By Reuters

Lebanon’s central bank chief said he will ensure local banks comply
with a US law targeting Hezbollah’s finances, weeks after a bomb attack
at a major Lebanese lender that had begun closing accounts linked to the
militant group.

Riad Salameh told Reuters the US law must be
enforced to keep Lebanon’s banks within the global financial system and
stabilise the hugely indebted economy as neighbouring Syria’s civil war
hits tourism and growth.

“Of course this (law) has created a lot
of tension in the country, and the tension was not good for Lebanon, but
overall we have preserved the objectives that we had in mind,” he said.Passed
in December, the law threatens to bar from the US financial market any
bank that knowingly engages with Hezbollah, designated a terrorist
organisation by the United States. It has led to a standoff between the
central bank and Hezbollah, which views it as a breach of sovereignty.

Salameh
and the US Treasury have repeatedly said the Hezbollah Financing
Prevention Act is not designed to hurt Lebanon’s economy or to unjustly
prevent members of Lebanon’s Shiite community from accessing banking
services.

Hezbollah, whose fighters played a major role in forcing Israel to
withdraw from southern Lebanon in 2000, enjoys strong support among
Lebanese Shiites. Its members include government ministers, MPs, and
local councillors.

Salameh would not comment on how many accounts had been closed so far, or how many were under investigation.

“The
process is being respected by the banks and a Special Investigations
Commission is looking individually at every request to close accounts
that they deem are in contradiction with the law,” Salameh said.

With
government debt of 136.7 per cent of GDP in 2015, the third-highest
among countries rated by Fitch, confidence in Lebanon’s central bank –
seen as one of the only effective institutions in the weak state – is
vitally important.

“The banking sector in Lebanon is the
cornerstone of stability in the country,” said Salameh, who took office
in 1993, making him currently the world’s second longest-serving central
bank head after Uzbekistan.

“Lebanon is funded by its banking sector only.”

Cost of war

Battered
by regional instability and a huge refugee burden Lebanon’s traditional
economic resilience is being put under ever increasing strain.

Salameh
forecasts growth of 1.5 to 2 per cent for 2016, in line with a World
Bank projection of 1.8 per cent but far below the 8-9 per cent growth
rates seen in the years before 2011.

Political paralysis that has
kept the post of president vacant for over two years is also testing
confidence in the country and curbing foreign direct investment (FDI).

FDI,
a key source of foreign exchange, dropped to about 5 per cent of GDP in
2015, compared to 12.5 per cent of GDP in 2009, according to central
bank and World Bank data.

“The Syrian presence… in terms of
displaced population has created costs for Lebanon which is reflected in
the economy,” Salameh said. “It has also created less consumption and
investment… because many Gulf citizens don’t come anymore to shop in
Beirut or to buy real estate in Lebanon due to the war in Syria.”

Fitch
cut Lebanon’s credit rating to B- from B last week, citing political
risks and the deepening toll Syria’s civil war is having on Lebanon’s
economy and politics. It was last rated B- in 2006, during the conflict
between Israel and Hezbollah.

Laws to allow oil and gas
exploration, which could raise revenues to help cut the deficit, or
public-private partnerships to revive crumbling public services, have
been stalled by the political impasse that has also left the presidency
vacant.

“Lebanon needs to put its act together (on reforms),”
Salameh said. “The time we are wasting is costly.” He said the central
bank will keep stabilising the economy for “as long as it takes” for the
government to become more effective, pass a budget and tackle the
structural deficit.

“The other scenario is not good for Lebanon
and it is much more costly than the costs we are incurring as a central
bank to maintain confidence of the markets.” Confidence in the central
bank remains high and should ensure Lebanon can continue to fund itself,
he added.

“You can see that from the stability we are witnessing
in interest rates charged on Lebanese debt that are much lower than
comparable rated countries in the world,” Salameh said.

“I think
this confidence has been preserved. We didn’t see pressure to change
Lebanese pounds into foreign currencies. This year we expect growth in
(bank) deposits by almost 5 per cent.

“Of course, we would have been much happier if there were not … these laws that create tension in our market.”