Lebanon has the good fortune to hold the largest gold reserve in the Middle East and North Africa, and the 19th largest in the world. The government has 9.22 million ounces of gold, or 286.8 tons, to be precise. Most of these reserves were purchased by far-sighted government officials during the 1960s and ‘70s. During the civil war years, the gold was famously protected by Central Bank Governor Edmond Naim, who slept in the Central Bank in part to protect the goods from would-be robbers.
Acting Prime Minister Selim Hoss proposed a plan to sell 20% of the gold reserves in 1987, which would have brought about $800 million into the government’s coffers, and could have been used to combat the deterioration of the Lebanese pound’s value against the dollar. But the plan did not win approval from the cabinet or parliament, which had passed a law in the 1980s outlawing the sale of the gold reserves without its approval.
At today’s prices, Lebanon’s gold is worth over $9 billion – or about 38% of Lebanon’s GDP and 22% of its public debt. Currently, it is sitting in bank vaults in Lebanon and the United States.
The question that follows, then, is should the Lebanese government go on a spending spree? By selling some of the gold to pay down its public debt, the government could save a substantial sum of money that now goes to finance the interest on the debt. On the other hand, those who want to keep the gold argue that its very presence is important because it puts investors at ease.
Penny-pinchers
A self-described “partisan” of keeping the gold, Central Bank Governor Riad Salameh claimed that the issue of Lebanon’s debt should be solved through economic growth. “I think we have to keep these fundamentals untouched and preserve our external strengths,” he said. “This is helping maintain the stability of prices in our country.”
Salameh also pointed to the positive psychological effects of keeping the gold. The gold “is important in times of crisis as a way of settling payments, especially if you have a crisis in the currency,” he said. Keeping the gold has the positive effect of convincing investors that the Lebanese economy can fall back on these assets to weather any crisis.
As Salameh pointed out, in the past three years alone, Lebanon withstood numerous crises, including the assassination of former Prime Minister Rafik Hariri and other anti-Syrian leaders, the 2006 summer war, the paralysis of the central government and a protracted battle with Fatah al-Islam in the Nahr al-Bared refugee camp. Given this history, it only seems wise to adopt a policy that gives Lebanon the largest possible safety net for the future. “Any selling of gold may not end up giving the results we want, because people might be scared of the weakening of our international assets,” argued Salameh.
Big spenders
On the other hand, critics contend that the government’s current gold policy forces Lebanon to deal with the worst of both worlds. The civil war-era law forbidding the sale of Lebanon’s gold undermines the stability normally provided by gold reserves. If the government cannot use the gold to pay back investors during times of crisis, or use it as collateral for a loan, it might as well not even be there, argue the policy’s detractors.
At the same time, Lebanon is not reaping the benefits that would come from paying down its national debt. The interest on the debt currently costs Lebanon approximately $3 billion a year. By using the gold to repay some of the debt, the government could save hundreds of millions of dollars annually. Alternatively, the gold could be used to buy assets that produce interest or income. Given time, the money from these assets would accumulate, and it could be used to pay down Lebanon’s crushing debt even further.
It is important to realize that the issue of the gold does not have to be an all-or-nothing decision. The government could sell a portion of its gold while prices are at a record high and still maintain considerable reserves in both the metal and foreign currency. At a time when Lebanon’s debt-to-GDP ratio is one of the highest in the world, this seems like the prudent course of action. As any businessperson would say: You have to spend money to make money.
David Kenner, NOW Staff , March 18, 2008
