Lebanon’s Gold Shifting Sands

Before the First World War (WW1), Lebanon and Syria were part of the Ottoman Empire (colloquially known as the Turkish Empire),and the Turkish pound otherwise known as the ‘Ottoman Lira’ (OL) was the legal tender.

In 1918, following the downfall of the Ottoman Empire, in order for the Allied Forces to normalize economic life in Lebanon and cover their expenses, the OL was replaced by the English authorities with the banknote of the National Bank of Egypt, a Sterling-based Egyptian currency (issued by a private British institution) as the legal tender under the joint French and British mandate.

In 1920, upon taking Lebanon and Syria under its separate mandate, the French Government sought to replace the Egyptian pound (EGP) and granted a commercial bank - the 'Banque de Syrie' (a French affiliate of the 'Ottoman Bank'), the authority to issue a currency for the states under its new mandate, namely the new Syrian currency, reimbursable to the bearer or at sight by checks drawn on Paris.

As the political status of Lebanon evolved, the Banque de Syrie, which was to act as the official bank for Lebanon and Syria, was renamed the ‘Banque de Syrie et du Liban’ (BSL).

In 1924, the BSL was granted the sole right to issue a French Franc based Lebanese-Syrian currency in Lebanon and Syria for 15 years and, was to expire on March 31, 1939. Meanwhile, the political status of the signatory states had changed.

In 1936, a treaty of friendship and alliance was signed between France and Lebanon for a 25-year period.

In 1937, two years before the expiry of the 15-year period, the BSL was extended for another 25 years to issue in Lebanon a Lebanese currency separate from the Syrian currency, both of which could be used interchangeably in either state.

In 1940, the banknotes issued under the Convention of January 23, 1924, were to be replaced by special banknotes marked “LEBANON”.

Although the currency was Lebanese in name, it remained a disguised French franc until 1941, when it was linked to the pound Sterling after the defeat of France and the invasion of Lebanon by the Allied forces.

On 1943, as Lebanon formally achieved its independence from ‘League of Nations’ (LON) mandate under French administration, a new era of monetary independence started as a consequence.

In 1944, France agreed to transfer power to the Lebanese government, thus granting the territory independence.

In 1947, Lebanon became a member of the ‘International Monetary Fund’ (IMF) and of the 'World Bank', with a quota of $4.5 million, none of it paid in Gold, rather in cash, according to the IMF’s 1947 annual report.

At the time, the IMF sought to tie the world’s currencies to the dollar through the “Bretton-Woods system”. Under this, dollars would be convertible to Gold, with each ounce being worth $35.

?Hence, Lebanon informed the IMF that its national currency, the Lebanese Pound, was pegged to the French franc by virtue of the '1937 Agreement', which grants the BSL the concession to issue the Lebanese Pound.

In 1948, following its independence, Lebanon concluded a monetary agreement with France separating its national currency from the unstable French franc (Law of May 24th, 1949), Lebanon sought the Lebanisation of the BSL.

Lebanon split from its monetary union with Syria after signing the Franco-Lebanon Agreement. Under this, the Lebanese Pound would no longer be equal to or interchangeable with the Syrian Pound; it would no longer be supported by French reserves.

Thus, the parity of the Lebanese pound was to be expressed in Gold, taken as a common denominator, or in the US dollar based on its rate of July 1, 1944. Under this agreement, the official rate of the Lebanese pound was the rate declared to the IMF.

Lebanon created the Foreign Exchange Office, a control body attached to the Ministry of Finance. Controlling exchange operations was limited to some hard foreign currencies, with a free exchange for other currencies, but these restrictions were gradually removed by the government. With this Agreement, the coverage of the Lebanese currency in the French franc came to an end.

On the heels of the First Arab–Israeli War (1948–1949)

In 1949, Lebanon refocused its monetary policy on a favorable exchange rate with the US dollar. To do this, Lebanon passed a law, under which the LL was equivalent to 405.512 milligrams of Gold, and all notes were to be backed by 50 percent Gold and foreign currency coverage, with the rest being covered by bonds and securities. Decree no. 15105, issued later clarified that the Gold cover should be gradually raised to that level over the next four years.

