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Lebanese government, central bank clash over fuel subsidies

ForexAug 12, 2021 04:56PM ET
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3/3 © Reuters. FILE PHOTO: A worker fills up a car with fuel at a gas station in Beirut, Lebanon June 24, 2021. REUTERS/Mohamed Azakir/File Photo 2/3

By Nafisa Eltahir and Tom Perry

BEIRUT (Reuters) - The Lebanese government clashed with the central bank on Thursday over its move to end fuel subsidies that have drained the currency reserves, saying prices must not change and subsidies must continue until measures are in place to help the poor.

With the government and central bank adopting conflicting positions, petroleum importers demanded clarification, with one warning of huge fuel shortages due to inadequate supply.

The loss of fuel subsidies would open a new phase in the financial crisis that has sunk the value of Lebanon's currency by more than 90% since 2019 and thrown more than half the population into poverty.

Since the crisis began, the central bank has been effectively subsidising fuel by using its dollar reserves to finance imports at exchange rates well below the rates on the parallel market.

The central bank defended its decision to provide dollars at market rates, saying it had told the government a year ago that legislation would be needed to dip into the mandatory reserve, a portion of deposits that must be preserved by law.

The public dispute at the very top of the Lebanese state captured the failure of the ruling elite to set policies to get the country out of its worst crisis since the 1975-90 civil war, even as supplies of fuel and medicine have run out.

Petroleum importers noted that while the government said petroleum products must continue to be sold at prices based on a subsidised exchange rate, the central bank would now only open credit lines for them to import at the market rate.

The same exchange rate must apply for buying and selling, they said. "We are waiting for them to sort it out, to communicate what they want to do," Maroun Chammas, a member of The Association of Petroleum Importing Companies, said.

The central bank's decision triggered scattered protests, though fuel prices were unchanged on Thursday and many petrol stations were shut.

After an emergency meeting of the caretaker cabinet, the government affirmed the need to continue subsidies, and that steps to rationalise them should only begin when prepaid cash cards for the poor, approved by parliament in June, were rolled out.

It also said there must be no change in the prices of refined petroleum products.

The government statement did not spell out how this would be achieved if the central bank was going to stop providing dollars at subsidised exchange rates.

The government accused governor Riad Salameh of acting unilaterally.

"They made us lose everything in Lebanon: no fuel, no electricity, no water, nothing. House rents now cost millions. Where should we go from here?" said Hussein Ibrahim, who was protesting against the decision in Sidon.

SUMMONED TO PALACE

President Michel Aoun summoned Salameh to the presidential palace for a meeting at which the governor refused to back down, saying use of the mandatory reserve required legislation, a ministerial source said.

The source said the idea of draft legislation was discussed at the cabinet meeting and the government would work on a draft.

"The country cannot bear the dire consequences of this type of decision," Diab said at the start of the cabinet meeting.

"Its damages are much greater than the gains of protecting the mandatory reserves in the central bank" because it would take the country into the unknown.

MPs from the powerful Shi'ite Muslim group Hezbollah rejected Salameh's move, echoing the view that the prepaid cards must be rolled out before any action on subsidies.

The fuel subsidy has been costing about $3 billion a year.

The central bank said that while it had spent more than $800 million on fuel in the last month and the bill for medicines had multiplied, those goods were still absent from the open market, and being sold at prices that exceed their value.

Tempers have frayed with motorists queuing for hours for petrol and often not being able to fill up. Three men died in altercations on Monday related to scarce fuel supplies.

The central bank said on Wednesday it would offer credit lines for fuel imports at market rather than subsidised exchange rates.

Unsubsidised, the price of 95-octane gasoline was projected at more than four times its previous price in a schedule reported by a broadcaster.

Most recently, the central bank had been extending credit for fuel imports at a rate of 3,900 pounds to the dollar, compared with a parallel market rate of more than 20,000 pounds.

The reserves have sunk from more than $40 billion in 2016 to $15 billion in March.

Lebanese government, central bank clash over fuel subsidies
 

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