought IMF support on Friday, his government has been criticised for not moving fast enough to tackle the crisis.
Mr Salame has led the central bank since 1993, seen at least eight different prime ministers during his tenure and has rarely faced criticism from Lebanon’s political class.
“Riad Salame has all the secrets of the republic,” said one prominent executive who spoke on condition of anonymity. “In a way he’s a time-bomb for [the politicians]. The only one who doesn’t care is Diab”.
Additional reporting by Asmaa al-Omar
