Look in the archives, and the signs are there. In summer 2018, the Banque du Liban (BDL) celebrated its 55th anniversary. It also marked Riad Salameh’s 25th year at the institution’s helm; the government has repeatedly reappointed him every six years, an exceptionally long tenure for the head of a central bank. LibanPost issued a stamp in his honor, and Cedar Wings, the in-flight magazine of Middle East Airlines, published a glowing tribute to the bank. The BDL was a symbol of “Lebanese resilience,” it said, and Salameh “par excellence, the very embodiment of the institution” and “of confidence in Lebanon, in its banking sector…. He is the governor at the service of the Lebanese pound.”

The reverential tone is explicable. The article was written by the CEO of the airline, 99 percent owned by the BDL, which took control of the national flag carrier when it faced bankruptcy in 1996. Its partial or total privatization has been a recurring question since its recovery in the 2000s. Despite demands from Lebanon’s external donors, and Salameh repeatedly flagging it as a priority, it has still not happened. Yet the BDL, like every other central bank, is not supposed to manage commercial assets long-term, whether they an airline or, more unusually, a casino, as is the case with the Casino du Liban, on the Beirut Corniche, in which it has an indirect long-term stake.

Its tone may have been especially sycophantic, but the Cedar Wings profile was just one voice in a chorus of praise for the BDL, which before the country’s current crisis was considered Lebanon’s only functional institution, its governor acclaimed at home and abroad for maintaining the stability of the national currency, the Lebanese pound, and of the banking and financial system. But in summer 2018 the praise felt like a preemptive PR campaign: For months, rumors of devaluation had been rife in Lebanon.

Sinking into an abyss

Despite BDL denials, the Lebanese gradually realized their economy was in trouble. Barely a year later, in October 2019, social unrest erupted in Beirut and spread nationwide. The pound began to look shaky on the black market. In March 2020, during the Covid-19 pandemic, the state defaulted on its foreign debt for the first time in its history. Then, on August 4, there was a huge explosion in the port of Beirut. Lebanon was sinking into an abyss, and it still hasn’t reached the bottom. The economy crashed as the pound fell sharply and foreign exchange reserves evaporated. The people, with no access to forex savings, suffered shortages of medicines and basic goods, and power cuts became more frequent. Fights broke out in the long gas queues that formed before dawn, and shopkeepers spent the night in their stores to deter looters. Half the population is now below the poverty line. According to the World Bank, Lebanon’s economic crisis is one of the world’s three worst in peacetime since the 19th century.

The BDL’s fall from grace with the public was dramatic. Its impressive record now looks like smoke and mirrors, and the Lebanese see Salameh’s response to the crisis as the final error that destroyed their purchasing power. They blame him for not introducing official capital controls when the pound started to plummet, which enabled the wealthy to take their money abroad.

They also blame him for delaying audits intended to shed light on the BDL’s accounts and methods, an IMF condition for negotiating a financial rescue package. Resentment has grown with mounting accusations that the governor and his associates have lined their own pockets, although Salameh has vigorously denied this. He is now the subject of legal complaints in Lebanon, France, the UK, and Switzerland.

Toufic Gaspard, a former IMF and Lebanese finance ministry adviser, was one of the first to question the BDL’s actions, more than two years before the crisis. “Lebanon is very likely heading towards a serious financial crisis, which would take the form of a depreciation of the currency and, more critical, a destabilization of the banking sector,” he wrote August 2017 in a study published by the Maison du Futur research center and the Konrad-Adenauer Foundation. Gaspard showed that the BDL’s net reserves—after deducting what it owed creditor banks—had been in the red since 2015, a sign the institution was heading for disaster.

He also examined its financial policy. “Financial engineering,” a strategy devised in the 2000s, accelerated in 2011, and taken to a new level in 2016, boosted BDL reserves, which were essential for financing imports and defending the pound on the foreign exchange market. This strategy of attracting foreign capital, which was then siphoned off by Lebanese banks offering high interest rates to lenders, amounted to what Gaspard called “national financial suicide.”

BDL rejects all criticism

But in 2017 the BDL was unwilling to engage with criticism. The shock waves caused by Gaspard’s paper forced the bank to issue an official statement in which, predictably, it extolled the virtues of its stability policy and tried to discredit the author’s analysis. Under pressure from various sources, the Maison du Futur canceled the meeting that was supposed to mark the launch of the paper.

This episode is symptomatic of the influence the central bank has acquired under Salameh; the man and the institution have become so closely linked over the last 30 years that their fates are inextricable. So great was this influence that the governor’s financial clout was equated in Beirut circles with the military clout of Hezbollah leader Hassan Nasrallah.

