Lebanon seems to be the last country to have taken advantage of the growth that the region has enjoyed for the past four years.Why is that?

Lebanon and its people are very successful entrepreneurs and corporate officials; you can see them operating all over the Arab world and even in Europe and the United States. Laws, human resources, competitiveness, intelligence, which all are the source of growth in today’s economy, are present.The problem is political. As long as Lebanon is being used as a ground for defusing regional conflicts, investors’ confidence will remain low. This has been the case since 1975: being the regional playground has made us miss the two oil booms, first in the 1970s and then today. And in this environment, we will always have to work against this unless something changes in how Lebanon is used.

Could politics and economics be disconnected in order to allow growth?

The Lebanese are trying to achieve that. We have been able to build monetary stability and a strong banking sector in a country that hasn’t had a normal year in the whole 14 years I’ve been head of the Central Bank. There is a will to progress, but one has to be realistic. It’s not only in Lebanese hands; policies are also decided abroad. On the other hand, these risks are known and it has been proven that our laws and markets have protected investments despite very hard moments in our history. People who invested in real estate or had bank accounts before the 1975 civil war came back in 1990 to find that their bank account was still open with capital and interest, and that the value of their real estate had appreciated in dollar terms. This resiliency is why there’s still interest in Lebanon – although it’s not up to our expectations or to its potential.

Lebanon seems stuck between a rock and a hard place. Is there a solution?

Our problem is that debt growth has been higher than economic growth. This is weighing on our economy, and is also a source of vulnerability because it engenders higher interest rates. We must increase government revenues to get control of the recurring deficits. This can only be done through economic growth. We also need to privatize all government commercial activities of the government that are one cause of the deficit; they’re hindering the economy instead of being profitable and creating a capital base for business expansion.

What are the priorities?

Electricity is the most important. Energy represents almost half of the yearly budget deficit. Lebanon is squeezed because of higher oil prices, and this is affecting not only the budget deficit but also the balance of payment. Each year the country receives around $5 billion in transfer remittances from Lebanese living abroad, but these surpluses are immediately spent on oil payments. There must be a radical solution to this issue; the private sector should take over using various approaches. We also have to prospect for alternative sources of energy for our country, which is rich in water. We also need a comprehensive energy policy.

There’s a fight between traditional forces that want an almost socialist state, and modern forces that want a liberal, open economy. What does this controversy reveal?

Privatizations are controversial issues worldwide. In the final analysis, the question is political. There are laws and a high council for privatization, therefore the country, despite its divisions, is trending toward privatization. The opposition to this operation is not a majority, but what people want is transparency. They don’t want national wealth to be distributed to elite groups, because previous experiences in this domain have not been really successful. Confidence should be created in the process. Lebanon has always been a market economy, and we don’t have that much to privatize. Besides, the opposition’s options are not realistic. You cannot build a welfare state in a country that has a $40.5 billion debt.

Lebanon’s economy has always been vibrant, but Lebanese companies aren’t thriving outside the country. How do you explain that?

This is due to the absence of capital markets. We have been working to implement new rules and regulations to help capital markets emerge in Lebanon. The absence of a liquid equity market has really handicapped expansion. The political instability has also driven the Lebanese entrepreneurs to launch their operations outside Lebanon. But Lebanon doesn’t have oil revenues, so the Lebanese have to create capital by their own work, which puts us in an unfair competition against other regional markets. Nevertheless, we hope there will be a fully integrated Arab market with open trade between Arab countries. Lebanon cannot survive without its external sector.

But hasn’t the regional financial center shifted to Dubai or Bahrain?

We’re not competing with Dubai or Bahrain. These markets should be integrated in an additional manner, not on a competitive basis. Each market has its specifics, and human resources are Lebanon’s biggest capital. A financial center is essentially based on human resources so, in a very natural way, Lebanon will always be a center.

High inflation is a real issue in the region, especially in Lebanon, and it’s expected to get worse in 2008. What are the prospects?

Lebanese residents find Lebanon expensive, while foreigners find it cheap. The answer lies in productivity and efficiency. Lebanon cannot fight global trends: higher euro and oil prices are going to increase costs in Lebanon and corrode our purchasing power. On the other hand, raising salaries would boost inflation. So we have to increase productivity in order to create higher revenues in Lebanon. As a central bank, our contribution is maintaining the stability of the currency.In fact, the price stability that Lebanon witnessed was directly related to our ability to maintain a stable Lebanese pound.

In 2006, the Central Bank had $13 billion in foreign currency reserves just to make sure that the parity between the Lebanese pound and the dollar would be maintained. How long can the Central Bank keep on protecting this balance?

Our holdings in foreign currencies have been fluctuating between $12 billion and $13 billion – a historical record for Lebanon. Our ability to control the exchange market is very high. We won’t depart from our policy of maintaining a stable Lebanese pound, which anchors confidence. The IMF has recently agreed that the value of the pound is fair. We have our reserves, of course, but we’ve also successfully used financial engineering in the past three years, and that can replenish these reserves. Today, dollarization in Lebanon is at 78 percent and we do not expect a high demand to convert the pound to the dollar.

After the 2006 war, the IMF said that the Central Bank was ‘carrying the weight of stabilizing the Lebanese currency and of managing Lebanon macroeconomics,’ and that ‘the government should help.’ What’s happened since?

Nothing has changed yet. But if we were to have a government that could implement the reforms plan, it would help lighten the burden on the Central Bank. Still, we cannot blame the government because the general environment hasn’t been really helpful. Anyway, the Central Bank will continue operating in the same way, taking on a lot of the burden when it is necessary.

Why hasn’t Lebanon been affected by the sub-prime crisis?

Five years ago the Central Bank issued circulars prohibiting our banks from entering these markets. We based our decision on the lack of transparency in this type of instrument. We have been very cautious with bank involvement in derivatives. This policy has paid off. Banks in Lebanon didn’t lose at all. On the contrary, their liquidities are very high and they are today taking advantage of this, being approached to fund operations that foreign banks couldn’t pursue outside.

What will the worldwide effect of the sub-prime crisis be, and how will this unfold in the region?

The risks for our region are starting now. Our region is rich in liquidity, and the sub-prime crisis has created a lack of liquidity to fund operations that were going to take place in leverage buyouts on the international markets. Today, these operations are seeking liquidity in our area. We’re looking at how to monitor the involvement of our banking sector in such operations. In particular, Arab oil countries are being approached more aggressively and hopefully they’ll enter investments at the right prices. A recent deal on Citibank involving Abu Dhabi and Arab involvement in EADS is both an opportunity and a starting point for our region in terms of exposure, but it has to be well monitored.

For a long time you worked in the very competitive private sector, and part of your role is maintaining coordination between many competing forces. What have you learned?

We should bring more people from the private sector to the public sector to use their expertise and knowledge to improve our situation. We should make this a priority, because it would increase confidence in the government and induce political stability.

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