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Banks lower interest rates in wake of 'Paris II' pound gains ground against dollar - The Daily Star

Commercial banks have started reducing interest rates on deposits in US dollars and Lebanese pounds, signaling their positive reception of the 'Paris II' donor conference.

The Central Bank said rates on deposits in Lebanese pounds at most commercial banks fell by 1.5 percent, or 150 basis points, and those in US dollars dropped by 0.7 percent, or 70 basis points.

The drop in interest rates coincided with the continued improvement of the local currency against the dollar.

The Central Bank said the Lebanese pound closed at LL1,506.5 against the US dollar at the end of Wednesday's trading. The average trading on the Lebanese pound over the past five years has ranged between LL1,514 and LL,515 to the US dollar.

Central Bank Governor Riad Salameh will meet a delegation from the Association of Banks in Lebanon on Thursday to discuss further cuts in interest rates both on US dollar and Lebanese pound deposits. The association includes all of the commercial banks in the country.

Fahim Moadad, the second vice-governor of the Central Bank, told The Daily Star that the demand for the Lebanese pound has been mounting over the past few weeks. He said that many investors are making short-term deposits in one- to three-month investment plans."The interest rates on long-term and short-term deposits do not vary a lot these days," Moadad said.

Before Saturday's Paris II conference, the maximum interest rate offered by commercial banks on US dollar deposits did not exceed 5.5 percent, compared to 12 percent for Lebanese pound deposits.

Some bankers believe that depositors will be more inclined to hold local currency, because the interest rates are higher. "People have confidence in their local currency. They now feel safer to deposit in the Lebanese pound than to do so in US dollars," Moadad said.
The Central Bank bought $60 million from the currency market Monday and another $70 million on Tuesday. "We also bought more dollars from the market on Wednesday," Moadad said.

He said the Central Bank was able to increase its foreign currency reserves thanks to the demand for local currency. Moadad said that as long as market indicators are positive, depositors and investors will shift to the local currency. He said the private sector will take advantage of the drop in interest rates.

"The commercial banks will start lending to the private sector at cheaper interest rates in the near future because government borrowing from these banks will decline."

Since 1994, the commercial banks have given the government more than $15 billion in loans and a similar amount to the private sector. Entrepreneurs and investors have been urging the Central Bank to reduce interest rates on borrowing to help stimulate the economy. Moadad suggested that after the government secures the soft loans from Paris II, banks will then be compelled to offer cheaper lending rates to the business community. Even before Prime Minister Rafik Hariri succeeded in securing pledges of $4.4 billion in soft loans last week, the Lebanese pound gained significantly over the past six months.

According to a Central Bank bulletin, deposits in US dollars at commercial banks fell to 71 percent of total deposits in October. And bankers are not ruling out the possibility that Lebanese pound deposits will reach 50 percent of total deposits in the future.

Moadad said the government seems committed to the economic plan that was submitted at the Paris II donor conference. He added that the market will continue to respond positively in the coming months. The Lebanese government handed participants at Paris II a 30-page document outlining its planned reforms to tackle the country's $30 billion debt.

Shadi Hanna, the treasurer of Byblos Bank, said depositors are shifting deposits to the Lebanese pound in anticipation of a further drop in interest rates. Some bankers expect interest rates on two-year Treasury bills to drop to 12 percent, compared to the current 14.14 percent.

Beirut,12 02 2002
Osama Habib
The Daily Star
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