The Law for the Code of Money and Credit provides the Central Bank of Lebanon (CBL) with financial and administrative autonomy, but the International Monetary Fund (IMF) reported in its 2005 Report on the Observance of Standards and Codes (ROSC) that there have been times in the past when the CBL independence has been compromised. Contributing to the problem is the CBL's own regulatory framework, in which the Minister of Finance nominates candidates for the posts of governor. In addition, representatives of ministries serve on the CBL board of directors. The 2005 IMF ROSC does note that such representatives are prohibited by law from interfering with the CBL management. It does nonetheless contribute to a certain lack of clarity of responsibilities in monetary and fiscal policy. In this context, to better separate the roles played by the CBL and the Ministry of Finance, the IMF's Executive Board, during the discussions of the 2007 Article IV consultations, favored the CBL to refrain from quasi-fiscal activities, and supported the establishment of a joint working group in the Ministry of Finance and the CBL to better coordinate interventions in the financial market. The IMF Directors also cautioned for the central bank to reduce the direct financing of the government in order to maintain a healthy balance sheet. In sum, however, no comprehensive information is publicly available to enable an accurate assessment of Lebanon's overall level of compliance with the IMF's Monetary Policy Transparency Code.

General Overview

The 2006 Article IV Consultations between the International Monetary Fund (IMF) and Lebanon dealt with monetary and exchange rate policy, but addressed transparency issues only tangentially. In the Public Information Notice to the Executive Board Discussion of the IMF to the 2007 Article IV discussion, IMF Directors noted that while overall economic performance has significantly been affected by the July/August 2006 conflict with Israel, "the monetary policy framework has served Lebanon well, especially in helping to maintain financial stability in the face of disruptions in international financial markets."

The IMF's 2005 Report on the Observance of Standards and Codes (ROSC) focused on fiscal policy transparency, but did comment in passing on a few monetary-policy transparency-related issues. For instance, the 2005 ROSC noted that Lebanon's Central Bank (CBL) was granted administrative autonomy by the provisions of the Law for the Code of Money and Credit of 1963. The ROSC cautioned, however, that this autonomy has been subject to compromise, most recently due to fiscal dominance during the crises of 2002 and 2003. The bank's regulatory framework establishes conditions that enable such compromise. For instance, the Minister of Finance proposes the individuals who may be considered for the offices of Governor and Deputy Governors, the Council of Ministers issues the final approval, and representatives of both the Ministry of Finance and the Ministry of Economy and Trade sit on the CBL's supervisory board. The law forbids that the ministerial representatives not interfere with bank management, but it also requires that the CBL "coordinate with the government to ensure compatibility between the functions of the CBL and the objectives of the government" (p. 6). In light of this, the 2005 ROSC recommended that the CBL's independence be strengthened. Specific recommendations were that "the CBL should stop making loans, especially to the state owned electricity company (EdL), and make publicly available information on its equity holdings" (p. 29).

According to the CBL website, the central bank is empowered to issue licenses for the establishment of banks, financial institutions, brokerage firms, money dealers, foreign banks, leasing companies, and mutual funds in Lebanon. Control and supervision of such institutions is the responsibility of the Banking Control Commission (BCC). Circulars and resolutions that govern the relations between banks and their customers are issued by the CBL in consultation with the Association of Banks of Lebanon (ABL). The central bank website also acknowledges that the CBL and the government coordinate closely for the purpose of aligning their objectives. This means that fiscal and monetary policy, too, are coordinated. The website notes that the CBL "informs the Government on economic matters that might negatively affect the national economy and currency and suggests measures that might benefit the balance of payments, the price level, public finance and offers advice on how to promote economic growth." On this subject, the 2005 IMF ROSC notes that such coordination and policy exchanges occur regularly but informally, and remarks that "in the past, this has led to some tensions in policy choices and weakened central bank independence" (p. 10).

In a similar context, during the IMF's Executive Board discussion to the 2007 Article IV consultations, the IMF Directors cautioned the central bank to reduce the direct financing of the government in order to maintain a healthy balance sheet, which should be supported by the Lebanese authorities' intention to rely more on market finance in the future. In this context, and in order to better separate the roles played by the CBL and the Ministry of Finance (MoF), the Executive Board also suggested that the CBL stay away from quasi-fiscal activities, and supported the establishment of a joint working group in the MoF and the CBL to better coordinate interventions in the financial market. Regarding the monetary policy instruments of the CBL, the IMF Board supported the planned introduction of transparent short-term monetary instruments, and also underscored the importance of allowing greater interest rate flexibility in Treasury bill auctions.

