Lebanon’s central bank controversy shows limits of technocracy

The controversy over last week’s appointment of Karim Souaid as the new central bank governor in Lebanon reveals the limits of what a technocratic government can achieve. The process was accompanied by an intensive and sometimes vicious media campaign, including personal attacks and populist conspiracy theories. It divided the country along unexpected lines, creating a rift between newly elected President Joseph Aoun and his prime minister, Nawaf Salam, as well as one within the Cabinet.

One wonders what all the fuss was about. If the most competent people cannot discuss a technical problem, then the problem is not technical and needs a broader perspective to address other ideological and moral dimensions.

There is little doubt that the reformist government of PM Salam, if credentials are to be considered, is probably the most honest and technically competent in the history of humanity. I recall just one British prime minister ever having a doctorate, while ours has a doctorate from France and a Master of Laws from Harvard, in addition to a brilliant academic and diplomatic career, during which he presided over both the UN Security Council and the International Court of Justice. French historian Henry Laurens described Salam as “the master of the world.” His Cabinet of 24 ministers includes thirteen doctorates, three Masters of Laws, three Masters of Business Administration, two brigadier generals and one major general.

The government, if credentials are to be considered, is probably the most honest and technically competent in the history of humanity

Nadim Shehadi

Due to the country’s economic crisis and the devaluation of the currency, the salary of Cabinet ministers is barely equal to that of their driver. This also implies that ministers largely have to pay staff and cover expenses out of their own pocket, while having left brilliant careers and businesses behind in order to perform their patriotic duty. You could not find a more dedicated bunch.

One of the risks of such excessive ministerial talent and decency is that they could propose reforms that would work for a time, but only as long as the people in government are both as gifted and as clean as they are. Whereas what you really want is a system where you know that, whatever happens, incompetent and corrupt people cannot do much harm.

The debate raised many questions about policymaking and the independence of the central bank, as well as analyses of the causes of the crisis, the restructuring of the banking sector and the handling of the government's default on Eurobond debt service payments in March 2020. These are practical and legal issues that our ministers should be able to handle.

It gets complicated with the question of burden-sharing, or who should bear the losses from the financial crisis between three parties: the state, the banks and the depositors. The polarization is also similar to discussions over the “socialization” of financial losses that happened in the US after the 2008 financial crash, when hard-earned taxpayer money was used to bail out financial institutions, while bankers were allowed to keep their bonuses.

The division is interesting because it runs along classic left and right economic views and across sectarian and political lines. The chorus on the PM’s side call themselves the reformers who want to build a state, while using highly emotional language resembling Karl Marx’s text describing France’s “July Monarchy (as) nothing more than a joint stock company for the exploitation of France’s national wealth.”  

The other side uses equally dramatic descriptions, with imagery of a global conspiracy backed by George Soros-funded “woke” nongovernmental organizations and expatriate financial executives who want to destroy the Lebanese banking system and replace it with their own banks. There is a Byzantine feel to all this, oblivious to the fact that the country is technically still at war — I could even hear an air raid in Beirut while writing this article.

Ultimately, everybody knows that some sort of agreement, a compromise, will have to be reached between the new governor of the central bank, together with the government, and the banks. This deal will have to satisfy the International Monetary Fund, with the objective of rebuilding confidence in Lebanon’s financial sector and putting the economy and the country back on a positive track.

The Lebanese financial crisis will go down in history as the perfect crime, where the victims are fighting over the losses and the actor that is responsible gets away with it. All three parties — the state, the banks and the depositors — are going to incur major losses and it will be a long time before they can get back to where they would have been had the crisis not occurred. It all boils down to the question: what will you save from the burning house?

In fact, the intense debate is over the financial repercussions, whereas the real cause of the collapse is in a different realm. Throughout the last 20 years, Lebanon has been held hostage by Hezbollah and no country could have survived the constant battering that brought it to its ruin. It became the battleground and the front line of a regional and international confrontation, resulting in a decade of assassinations starting in 2004; a destructive war in 2006; an occupation of the capital, which was then attacked by black-shirted armed men in 2008; a coup in 2011; and paralysis, as Lebanon was without a president and parliament and had no effective government for almost three years.

The intense debate is over the financial repercussions, whereas the real cause of the collapse is in a different realm

Nadim Shehadi

The country was isolated from its main economic partners in the Gulf. Huge revenue losses were incurred through Hezbollah’s control of Beirut’s port and airport. The constant declarations of war ruined summer tourist seasons and deterred investment. The Syrian war brought close to 2 million refugees to the country.

One way of looking at it is that Hezbollah milked the country dry to subsidize the so-called axis of resistance’s wars, which have resulted in a fiasco. No society could have survived such pressures and the financial aspects we are arguing about represent the mechanisms of the collapse, rather than the cause.

In the meantime, the law is very clear that the state has full responsibility to recapitalize the central bank. If this happens, it would save the banking sector and whatever is left of the depositors’ money, while establishing the rule of law and confidence in the future. Lebanon has the expertise and wizardry to work out the mechanisms and the details. Perhaps a better definition of the central bank’s prerogatives and limitations will result from this, but it was not the main reason for the collapse.

While every skill is present in the Cabinet, ministers may also need to consult a historian, who would explain that, in the mid-1940s, there were barely half a dozen banks in the country. In fact, they could be more accurately described as exchange and trading counters. By the mid-1960s, there were more than 90 sophisticated financial institutions. The Lebanese banking sector is in fact worth saving, as it is the inheritor of centuries of Levantine trading history, with merchant families and their networks from all over the region taking refuge in Beirut to escape nationalist and socialist revolutions.

The banking sector is the cumulative experience gathered through ancient trade routes via Damascus, Aleppo and Mosul and the financial operations to build and manage trade through the Suez Canal. What is really at stake is the future shape of  Lebanon’s economy and its role in the region. This could be beyond the concerns of accountants, lawyers and economists, no matter what degrees they hold.

• Nadim Shehadi is an economist and political adviser. X: @Confusezeus