The Story of Salameh: Tracing the roots of Lebanon’s soaring debt

Riad Salameh and Government Debt: How it all started

Recently, there have been buzzing discussions surrounding the enigmatic figure of Riad Salameh.

Some regard him as an exceptional personality who safeguarded the Lebanese lira amid widespread corruption throughout the state. Conversely, others view Salameh as the maestro behind a Ponzi scheme, benefiting from state waste and appeasing a corrupt authority.

It all traces back to the year 1994 when Lebanon was grappling with the aftermath of a civil war and a soaring national debt; the government of Rafik Hariri decided to issue dollar-denominated Eurobonds. This move was favored due to the lower interest rates, although Lebanon does not control the US dollar, the currency used for these bonds.

Starting with a mere $400 million in Eurobonds in 1994, the debt accumulated to a staggering $30 billion before the crisis of 2019 hit.

By 2000, the country faced negative economic indicators, including growth problems, fiscal deficits, and a public debt that surpassed $20 billion, exceeding the country's dollar reserves. Lebanon even experienced a negative balance of payments, meaning more dollars were exiting the country than coming in.

Faced with such challenges, then-President Rafik Hariri and his team sought international assistance for rescue.

Therefore, the conferences of Paris I in 2001 and Paris II at the end of 2002 saw Lebanon receiving financial facilities and loans in exchange for pledges to implement reforms. The global attention garnered by these conferences painted a positive image of the country, boosting confidence in its economy and banking sector.

The influx of deposits into banks witnessed significant growth ($6 billion in 2003 and $7.3 billion in 2004), leading to economic growth and an increased inflow of foreign currency compared to the outflow during that period.

However, the economic gloom set in with the assassination of President Hariri in 2005, followed by a series of targeted killings of anti-Syrian figures and the July 2006 war. The economy suffered, and the government's haphazard exchange rate policy persisted, further exacerbating the national debt.

In 2007, Lebanon once again sought international aid and convened Paris III. Around $7.5 billion in assistance was secured, but a significant portion was prey to brokerage and waste, while promises of reforms remained largely unfulfilled.

Nevertheless, the momentum and positive impression left by Paris III led to an increase in bank deposits that year ($8 billion).

During the Paris III conference, French President Chirac stated, "the monetary stability desired by Rafik Hariri, and of which Governor Riad Salameh is a vigilant and respected guardian, is an essential condition for the confidence of the financial community."

Salameh, who maintained relationships with various parties internally and garnered international attention, was seen as a potential candidate for the presidency after the end of President Emile Lahoud's term in November 2007.

Regardless, the Doha Agreement eventually led to Michel Suleiman assuming the presidency, leaving Salameh's desire unfulfilled as he remained in his position as the governor of the Central Bank.