Dissecting deposits: The case of Lebanon’s missing $70 Billion

(Originally published in An-Nahar October 2018)

Most so-called local economic reports read more like (bad) poetry, rather than providing actionable intelligence. One such report on real estate, from a few years ago, said:

                                                Prices in Lebanon are like stairs,

                                                they go up,

                                                then stabilize for a while,

                                                and then go up again,

                                                they don’t fall.

All that was missing in this nonsensical statement was the iambic pentameter and rhyming, to turn it into a sonnet. Of course, since all stairs end at the top of the building, the author must have been referring to Led Zeppelin’s song, Stairway to Heaven.

So you can imagine my delight when I stumbled last week upon an outstanding research report by BLOMInvest Bank, a rarity these days, and, frankly, I’m surprised that it got through the internal censors.

The aforementioned report said that the balance of payments from 2006 to 2010 was just over $19 billion, and that the balance of payments, from 2010 until now, was a negative $13 billion. Balance of payments are basically the net amount of US dollars that have entered (or exited) the country. In other words, deposits in “real money” have increased by only $6 billion in the last twelve years ($19 billion minus $13 billion). I’ll get to what I mean by “real money” later.

So despite the astronomically high interest rates, the increasingly frequent financial engineering transactions, and our numerous expats overseas remitting funds, net net, $13 billion walked out of the country in the last eight years. Yet, we keep being bombarded about the huge amount of deposits we have, namely around $175 billion, and how they’re increasing … proudly repeated by the ex-perts and the “current-perts” so I decided to go back to 2006 and look the numbers up. It turns out we had just under $60 billion back then.

I will ignore the Lira portion of the deposits, because our central bank can print as much of it as it likes. However, for every dollar withdrawn in cash or transferred overseas, we have to either use our stash of real dollars or ask President Trump to send it over, and chances are that he ain’t gonna do that.

In 2006, almost 75% of our deposits were in US dollars, i.e. $45 billion. Today, out of the $175 billion, around two-thirds are US dollars, or around $120 billion. Although I don’t hold a PhD in Nuclear Physics, the Math is straightforward. If the net balance of payments from 2006 until today was an increase of $6 billion, that means real dollars are now at best $50 billion, if that.

So the question is how did we end up with $120 billion today? Well, a large part of it is explained by the interest paid on these deposit accounts. Let’s assume an average annual interest rate on dollar deposits of 5% from 2006 until now. Over a time period of twelve years, that means that the $45 billion would have grown to at most $81 billion (even assuming no spending of any interest, which is highly unlikely). Adding the $6 billion in excess balance of payments, makes it $87 billion.

But wait a minute. There’s still some $30 billion in deposit growth that’s unaccounted for. Where did it come from? This can only be explained by two things: cash deposits (wink, wink)  or the Multiplier Effect.

Let’s look at the first possibility. While there’s no question that some illicit cash enters (or used to enter) the country, and end up in banks, the fact of the matter is that since 75% of dollar cash worldwide is hundred dollar bills, and since there are only $600 billion of hundred dollar bills outside the United States, it’s highly unlikely that 5% of the world’s cash is flowing through our banking system. Besides, that would not be a very nice conclusion, if you know what I mean, as I’d like to think that our banks have tight Know Your Client (KYC) and anti-money laundering (AML) procedures, preventing that type of size from entering the sector … right?

So now let’s look at the other, more technical, possible explanation — the Multiplier Effect. What on earth is that? Let’s take an example to illustrate it. Say a Lebanese girl, Pam, works in Dubai selling ballerina shoes and transfers $100,000 of profits to a bank in Lebanon. That would immediately increase the deposit size of all banks by $100,000. Now say the bank takes her $100,000 and lends it to another customer, Nadim. Actually, they have to lend less because of reserve requirements, but humor me here. Nadim now buys a BMW and pays the dealer the $100,000, who deposits it in his bank. This increases total bank deposits by $200,000. Now say the dealer bought the building next door from Samir, by taking a $300,000 subsidized Iskan loan, paying $400,000 for it. Samir now deposits his $400,000 in his bank … and so on and so forth. So, if we took a snapshot of deposits at that precise point in time, this would show that the banking sector has now increased its deposits by $500,000. But how much of all that is “real money,” i.e. money that you can literally withdraw, and touch, and take out? The answer is only the original $100,000 that Pam transferred from Dubai. The other $500,000 are just accounting entries in the bank’s computers. No new real dollars entered the country.

There’s actually nothing wrong with all this — all modern economies use the multiplier effect — the only difference is that, here in Lebanon, we use someone else’s currency, which we can’t control, for most of our economy.

So back to the macro situation. Assuming the $60 billion in deposits in 2006 were all “real” (which is unlikely), adding the $6 billion increase in the balance of payments, means the whole sector has only $51 billion in “real money” today. The rest, interest and multiplier effect, are just virtual entries on a computer screen and not available for withdrawal.

To illustrate the difference between real and virtual money, let’s take an example. Say that Zeina just came back from a business trip to Mongolia, and brought back 100 Mongolian Tugriks (Mongolian currency) and that she’s the only one with Tugriks in Lebanon. Say Zeina goes to Trustme Bank, who is running a special on Mongolian Tugrik deposits, and paying 100% interest. Zeina deposits the 100 Tugriks. A year later, Zeina receives a bank statement that says that she now has 200 Mongolian Tugriks in the bank. Assuming that nobody else has been to Mongolia and brought back Tugriks, and that Trustme Bank still has the 100 Tugriks and hasn’t lent them out, then he really would only have 100 Tugriks in real money to pay Zeina, if she ever decides to withdraw all her money. However, Zeina never really finds out, because she decides to extend her 200 Tugrik deposit for another year, after which she receives another statement that says she now has 400 Tugriks! Zeina’s plan is to keep the money in Trustme Bank for 15 years, when, at this rate, she’ll have 3.2 million Mongolian Tugriks and can then move to retire a millionaire in Ulaanbaatar, Mongolia.