Lebanon central bank pledges stability amid political paralysis

Lebanon's central bank chief said he will ensure local banks comply with a US law targeting Hezbollah's finances, weeks after a bomb attack at a major Lebanese lender that had begun closing accounts linked to the militant group. Riad Salameh said the US law must be enforced to keep Lebanon's banks within the global financial system and stabilise the hugely indebted economy as neighbouring Syria's civil war hits tourism and growth. "Of course this (law) has created a lot of tension in the country, and the tension was not good for Lebanon, but overall we have preserved the objectives that we had in mind," he said.

Passed in December, the law threatens to bar from the US financial market any bank that knowingly engages with Hezbollah, designated a terrorist organisation by the United States. It has led to a standoff between the central bank and Hezbollah, which views it as a breach of sovereignty.

Salameh and the US Treasury have repeatedly said the Hezbollah Financing Prevention Act is not designed to hurt Lebanon's economy or to unjustly prevent members of Lebanon's Shi'ite community from accessing banking services.

Hezbollah, whose fighters played a major role in forcing Israel to withdraw from southern Lebanon in 2000, enjoys strong support among Lebanese Shi'ites. Its members include government ministers, MPs, and local councillors.

Salameh would not comment on how many accounts had been closed so far, or how many were under investigation. "The process is being respected by the banks and a Special Investigations Commission is looking individually at every request to close accounts that they deem are in contradiction with the law," Salameh said. With government debt of 136.7 percent of GDP in 2015, the third-highest among countries rated by Fitch, confidence in Lebanon's central bank - - seen as one of the only effective institutions in the weak state -- is vitally important. "The banking sector in Lebanon is the cornerstone of stability in the country," said Salameh, who took office in 1993, making him currently the world's second longest-serving central bank head after Uzbekistan. "Lebanon is funded by its banking sector only."

Battered by regional instability and a huge refugee burden Lebanon's traditional economic resilience is being put under ever increasing strain. Salameh forecasts growth of 1.5 to 2 percent for 2016, in line with a World Bank projection of 1.8 percent but far below the 8-9 percent growth rates seen in the years before 2011.

Political paralysis that has kept the post of president vacant for over two years is also testing confidence in the country and curbing foreign direct investment (FDI).

FDI, a key source of foreign exchange, dropped to about 5 percent of GDP in 2015, compared to 12.5 percent of GDP in 2009, according to central bank and World Bank data. "The Syrian presence ... in terms of displaced population has created costs for Lebanon which is reflected in the economy," Salameh said.

"It has also created less consumption and investment ... because many Gulf citizens don't come anymore to shop in Beirut or to buy real estate in Lebanon due to the war in Syria." Fitch cut Lebanon's credit rating to Bfrom B last week, citing political risks and the deepening toll Syria's civil war is having on Lebanon's economy and politics. It was last rated B- in 2006, during the conflict between Israel and Hezbollah.