Gold reserves in Lebanon: safe haven or frozen wealth at the time of collapse?

Beirut

Lebanon is grappling with the repercussions of an economic crisis that has erupted since mid-2019, and its most prominent headlines are bankruptcy, the dissolution of the banking system and the public sector, the squandering of depositors' money, the collapse of the lira, and the extreme poverty that the Lebanese have not known since the inception of their country.

After the parliamentary elections, Lebanon is moving to a foggy and complicated stage in the administration of government, at a time when it possesses a wealth of gold reserves that are part of the state's assets, some of which are stored in the Central Bank of Lebanon, and most of them are deposited in the United States of America.

With the economic and financial noose intensifying, the parties to the crisis, the culprits and those affected, present this yellow metal as a problem among those who call for the necessity of its use, and others warn against harming it as it is one of the most valuable assets that Lebanon officially owns.

Al Jazeera Net discusses the issue of gold reserves between ways of benefiting and risks with: the former Minister of Finance, the researcher and advisor to international financial and banking institutions, George Corm, the legal researcher specializing in banking affairs, Sabine Al-Kik, and the researcher and economic journalist Vivian Akiki.

What is the story of gold reserves?

Lebanon ranks 20th in the world in gold reserves, according to the classification of the World Gold Council, and ranks second in the Arab world after Saudi Arabia (it has 323.1 tons), as it owns 286.8 tons, or about 10 million ounces, valued at 17 billion dollars.

George Corm recalls the story of Lebanon’s possession of this reserve after independence from the French mandate. Since 1948, it began acquiring the first amount of gold following its accession to the International Monetary Fund in 1946 after the recognition of the Lebanese pound as an independent currency.

At that time, according to Qurm, buying gold was linked to stabilizing the exchange rate of the dollar and preserving its value, and it continued until the early seventies, after the United States of America disengaged the dollar’s ​​coverage and printing it with gold, a decision known as the “Nixon Shock” (in relation to former US President Richard Nixon), which The dollar was imposed as a reserve alternative to gold to preserve the value of all other currencies around the world. Since 1971, Lebanon has stopped buying gold following the American decision to reach the value of its savings of 286.8 tons.

Here, Vivian Akiki points out that the successive Lebanese governments between independence and the early seventies continued to buy gold to feed the reserves of the Central Bank of Lebanon, from the budget surplus and taxes they take from citizens.

Akiki describes what the Lebanese have done as a great sacrifice to buy gold and serve financial policies in exchange for not obtaining the lowest basic rights, "which makes these mineral assets an acquired right for all Lebanese."

In 1986, Lebanese Law No. 42 was issued, and stipulates the following: “Exceptionally and contrary to any text, it is absolutely forbidden to dispose of gold assets with the Banque du Liban or for its account, regardless of the nature and nature of this disposal, whether directly or indirectly, except by a legislative text issued by the Parliament".

Sabine El-Kik states that any procedure or step to use gold requires the approval and vote of Parliament, and Vivian Akiki clarifies that the law was issued to protect gold and prevent it from being controlled by the Lebanese militias during the war.

In 1996, the Lebanese government approved the agreement on contracts for the issuance of debt bonds in foreign currencies (Eurobonds), and one of its conditions stipulates that the Lebanese state must submit to the laws of the New York courts to resolve the dispute between it and creditors, and requires the state to relinquish its sovereignty over its foreign assets, if it fails to pay its debts. in foreign currencies.

Akiki said that gold is the most important of these foreign assets, which means that the state, by virtue of abandoning its foreign assets, after defaulting for the first time in the payment of Eurobonds dues in March 2020 under the government of Hassan Diab.

Sabine El-Kik states that the public debt has exceeded $90 billion, some of which is due to be paid in Lebanese pounds.

While the Eurobonds alone amount to about $39 billion, and the last bond is due to be paid with its interests in 2037, which Lebanon defaults on due to its crisis, with the deficit in the banking system - officially recognized - reaching about $70 billion.

