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Can the gold reserves restore Lebanon's luster?

A gold bar is displayed at the currency museum of Lebanon's Central Bank in Beirut November 6, 2014. REUTERS/Jamal Saidi

BEIRUT: Lebanon’s gold reserves have been sitting idle behind the heavily fortified walls at both Fort Knox and the Central Bank for many decades as a safety net that the country could use one day in the event it faced a severe economic crisis.

Now the issue of gold has been raised by some experts and financial analysts who are divided on whether to use part of these reserves as collateral to rescue the economy, which has hit rock bottom since the anti-government protests erupted in Oct. 17, 2019, and the subsequent outbreak of the coronavirus pandemic.

Lebanon ranks among the top 20 countries in the world in terms of gold holdings, of which it has about 286.6 tons, or 10,116,572 ounces, worth close to $16 billion (according to the current market value).

The Central Bank has always highlighted the importance of the gold reserves it holds on behalf of the Lebanese state.

In the mid ’70s and early ’80s, BDL moved a large amount of its gold reserves to Fort Knox for security concerns at that time.

Any decision to either liquidate part of the gold or use it as collateral to borrow from the international markets at low interest rates is in the hands of the Parliament.

But since the Taif Accord, no politician or parliamentarian has ever proposed using part of the gold reserves to borrow from the international markets.

Nassib Ghobril, the head of the economic research at Byblos Bank, wondered why the gold reserves are still kept in the coffers despite the steep current economic crisis.

“The gold is usually used in times of crises. We have been hearing for decades that gold reserves are there for confidence and in times of crisis. The decision to sell all or part of the gold has to be taken by a majority vote in the Parliament. But because of the deep liquidity shortages in the market and economic contraction, the government should take an overdraft against part of the gold reserves and this way they will not sell any part of the gold,” Ghobril told The Daily Star.

He suggested that the government could take on overdraft of $5 billion to $6 billion against the gold reserves and inject this cash into the economy to support businesses and inject liquidity in the market.

“This will also support the exchange rate. The gold rate should not be untouchable. The gold reserves should be used in times of unexpected crises and we are passing through such a crisis,” Ghobril argued.

Echoing similar views, Rock-Antoine Mehanna, an economist and a university professor, believes that this is the good time to use part of the gold reserves as collateral to borrow money at cheap interest rates.

Mehanna suggested that Lebanon could use part of the gold reserves as collateral at an interest rate of 0.5 percent or 1 percent at the most.

He did not see any reason why Parliament should not take such a decision on gold reserves in the interests of the country and its economy.

“We can borrow money against part of the gold reserves at very low interest rates. We need to take advantage of the drop in interest rates on the international markets. The second option is we can use it as a swap in foreign currency,” Mehanna noted.

Mehanna agrees that most citizens distrust the government to conduct this operation and for this reason he advised taking a credit line from one country to another but on condition that the private sector would be the main beneficiary.

He stressed that the money raised from this operation would be used to finance the import of industrial and agricultural raw materials.

“If we inject $1.5 billion each year into the Lebanese economy from either selling 10 percent of the gold or borrowing against this precious metal then we can stimulate the industrial and agricultural sector that badly needs raw materials to export its products,” Mehanna said.

He insisted that Lebanon could not wait forever until the International Monetary Fund released funds for Lebanon.

“Lebanon’s economy is struggling while poverty and unemployment are on the rise. One way to alleviate this crisis is to use part of the gold to inject cash into the market and kickstart the economy,” Mehanna said.

But Dan Azzi, a financial analyst and former CEO of Standards Chartered Bank in Lebanon, totally dismissed the idea of using gold reserves at this moment.

“Purchasing the gold was a decision made in the 1970s by late President Elias Sarkis, God rest his soul. Then in the 1980s, the legislators in the Gemayel-Wazzan Era (whatever you may think of that administration) passed a law making it onerous to sell the gold. The law was so tight and wide, that even transactions such as income-generating derivative contracts (selling out-of-the money call options) were banned,” he noted.

Azzi warned that any new gold purchased subsequently would fall under the old law and get stuck.

“Borrowing against the gold was also covered. The decision to buy the gold and pass that law was prescient and wise, otherwise our successive incompetent governments would have blown it, just like they blew everything else. Today is no different. The gold should be left until all other choices, such as IMF or CEDRE, have been exhausted (assuming they won’t impose a requirement to use it, anyway),” he added.

Azzi reminded that the last balance sheet published by BDL showed that the value of gold holdings had decreased between April 30 and May 15 by $165 million, even though the price of gold increased from $1,689 to $1,744 per ounce between those dates.

“This means that either there was an error in reporting or there was a sale, or some other transaction, such as a derivative, which lost money,” he explained.

Lawmaker and former Economy Minister Yassin Jaber also did not show any enthusiasm to liquidate part of the gold or use it a collateral to borrow money from the markets.

“I don’t fancy this idea at the moment. I prefer to take money from the IMF because it comes with a whip and we need this whip to get our act together and implement reforms,” Jaber told The Daily Star.

The MP insisted that using the gold to inject cash would not pressure the government to implement reforms and it would eventually return to its old habits.

“First we need to seek conditional assistance from IMF and CEDRE. But if this option does not materialize then we can resort to plan B, which is using gold. However, the government should pursue plan A since it will push officials to execute reforms,” Jaber said.

 

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