The 2006 IMF Article IV Consultations report notes that disagreements between the CBL and the MoF have sometimes resulted in the poor coordination of government and central bank policies. The IMF found that this was not the case recently, however, and applauded the recent MoF commitment to not only avoid recourse to CBL financing but also to repay certain outstanding loans. The IMF also noted the CBL's willingness to address the problem of loss-making operations, noting that recourse to these was sought not by choice but through necessity. The IMF predicted that a rapid decline in CBL losses would likely only occur after 2009, given current obligations. While the CBL has several strategies in mind to reduce its losses, including the introduction of new fees and the sale of certain of its assets (including Middle East Airlines), the IMF suggested that additional measures would be required to hasten the reduction of CBL losses. Finally, the 2006 IMF report did assert that the CBL's reporting of monetary statistics to the Fund is generally reliable and timely. When a report of data to the International Financial Statistics is delayed on occasion, it has nonetheless been available on the CBL website.

In the area of exchange rate policy, the exchange rate peg to the U.S. dollar was considered by the IMF Executive Board in the 2007 consultations as being beneficial to "maintain financial stability without impairing competitiveness."

The Principles

Clarity of roles, responsibilities and objectives of central banks.

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According to the CBL website, the Law on Money and Credit (1963) established the central bank as a "legal public entity enjoying financial and administrative autonomy." The website asserts that the CBL is exempt to the regulations that apply to public sector entities, and its capital is "totally appropriated by the State." The mission of the CBL is to maintain the integrity of the national currency and thus to sustain social and economic growth. In addition, it is mandated to maintain the soundness of the broader banking sector, foster the development of financial markets, develop and oversee the payments systems and money transfer operations, and develop and oversee clearing and settlement operations. By law, the CBL is empowered to use all appropriate measures to ensure exchange rate stability. It is specifically permitted to intervene in the foreign exchange market by buying and selling foreign currencies. Bank liquidity is controlled by the CBL through its control over discount rates, market interventions, and credit availability to banks and other financial institutions. This latter activity is accomplished by deliberate, targeted credits to particular sectors or for particular uses, and by exercising its right to regulate credit in general.

Although the Law on Money and Credit asserts administrative autonomy for the CBL, the IMF's 2005 ROSC found that this autonomy has been known to be compromised and suggests that the bank's regulatory framework establishes conditions that enable such compromise. For instance, the Minister of Finance proposes the individuals who may be considered for the offices of Governor and Deputy Governors, the Council of Ministers issues the final approval, and representatives of both the Ministry of Finance and the Ministry of Economy and Trade sit on the CBL's supervisory board. The law forbids that the ministerial representatives not interfere with bank management, but it also requires that the CBL "coordinate with the government to ensure compatibility between the functions of the CBL and the objectives of the government" (p. 6). In light of this situation, the 2005 ROSC recommended that the CBL's independence be strengthened. Specific recommendations were that "the CBL should stop making loans, especially to the state owned electricity company (CBL), and make publicly available information on its equity holdings" (p. 29). The foregoing information notwithstanding, there is no publicly available information that directly addresses Lebanon's compliance with this principle.

Open process for formulating and reporting monetary policy decisions.

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According to the CBL website, the bank's Department of Statistics and Economic Research is responsible for publishing monthly, quarterly, and annual bulletins on key financial and economic indicators on the website. There is, however, no publicly available information that directly addresses Lebanon's compliance with this principle.

Public availability of information on monetary policy.

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There is no publicly available information that directly addresses this principle. However, the CBL website discloses that its Department of Statistics and Economic Research publishes monthly, quarterly, and annual bulletins on key financial and economic indicators on the website. The International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) website discloses that Lebanon is not a subscriber to the SDDS. However, the IMF's website shows that Lebanon has been a subscriber to the less rigorous General Data Dissemination System (GDDS) since January 2003.

Accountability and assurances of integrity by the central bank.

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There is no publicly available information that directly addresses this principle. However, the 2005 IMF ROSC reports that the CBL receives its legislative mandate for financial and administrative autonomy from the Law on Money and Credit. The report cautions that the CBL's independence has been known to be compromised in previous years. Contributing to the possibility of compromise is the CBL's own regulatory framework, which places the nomination of bank governor and deputy governors in the hands of the Minister of Finance and the final appointment in the hands of the Council of Ministers.