In reality, it’s impossible to say whether impotent governments or an omnipotent central bank bear more responsibility for Lebanon’s current situation. Governments’ inability to reform and develop the economy encouraged the bank to try ever harder to attract foreign capital, incurring a very high long-term cost for the Lebanese treasury.

Lebanon’s fate may have been sealed when it chose to peg its currency to the US dollar, informally from 1992, then officially in 1997, at 1,507.5 Lebanese pounds to the dollar. This decision was motivated by the need to boost monetary reserves with dollars. Cédric Tille, professor of international economics at the Graduate Institute for International and Development Studies in Geneva, suggests that “a country that accumulates budget deficits and relies on the central bank to finance them can survive for a while on a fixed exchange rate. But eventually, the system breaks. Lebanon’s situation belongs to the first generation of balance of payments crisis models, which were developed in the 1970s. The literature shows a soft landing is impossible: The break is always abrupt.” In 2018, according to the UN, Lebanon had a balance of payments deficit of nearly 24 percent of GDP, putting its economy somewhere between Afghanistan’s (15.8 percent) and Mozambique’s (27.2 percent).

‘Ingredients of a disaster’

Jérôme Maucourant, an economist at Jean Monnet University in Saint-Étienne, agrees that Lebanon’s fixed exchange rate was “the key ingredient of the present disaster.” In an essay coauthored with Frédéric Farah, an economist and researcher at Paris-1 University, he writes: “At the end of the civil war [1975–90], the Lebanese economy chose a development model that followed the recommendations of the Washington Consensus, ie expanding the economy’s extroversion, seeking ever more external capital, and extending free trade. In this way, numerous treaties weakened the structure of the Lebanese economy by brutally exposing it to deregulated and unfair forms of competition. Sectors such as timber, footwear, and apparel were directly affected. It is therefore unsurprising that an exorbitant current account deficit developed…. thus the need to bring in dollars to the BDL, all in defense of its fixed exchange rate.”

For years, the system held together by giving the star role to the central bank through a sort of institutional consensus. And every piece of financial engineering was a way to buy time to keep the system afloat. “This could have continued for a long time, since everyone was satisfied: the BDL, the banks, the state. It was the irruption of external shocks that killed the system,” says Nikolay Nenovsky, professor of monetary theory and board member of the Bulgarian National Bank, which is also subject to a fixed exchange rate. The destabilizing effect of the conflict in Syria and the fall in oil prices—which has depressed diaspora incomes—curbed the vital inflow of foreign currency.

But these recent shocks are just part of the story. They say nothing about where the BDL has previously veered off course. Tille points out that “in emerging countries, it’s common for the central bank, a technocratic entity, to be the most respected institution, as long as it sticks to its mandate. But it may sometimes venture beyond that to compensate for the failings of political power. This is a dangerous game, because it may then pursue contradictory objectives, and politicians lose the incentive to implement necessary reforms.”

Salameh could have stuck to the BDL’s mission as defined by the Code of Money and Credit: safeguarding the stability of the currency, the soundness of the economy and the banking system, and developing money and financial markets. But it proved impossible to resist thinking bigger when he’d been given the keys to the system, and Lebanon’s backers—especially France—praised him to the skies. As well as exercising control over businesses, the BDL also turned itself into a champion of the digital economy and between 2014 and 2016 organized BDL Accelerate, a well-funded conference that sought to be a “digital Davos” and make Beirut a seedbed for startups.

Much more problematically, under Salameh, and without governance safeguards, the BDL developed a culture of secrecy incompatible with the trust it had made its watchword and the transparency that is supposed to characterize central banks. It stopped publishing its profit and loss account around 20 years ago, and its governor has failed to defend his monetary policy before parliament, a tradition that had continued even during the civil war. Last year, leaks of the BDL’s 2018 audit report by EY and Deloitte revealed dubious accounting practices.

Yet there were ample warnings. In a series of cables from 2007, published in 2010 by WikiLeaks, the US embassy in Beirut painted a different picture of Salameh, especially worthy of Washington’s attention as he was then publicly signaling presidential ambitions. The diplomatic cables described his “very complex” relationship with the government, whose bills the governor settled according to his whim. They also called the BDL’s autonomy “extreme” and described a governor already reluctant to disclose the country’s net reserves or submit to IMF inspection. The embassy concluded that this far exceeded a central bank’s economic prerogatives and political independence. In the archives, the future was already foretold.