Interest rates have risen substantially due to tightening monetary conditions since the crisis surrounding the Prime Minister’s resignation in November 2017, according to the World Bank’s ‘Lebanon’s Economic Update October 2019’.
The average interest rates on deposits in dollars and lira rose by 229 and 325 basis points (bps) respectively between November 2017 and July 2019.
“A principal objective for the policy-induced monetary tightening has been to boost the foreign exchange reserves of the Central Bank (BDL) and limit the lira resources in the market that can be used against the exchange rate. This is in a context of surging risk premia,” the World Bank said.
Despite the rise in interest rates, deposits began to decline in 2019. They fell by 1.2 percent to $171.1 billion at the end of August compared with the end of 2018. The increase in the interest rates on deposits was followed by a rise in interest rates on bank loans to the private sector. The average interest rates on loans in dollars and liras increased by 251 bps and 289 bps respectively over the period November 2017-July 2019.
“As a result [of monetary tightening], the stock of banks’ credit to the private sector has been on an uninterrupted retraction since its peak in December 2017,” according to the World Bank’s report. The commercial banks’ claims on resident customers dropped seven percent to $48.2 billion at the end of August compared with the end of 2018.
BDL’s monetary tightening and financial engineering operations could not prevent a decline in its gross foreign exchange reserves, which dropped by $7.8 billion during the first half of 2019 to $36.4 billion at the end of June. The Central Bank, however, was able to add $1.4 billion to its foreign exchange reserves during the second half of August thanks to inflows from non-resident private sector depositors.
The decline in BDL’s foreign exchange reserves reflects a deterioration in the balance of payments (BoP). The BoP deficit recorded in the first half of 2019 was $5.4 billion which is almost $600 million larger than the deficit reached in the full year of 2018. The annual BoP deficit totaled $4.8 billion in 2018, its highest level in eight years.