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BEIRUT: Lebanese banks are pulling out the stops to bring in dollars as the country strives to preserve a two-decade old currency peg, offering high returns to customers willing to change their hard currency into long-term Lebanese pound deposits.

It is one sign of Lebanon’s determination to maintain monetary stability as political leaders’ warnings of economic crisis have fuelled rumours that have led the central bank to issue repeated assurances about the peg’s soundness.

But the central bank’s high interest rates that keep money flowing into banks are increasing risk within the financial system and strangling an already depressed economy. That all comes at a time of renewed political uncertainty as Lebanon nears three months without a government.

With growth low and traditional sources of foreign exchange - tourism, real estate and foreign investment - undermined by years of regional tension, Lebanon is now relying more on the billions of dollars expatriate Lebanese deposit in local banks.

The banks buy government debt, which finances the country’s eye-watering public indebtedness, and deficits.

There is broad agreement that Lebanon - the world’s third most indebted state - needs urgent fiscal reform to help the economy and reduce dependence on central bank operations described as unconventional by the International Monetary Fund.

But since parliamentary elections in May, politicians have failed to form a government that could tackle the deficit, reinforce confidence in the financial system and unlock billions in donor financing.

Focusing on high interest rates has come at a price.

“The priority today for the central bank is to raise rates to attract capital and preserve capital in foreign currency in Lebanon so we can continue with the policy of stabilising the pound, which is the top priority,” Raed Khoury, Lebanon’s caretaker economy minister, told Reuters last month.

“It is the reason for Lebanon’s political and monetary stability and confidence in Lebanon. Of course these factors don’t come at a low cost. The cost is high for our economy.” Ordinary Lebanese are feeling the effects of the weak economy. Lending is down and business activity is falling along with prices in a real estate sector that was once a pillar of the economy.

Annual growth rates have fallen to between 1 and 2 per cent, from between 8 and 10pc in the four years before the Syrian war, and Lebanon’s debt-to-GDP ratio hit more than 150pc at the end of 2017, the IMF said.

The central bank last hiked interest rates at the end 2017, by 2 percentage points in response to the crisis caused by Prime Minister Saad al-Hariri’s resignation, later rescinded.

But almost two months ago banks began telephoning customers asking if they had foreign currency locally or abroad they could deposit to earn interest rates of up to 15pc on five-year term Lebanese pound deposits.

Other offers heard by Reuters include 10pc on one-year and 11pc on two-year terms, with minimum deposits ranging from $20,000 to $50,000.

The weighted average interest rate on Lebanese pound deposits was 6.7pc in June, the highest since December 2009. The average rate on dollar deposits was 4.1pc, the highest since February 2008.

And since the Hariri crisis, the average term of Lebanese pound deposits increased from 40 days in October to 120 days today, Bank Audi chief economist Marwan Barakat said. Banks convert customers’ cash into local currency and deposit the dollars in the central bank which, a number of complex operations later, gives the banks even more attractive returns.

Published in Dawn, August 17th, 2018