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French Version

Pound gains strength against dollar - Higher yields than greenback keeps interest in local currency

Bankers say Iraq war has failed to dampen positive impact of ‘Paris II’ conference.

The Lebanese pound gained against the dollar this week despite ongoing war in Iraq, bankers and traders said Tuesday.“The pound was offered at LL1,513 and LL1,514 against the dollar today. Many of our customers are shifting toward the local currency because it carries a higher yield,” said Shadi Hanna, the head of treasury at Byblos Bank.

He added that the Lebanese were not taking news from Iraq as a bad sign, with most holding their local currency.“Why should people panic and buy dollars? There is no better bargain than the pound,” Hanna said.

Interest rates on the pound and Treasury bills range between 9 percent and 9.5 percent, compared to less than 4 percent on the dollar.Hanna added that the positive impact of the “Paris II” donor conference was not lost with the outbreak of war.

The Central Bank beefed up its foreign currency reserves to $10 billion after donor countries such as France and Saudi Arabia injected $2.2 billion in soft loans into the Treasury. Another $900 million from Italy, Canada and other states is expected to come soon, a source at the Finance Ministry said.

The donor states that met in Paris in November of last year have pledged $4.4 billion in soft loans to help Lebanon reduce debt servicing by $400 million a year. Some $1.3 billion of the aid package will go to development projects.“People are not concerned about their national currency any more because the Central Bank is in a good position to defend the pound,” Hanna said. Some economists say the Central Bank has spent more than $8 billion of its reserves to shore up the pound over the past six years.

The government believes that a strong pound will steer the country away from chaos and high inflation.“We are still basking under the sun of Paris II,” Hanna said. He added that the Central Bank has stopped issuing T-bills to control interest rates.

Other brokers said bankers and investors are now showing more interest in the three-year certificate of deposits that carry a yield of 9 percent.

Commercial banks sitting on strong cash reserves are considering providing the private sector with loans at cheaper rates to stimulate the economy.

Interest rates on Lebanese pound and dollar loans are expected to drop to 10 percent and 8 percent respectively, but most companies are not eager to borrow money from banks at this moment due to regional tension and a global recession.

Bankers also said investors from Lebanon and the region are buying large amounts of Lebanese eurobonds. The price of a eurobond jumped to $106 from $88 five months ago.

Echoing similar views, Nabil Chaya, the head of marketing at Banque Audi, said the Lebanese capital market is still in a better shape than abroad.“The market abroad is very volatile these days. But Lebanon has managed to hold up,” Chaya said, adding that Lebanon was in better shape than other countries because the Central Bank has refrained from issuing more paper bonds.

Chaya said banks are obliged to buy more certificates of deposit to keep their earnings high. He predicted that the market here will grow even stronger when the war in Iraq is over. But Chaya and other bankers underlined the need to speed up privatization this year to make good use of the Paris II momentum: “Paris II has offered us a breathing space for two years only and we must make the best use of it,” he said. He added that the government can securitize part of the telecom revenues to reduce the $31 billion public debt.

Beirut,04 14 2003
Osama Habib
The Daily Star
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