By the end of 1949, Lebanon’s Gold reserves reached 620,000 troy ounces (t oz.), and the country was able to raise its cover to 25 percent, and to 36 percent by the end of 1950.

In 1952, a 55 percent parity was reached. By then, the reserves had grown to 870,000 t oz.

In 1955, Lebanon had achieved 95 percent Gold backing. The cover would fluctuate between 77 and 92 percent in the years that followed.

The country would increase its Gold reserves to keep up with the growing amount of currency in circulation, which from 1952 to 1958 had increased from LL200 million to LL399 million. Therefore, the amount of Gold increased to 2.5 million t oz. in that year.

It was able to afford the Gold by selling its French currency reserves. In the 10 years since the agreement, Lebanon sold 13 billion francs ($110 million at the time) worth of reserves, in exchange for 2.6 million t oz., or 82 tones (t) of Gold worth $91.2 million.

On the heels of the Lebanon Crisis (1958) and a Coup d'état attempt (1961)

In 1961, Lebanon was also able to buy Gold using an unlikely source — foreign aid. In at least one case, Lebanon used US aid to buy US Gold. According to US congressional papers, while Lebanon was under the leadership of then-President Fouad Chehab, the United States granted Lebanon $10 million worth of aid, which Lebanon used to buy the same amount in Gold from the US Federal Reserve.

What aided the purchase of Gold was Lebanon’s favorable balance of payments, meaning more money was coming in from abroad than leaving the country.

World Bank figures from the 1950s show a positive balance of payments for most of these decades, despite a negative trade balance. The reason for this positive balance of payments was Beirut’s position as a financial hub at the time, as well as remittances from Lebanese expatriates, and transit fees paid to Lebanon by pipeline companies for the use of its ports and refineries in the cities of Tripoli and Saida.

In the 1950-60s, Beirut became an intermediary between the European and Asian Gold markets.

A council known as the “Council of Money and Credit” was formed to draw up the Money and Credit Code and the by-laws of Lebanon's future Central Bank, the ‘Banque du Liban’ (BDL).

In 1963, the BDL was established by the “Code of Money and Credit” promulgated on 1 August 1963, by decree no. 13513, with "Philippe Takla" (1915-2006), appointed as its first Governor in August 28, 1963, and started to effectively operate on the 1st of April 1964, with its legal tender the 'Livre Libanaise' or ‘Lebanese Pound’ (LBP) otherwise known as the ‘Lebanese Lira’ (LL).

As stipulated by (article 70) of the Code of Money and Credit, the BDL is entrusted with the general mission of safeguarding the national currency in order to ensure the basis for sustained social and economic growth.

In 1964, the Lebanese market was one of the reasons why the Soviet 'Moscow-Narodny Bank' (MNB) opened a branch in Beirut to “sell Soviet Gold on Lebanon's free market to finance wheat purchases from the United States and Canada” The New York Times reported.

Prior to 1964, the job was managed by the privately owned French BSL. After the shift to BDL, the Gold was moved from BSL’s headquarters on Allenby Street to the newly built BDL headquarters on Hamra Street. The Gold was locked away behind a 17-ton door in an underground vault 80 cm thick, allegedly built to withstand a nuclear explosion. Lebanon had amassed about 5.5 million t oz. of Gold, as per BDL’s 1965 annual report.

In 1965, the BDL annual report noted that since 1961 Lebanon had been importing Gold in huge quantities, amounting to 20 to 30 percent of its import balance sheet.

Lebanon’s Gold reserves helped it shield the LL against previous market shocks. This would happen again in the wake of the Intra Bank crash in 1966, the Arab-Israeli war of 1967, and after the Israeli attacks on Beirut.

On the heels of the Six-Day War (1967) and Insurgency in South Lebanon (1968–1982)

In 1968, “Elias Sarkis” (1924-1985), the 2nd governor of the BDL, made a decision to increase BDL’s Gold reserves, in his period, the Gold reserves increased to 8.214 million t oz., while he was responsible for acquiring a significant portion of the Gold reserves, 59.6 percent of the reserves had been purchased before his term.

In 1971, was Lebanon’s last purchase of Gold; by then the reserve had grown to 9.211 million t oz.. In that same year, Richard Nixon temporarily suspended the Bretton-Woods system convertibility, before formally ending it in 1973.

