Central Bank of Lebanon uses accounting tricks to increase assets by $6 billion

The Central Bank of Lebanon has resorted to accounting tricks to increase its assets by $6 billion during the financial crisis that has hit the country, according to financial statements accessed by the Financial Times. Statements audited in 2018 indicate that the Governor of the Central Bank, Riyadh Salame, changed accounting standards to increase the entity's assets and balance its books as risk liabilities increased. 

The accounts were audited by the consulting firms EY and Deloitte with reservations until June 30 and have not yet been made public. Two independent experts from the entity have stated that they have never encountered accounting practices similar to those applied by Salame and have raised doubts about this procedure. These experts have warned that this manoeuvre could be used to conceal losses.

"It is very strange. It's just a way of using accounting to artificially value the Central Bank's assets and hide the fact that its net valuation is negative," Willem Buiter, former chief economist at Citigroup and a specialist in Central Banking told the Financial Times. Neither the Central Bank of Lebanon nor the auditors Deloitte and EY have taken a position on this issue in response to the Financial Times' requests. 

Salame has been the governor of the Central Bank of Lebanon for 27 years and has been credited with stabilizing the country's finances during the violent conflicts that ravaged the nation and the rest of the region, despite the lack of reform by successive Lebanese governments. Lebanon is currently experiencing the most serious economic crisis since its civil war ended 30 years ago. Currency devaluation has eaten away at people's savings and fuelled rampant inflation. Unemployment has skyrocketed and the standard of living has plummeted. The Lebanese Government acknowledges that the Central Bank has losses of USD 50 billion. 

To cope with this dramatic situation, the Central Bank has also resorted to unconventional monetary policy to increase reserves, stabilize the banking sector, maintain currency parity and finance Government spending. Since 2016, the opaque and complex exchanges between commercial banks and the Central Bank, in dollars, Lebanese pounds and debt purchases, have been described by some analysts as a kind of "Ponzi scheme". The Executive's own economic recovery plan recognizes that Lebanon's banking system is insolvent.

Even so, Salame has defended the accounting practices of the Central Bank. "We have to have the financial engineering to buy time so that Lebanon does not collapse and we have not done anything that is not internationally agreed upon," the governor said during a speech in May. 

The 2018 financial statements reflect that the Central Bank's financial engineering operations have deepened the bank's debts as Lebanon's economic situation has deteriorated, according to the Financial Times. The institution's debt to banks and financial institutions has shot up by 25% in 2018. Two Lebanese economists, who preferred not to reveal their names, have assured the increase in liabilities is related to the expansion of financial engineering, in statements to the Financial Times. 

The Central Bank's accounting mechanisms have involved paying very high interest rates to obtain foreign currency in dollars and that has meant losing deposits worth 24 billion dollars between the fall of 2017 and February 2019, according to data handled by the IMF (International Monetary Fund). Local banks, which are often in difficulty, have benefited from this increase in foreign exchange from the Central Bank. 

Last year, the IMF warned Lebanon that the Central Bank's unconventional measures to maintain the flow of dollars were becoming increasingly risky and costly. "The Central Bank has been the lynchpin of financial stability," the IMF said in its assessment of Lebanon's economic strength published in October 2019, "but at the cost of intensifying ties between sovereign banks, which pose risks to the stability of the banking sector, and weigh on their balance sheets, while protecting the profitability of the banks".