Can Lebanon take advantage of the gold reserves to solve its crisis?

While Lebanon is currently plunged into sharp fluctuations in the dollar exchange rate (between less and more than 30 thousand pounds), and the collapses that are emerging from it in various sectors, Lebanon signed an agreement at the employee level only with the International Monetary Fund to put it on the rescue rail.

If the negotiations are completed and succeeded, despite the skepticism of experts, the estimates suggest the possibility of Lebanon obtaining about 4 billion dollars (i.e. a quarter of the value of the gold reserves) in return for implementing strict conditions, most notably: liberalizing and unifying the dollar exchange rate, recognizing financial losses and restructuring the banking system and the sector the public budget, distributing losses fairly among the concerned parties, controlling deficits and austerity in the public budget, and providing social protection networks.

Recently, there have been calls for the necessity of dealing with the central reserve, and gold implicitly, as the last remaining repository, while others find it useless to finance a state that complains of waste, bankruptcy and corruption without a comprehensive reform plan.

Here, George Corm warns of the dangers of using gold due to its Lebanese and international symbolism and in light of the lack of confidence in those in charge of the legislative, executive and monetary authorities. He said that gold is the only point of strength that Lebanon has in its crisis, and any operation to mortgage it or sell it means a complete collapse.

He believes that any rescue "must begin with an investigation committee that scrutinizes the central bank's accounts and all its assets, and by changing its governor, Riad Salameh, who has been in his position for 30 years."

The former minister considers that resorting to gold is a systematic escape from the core of the "irrational" monetary system crisis.

He pointed out that "the Central Bank has established over decades a fixed exchange rate (1507 pounds per dollar) that led to a financial and monetary disaster through slow monetary suicide, while the world was adopting floating exchange rate systems, which justifies the uniqueness of the Lebanese model with its financial crisis."

Beirut has a wealth of gold reserves that are part of the state’s assets, some of which are stored in the Central Bank of Lebanon (Reuters)

How can gold be used?

In parallel, Vivian Akiki raises questions about the places where Lebanon's gold is stored, and she fears mortgaging and seizing it until the Eurobonds are paid in full, at a time when Lebanon can be promoted by liquidating part of it in productive investment projects.

And she believes that supporting the disposal of gold in the crisis is accompanied by great caution about how this is interpreted by the ruling elite, and she said that gold is a valuable material asset, and “placing it without disposal is meaningless, knowing that not disposing of it previously had a meaning to protect it, and therefore any prejudice Gold is related to what we are going to use."

Akiki considers that the use of gold “should be to finance agricultural and industrial productive sectors and infrastructure, not to fix the exchange rate or compensate creditors and banks, and it must be in the service of all current and future generations, and based on a vision and perception of the state, not to neglect it as they have wasted depositors’ money.” .

Akiki calls for thinking about how to capitalize the Banque du Liban, because the monetary policies that it implements are an essential tool in guiding the economy, while "its practices of playing with interest and printing currency were not to serve the Lebanese society, but rather to serve the bank owners and accumulate their profits."

For her part, Sabine El-Kik states that disposing of gold is not related to the will of Lebanon and the Lebanese alone, but is subject to a joint decision with external parties, at the forefront of which is Washington, the International Monetary Fund and countries able to buy it and bear its transfers, noting that a number of countries such as Germany faced great difficulties to retrieve Her gold is preserved in America.

She said that the transfer of gold requires complex procedures related to the parties concerned with it and not only the state that owns it, and that the option of mortgaging it is easier than the option of selling it, because it is like a guarantee that does not require its transfer.

It considers that raising the gold file preoccupies the Lebanese public opinion with what is illogical to verify in the foreseeable future, and that Lebanon's problem is the loss of confidence in its financial system, and the solution is in operating the economic wheel, restructuring the banking sector, reviving it and recovering depositors' money.

“There is no sense in any rescue solution that does not start with reforming the banks and employing them in the service of the economy and society.”