From then on, Gold prices skyrocketed as they were no longer bound by the $35 an ounce rule. And so, the value of Lebanon’s Gold reserves grew from $375 million in 1971 to nearly $1.5 billion at the start of the Lebanese Civil War in 1975.

On the heels of the Lebanese Civil War (1975–1990)

In 1975, despite the Civil War erupting, Lebanon’s finances were initially kept largely intact. One year into the fighting, a 1976 US intelligence memo noted that the LL was still trading at LL2.70 per dollar, and that the currency still enjoyed 80 percent Gold backing, with the “majority of these Gold stocks … reportedly located abroad.”

In 1979, the country even managed to restock Gold by 3,850 t oz., by buying back from the International Monetary Fund its share of Gold distributed to its members.

In 1980, Lebanon still had a positive balance of payments. In a Financial Times article, an anonymous senior Lebanese banker attributed this to remittances from Lebanese living abroad, as well as foreign funding coming in to support militias involved in the war.

There were fears that one of the militias in the vicinity of the Central Bank would loot the Gold. It was decided that a big chunk would be shipped and stored in the US. Today, it is estimated that 2/3 of Lebanon’s Gold is stored in Fort Knox and New York. The only person who has jurisdiction to repatriate the Gold is BDL’s governor.

By then, Gold prices had jumped from $160 per ounce in 1975 to $376 in 1982, valuing Lebanon’s Gold at close to $4 billion.

In 1982, with the US Marine deployment in Lebanon, talks began to swirl around rebuilding the country. Regional and international donor conferences only offered paltry sums toward the estimated $13 billion reconstruction bill.

Soon, focus began to shift to how the Gold could be utilized to rebuild Lebanon. However, the BDL governor at the time, “Michel El Khoury” (born 1926), opposed this.

In 1983, the Lebanese currency began to slide against the US dollar as the balance of payment turned negative. The BDL attributed this to low oil prices, meaning fewer remittances. The press noted that with the Palestinian Liberation Organization having departed to Tunisia, there was less foreign funding coming into the country.

Figures from the BDL noted a deficit of $533 million in the balance of payments compared to a surplus of $238 million a year before.

To counteract this trend, BDL began using its foreign exchange reserves to prop up the currency in the market. Foreign currency reserves, which by the end of 1982 amounted to $2.6 billion, had decreased by $613 million “under double pressure from demands from banks and the public sector,” BDL’s 1983 annual report noted.

In 1986, out of fear that Gold might be used to prop up the LL, and to reinforce confidence in the currency, law 42/86 was passed preventing the BDL from dipping into the Gold reserves without the permission of Parliament.

In 1987, the currency had tumbled to LL220. To combat this, Lebanon’s then-Prime Minister “Salim el-Hoss” (born 1929), proposed selling 20 percent of the Gold to support the currency.

This proposal received opposition from experts, and by then-President “Amine Gemayel” (Born 1942), hinging on the formation of a new cabinet, which never happened.

Lebanon was already exhausting its foreign currency reserves to try to maintain the stability of the currency, reportedly reaching a low of $200 million in 1987, when a wave of bank failures besieged the Lebanese economy, forcing the. BDL to act as a lender of last resort further fueling inflationary pressures. Lebanon had entered an era where reliable statistics on the state of the economy were usually absent.

On the heels of the South Lebanon Conflict (1985–2000)

By late 1980s, years of conflict had distorted the economy. Total GDP was down, but the proportion of GDP contributed by the government was up. The national currency collapsed, and the country began sustaining balance of payments deficits.

In the 1990s, Lebanon adopted a short-term economic vision, built on services, mainly catering to neighboring countries and, therefore, became highly dependent on the regional political environment.

To rebuild the country, Prime Minister “Rafic al-Hariri” (1944-2005)’s government focused on appealing to foreign depositors by offering attractive interest rates. Offsetting interest rates created a rentier economy and impeded the development and diversification of the productive sector.

The government and the BDL decided to peg the LL to the dollar and maintain parity at 1515 LL against the dollar. In the long run, this proved to be a costly move as it slowly depleted dollar reserves. For years, political haggling hindered necessary reforms, the absence of which, in turn, led to increased corruption and continuous instability.?

