Central Bank’s loans to banks double in nine months

Outstanding loans granted by the Central Bank (BDL) to the local financial sector more than doubled in the first nine months of 2018 to stand at $27.9 billion at the end September, according to BDL data.

The increase in BDL’s loans to the financial sector registered over the nine-month period was $15.1 billion. This compares with an average annual increase of just $2.8 billion over the 2014/2017 period.

The loans to the financial sector mainly consist of credit facilities extended by BDL to the banks at attractive interest rates. The banks use the proceeds to subscribe to Treasury bills (T-bills) and certificates of deposit (CDs).

The financial sector’s deposits with BDL grew over the nine-month period by $16.1 billion, or 17 percent, to $113.6 billion. They represented 84 percent of BDL’s total liabilities at the end of September compared with 79 percent at the end of 2014. These deposits were increasing at an annual average of $10 billion over the previous three years.

The rise in BDL’s lending to the financial sector and the increase in the sector’s placements with the Central Bank show that BDL has intensified its swap transactions with the banks. These transactions are known as financial engineering operations.

These operations aim “to incentivize commercial banks to park their liquid foreign assets at the BDL instead of at international banks in order to stabilize the economy's net foreign asset position in response to the reduced pace of cross-border inflows that started in 2011,” according to Moody’s report ‘Annual Credit Analysis-Government of Lebanon’.

BDL’s foreign assets increased four percent during the first nine months of 2018 to $43.5 billion. Its total assets increased 15 percent during the nine-month period to $135.8 billion.

S&P said in a report released in August about the credit outlook of Lebanon that “BDL plays a material role in steering macroeconomic and financial policy. It encouraged foreign inflows back to the economy and increased central bank foreign exchange reserves through financial engineering operations conducted since 2016.” These operations, which also aim to help the government meet its external financing needs and maintain confidence in the currency peg, are however, “unusual and unsustainable”, according to S&P.