Lebanon stands at a critical juncture as it bids farewell to Riad Salameh, the central bank governor, who departed from his position just a few days ago after a three-decade tenure.

As the sun sets on an eventful era, the nation reflects on the legacy of a once-revered financial wizard, now mired in controversy and legal investigations. Salameh’s departure comes against a backdrop of severe economic crisis and political deadlock, leaving Lebanon grappling with the implications of his tenure.

For years, Riad Salameh was hailed for his role in transforming Beirut into a regional financial center and steering Lebanon through global economic uncertainty. However, as the financial system collapsed in 2019, Salameh’s reputation began to falter and he faced investigations, both in Lebanon and abroad, accused of corruption, money laundering and embezzlement of public funds. As the Lebanese pound plummeted, it left the nation deeper into a crisis, with many people holding Salameh accountable for the financial quagmire.

The economic crisis, ranked as one of the worst in modern history, has pushed the nation to the brink of collapse. Decades of corruption and mismanagement, with Salameh at the helm of the central bank, have exacerbated the situation, forcing the country deep into an abyss of financial despondence.

Economists hold varying perspectives on Salameh’s role in the crisis. While some credit him for preserving Lebanon’s national currency and maintaining economic stability after the war, others accuse him of running a ‘Ponzi scheme’ by siphoning off dollars from local banks at high-interest rates. Lack of transparency and accountability in financial operations has further eroded public trust and deepened the crisis. Now, the tiny Mediterranean country faces the daunting task of stabilizing its crumbling financial sector.

End of an era

Lebanese economist Roy Badaro highlighted that during Salameh’s tenure, and until his departure on July 31, there were allegations of law manipulations, misuse of power and illicit enrichment by various parties, including politicians, Lebanese and non-Lebanese individuals, bankers and civil servants.

“Salameh faced accusations of serious financial crimes brought forth by the Lebanese judiciary and six European countries,” Badaro told Al Arabiya English. “He deliberately transferred wealth over the past four years from the depositors and the broader Lebanese populace towards a select privileged few, resulting in high inequality and poverty levels.”

According to Badaro, these policies had intergenerational implications, endangering the prospects of the nation’s youth and putting an unnecessary burden on future generations.

In October 2019, hundreds of thousands of Lebanese took to the streets, directing a growing rage at the political elite. The widespread protests led to the downfall of Saad Hariri’s government, triggering panic among foreign investors. As a result, Lebanon’s financial institutions faced a liquidity crisis, with banks unable to fulfil dollar withdrawals for depositors.

The pandemic and the 2020 Beirut Port blast were blows to an already sinking ship. The Lebanese lira tumbled, reaching approximately 90,000 to a US dollar on the black market.

Badaro believes Salameh has played a significant role in the collapse of the financial system, holding him responsible for providing misleading information regarding the country’s financial situation and concealing losses, leading to false assurances about the stability of the Lebanese pound as a secure currency.

“Experts who were forthright in their analysis saw no viable solution without implementing painful reforms that could have offered some protection to the most vulnerable segments of the population,” he said. “Salameh, however, took an unethical approach, opting to ‘lirafy’ the economy, distributing losses onto the marginalized and unprotected.”

The quest for reform

As a new chapter unfolds, the first deputy governor of Banque du Liban (BdL), Lebanon’s central bank, Wassim Mansouri, has taken over as acting governor, following the failure of ruling politicians to name a successor to Salameh. Experts agree that Mansouri faces a challenging journey ahead.

“To be part of the solution, the central bank must strive to be independent. Credibility, trust and confidence must be restored in this entity,” Nasser Saidi, who was Salameh’s first vice-governor at BdL in 1993 and later became minister of economy and trade and minister of industry, told Al Arabiya English.

“There’s an urgent need for transparency and disclosure, along with crucial steps to be taken, including restructuring the banking sector, unifying the exchange rate and transitioning to flexible exchange rates.”

Additionally, Saidi emphasized the importance of abolishing the controversial exchange platform known as Sayrafa and ceasing the financing of subsidies and government operations.

The exchange platform was set up in May 2021, 18 months into Lebanon’s economic meltdown. It was widely recognized as a way for the central bank to stabilize the Lebanese pound, which nevertheless continued to decline.

Sayrafa was heavily criticized for its lack of transparency, concerns over sustainability and the potential for arbitrage, especially as the disparity between the platform’s rates and those of the parallel market continued to widen.

Saidi also highlighted apprehensions over the dwindling international reserves, which have dropped to below $9 billion from their pre-crisis levels of around $28 billion, leaving a considerable sum of approximately $19 billion unaccounted for over the past three years.

“I don’t envy Mansouri,” he said. “While he has a tough job on hand, he also has the protection of the Money and Credit Code. Our banking law provides independence to the central bank and gives protection to the BdL.”

He added: “It is of absolute necessity to eliminate the practise of holding multiple roles within the central bank administration. For years, Salameh had been simultaneously heading the Capital Markets Authority, the Special Investigations Commission, the Higher Banking Commission and overseeing the Banking Control Commission.”

To ensure transparency, independence and good governance, Saidi stressed that these institutions must be restructured to operate autonomously and not be part of the central bank’s functions.

Best-case vs worst-case scenarios

Amidst these turbulent waters, the sentiments of the Lebanese people cannot be overlooked. An air of fear looms over the nation as citizens confront the unknown, uncertain of what lies ahead for their country.

“There doesn’t seem to be a sustainable, long-term strategy to address the current pressing challenges,” Charbel Bayssari, political activist and member of the National Bloc’s General Assembly, noted. “The absence of a comprehensive plan raises concerns about perpetuating the same ineffective approach as before, potentially transitioning from organized chaos to complete turmoil.”

According to Saidi, two potential paths await Lebanon. The first one, known as “Libazuela,” leads to a situation resembling that of Venezuela – a government in disarray, a continuous devaluation of the exchange rate, widespread dollarization, reliance on a cash economy and a significant informal economy.

“If Lebanon were to follow this route, it would face increasing poverty, a surge in migration and a breakdown of social integrity,” Saidi said, adding that “the worst-case scenario would involve escalating violence and crimes and a loss of control over security.”

The alternative scenario involves implementing crucial political reforms, such as appointing a new president, forming a fresh government, electing a new parliament, alongside necessary changes to the electoral law, he added.

“A comprehensive set of reforms is indispensable to establish a dependable governance system. These reforms should encompass deep structural changes.”

Similarly, Badaro emphasized the importance of rectifying past monetary and economic approaches to instill confidence among the Lebanese and the international community.

“We must establish a robust rule of law and strengthen institutions as the foundation for progress. This would play a crucial role in gaining the trust and support of the international community as foreign aid and cooperation are vital for recovery and stability,” he explained.

He went on to say that “state assets should not be exploited to bridge financial gaps. Instead, they should be preserved for potential economic revival when the country’s governance and institutions are solidified.”

He added: “Looking ahead, the focus should be on achieving sustained ‘growth’ for the next decade.”

As Salameh departs, the ruling class remains firmly entrenched. To pave the way for a transformative future, Lebanon must address the systemic issues and acknowledge that those who contributed to the problems cannot be relied upon to provide the solutions.