Lebanon also engaged in a large-scale reconstruction project of more than 18 billion dollars to propel Lebanon as a regional tourism, real estate, and financial hub. These sectors, however, were highly dependent on funds from wealthy regional investors and the Lebanese diaspora.

On the heels of the Shebaa Farms conflict (2000–2006)

In 2005, the assassination of Rafic al-Hariri, and the 2006 Israeli War resulted in capital flight, dropping remittances, the use of the BDL dollar reserves to defend the LL, and declining growth rates contributed to a bleeding of the Lebanese state’s coffers.

On the heels of the July War (2006), Fatah al-Islam Rebellion (2007) and May clashes (2008)

In 2008, the Doha agreement ushered in a short phase of political stability in the country. The real estate sector had grown considerably following the reconstruction of downtown Beirut. Growth spread across the rest of Lebanon, which led to a speculation upsurge.

On the heels of the Israel–Lebanon border clash (2010)

In 2011, the Syria war, the drop in global oil prices, and what followed it in terms of economic downturn in the Gulf, the war in Yemen, all destabilized the political and security environment.

The economic downturn in Gulf countries, the war Yemen, and the Gulf crisis, also eroded regional tourists and investors’ purchasing power. Even more, the 400,000 Lebanese diaspora members also experienced a diminished financial ability to buy goods and services.

Despite of which, Global investment bank Goldman Sachs said Lebanon’s sovereign Eurobonds are worth much more than their current prices. Lebanon’s outstanding Eurobonds at the end of January 2018 stood at $27.8 billion.

On the heels of the Syrian civil war spill over in Lebanon (2011–2017)

By 2019, rates reached an all-time high, reaching over 8 percent on the dollar and over 12 percent on the Lebanese pound. Moreover, the interest rate differential resulted in predatory speculative trends, benefiting the wealthiest classes.?

These rates not only impacted Lebanon's treasury by contributing to a rapidly growing debt but also limited the business sector's growth. Banks preferred to invest in treasury bills, thus failing to diversify their risks. Banks began lending less and less to the private sector, whose productive capacity was already weakened by the civil war.

The massive use of the dollar in the Lebanese economy and the maintained parity of the BDL's exchange rate against the dollar continued to grow. The treasury faced increased pressure as Lebanon experienced prolonged economic shocks.

Furthermore, unprofitable investments in Turkey and Syria, as well as the deterioration of financial indicators such as Credit Default Swaps (the exchange contracts against the risk of default of the Lebanese government), compounded the increasing balance of payments deficit.

These factors, along with the deterioration of the sovereign debt ratings, pushed the BDL to intervene several times on the market through financial engineering operations.

The Fitch rating agency has also downgraded Lebanese banks' viability ratings (VR) from CCC-.to F. Furthermore, allegations of Lebanese Oil importers backed by politicians, smuggling over 1.7 billion dollars to Syria added fuel to fire. If true, this monetary trafficking would have contributed to draining the Lebanese market of its dollars.

The country appeared to be in free fall. Economic pressure will only further mobilize citizens to take to the streets and amplify violent trends, leaving Lebanon’s state nothing but bleak.

On the heels of the Israel–Hezbollah conflict (2023–ongoing)

In 2023, Fitch Ratings has affirmed Lebanon's ‘Long-Term Foreign-Currency’ (LTFC) ‘Issuer Default Rating’ (IDR) at 'Restricted Default' (RD). Fitch has also downgraded Lebanon's ‘Long-Term Local-Currency’ (LTLC) IDR to 'RD' from 'CC' and the ‘Short-Term Local-Currency’ (STLC) IDR to 'RD' from 'C'.

Noteworthy, Lebanon ranked 19th in the world and 2nd in the ‘Middle East, North Africa’ (MENA) region in terms of Gold reserves which stood at 286.83 t in 2023 according to the ‘World Gold Council’ (WGC).

Years ago, talks about selling Lebanon's Gold reserves to pay part of the public debt constituted a taboo. Today, economic and financial experts are proposing it to stop the financial annihilation. Some see the Gold sale as a foregone conclusion…

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Food for thought!