LEBANON UNDER THE FRENCH MANDATE
Ottoman domination of Lebanon, which lasted for more than four centuries, was brought to an end on October 6, 1918, with the entrance of the Levant Marine Division in Beirut roads. The paper money issued by the Turkish Treasury, with a forced exchange rate, suffered the same fate.
In order to normalize economic life in the occupied territories and cover the expenses of the allied forces, English authorities imposed the banknote of the National Bank of Egypt, the Egyptian currency having been, since October 30, 1916, closely linked to the sterling and entirely covered by securities issued in sterling.
In accordance with the convention signed between the French and the British governments on September 15, 1919, a new occupying authority started to rule Lebanon. French troops replaced the British, under the command of General Gouraud, who was appointed on October 12, 1919 as "High-Commissioner of the French Republic in Syria and Cilicia, and Commander-in-Chief of the Levant Army". Consequently, the use of the Egyptian currency, suitable for the British Treasury, became inappropriate. To obtain Egyptian pounds, France, being the sole occupying power, had to offer increasing amounts of francs.
During the First World War, the French franc had maintained its status thanks to advances from the British and American Treasuries. However, in 1919, the French franc registered a drop because of the British government's decision to stop these advances, thus breaking the alliance between the franc, the sterling and the dollar, and also because of the US Government's decision to suspend its regulating role of the associated change rates. In order to replace the Egyptian pound, the French government decided, by Decree NÂ° 129 issued by the High Commissioner on March 13, 1920, to endow Syria with a national currency.
On September 1, 1920, the representative of France proclaimed Great Lebanon. In 1920, the Bank of Syria was granted the concession of issuing the Syrian currency, which became legal tender on May 1, 1920. Banknotes issued by this bank were reimbursable to the bearer or at sight by checks drawn on Paris, at the rate of FF 20 for one Syrian pound.
As a consequence, an independent, currency-issuing department was established at the Bank of Syria. It was responsible for putting in circulation and withdrawing banknotes. Issuances were made either on behalf of the Treasury in Paris or on behalf of the Bank itself.
Concerning commercial operations, the Issuing Department was to provide the Bank of Syria with banknotes only in exchange of foreign currencies or foreign securities, which constituted, together with the credits granted by the Treasury in Paris, the coverage of the currency in circulation.
THE FRENCH-LEBANESE-SYRIAN CONVENTION OF JANUARY 23, 1924
THE BANK OF SYRIA AND GREAT LEBANON RECEIVES THE CONCESSION OF ISSUING A LEBANESE-SYRIAN POUND
On January 23, 1924, under the chairmanship of General Weygand, a convention was signed between the French, the Lebanese and the Syrian governments. According to this convention:
- The bank of Syria became the Bank of Syria and Great Lebanon, with a concession to issue the currency for a 15-year period, starting April 1, 1924.
- The currency unit, the Syrian pound, became the Lebanese-Syrian pound, equivalent to FF 20.
- The banknotes issued by the Bank were reimbursable over-the-counter, in checks to the bearer on Paris or Marseille, at the rate of FF 20 for one Lebanese-Syrian pound.
- Two series of banknotes of the same type were created, one in the name of Great Lebanon and the other in the name of Syria. However, the Bank was empowered to issue any of the banknotes on each territory, with free circulation in both countries.
- The overall value of banknotes in circulation could not exceed 25 millions pounds in the territories under French mandate.
- The Issuing Department was a distinct entity, entirely independent from the commercial operation departments of the Bank. Separate accounting was used in issuing and withdrawing banknotes.
Banknotes in circulation must always be fully covered by:
- Monetized gold, ingot gold, or foreign government bonds payable in gold.
- A portfolio of commercial papers, denominated in Lebanese-Syrian pound.
- A mandatory deposit in French franc at the Central Treasury in Paris, the value of which could not exceed one third of the currency in circulation, with interest of 1.5% per annum.
- Securities issued or guaranteed by the French Government, redeemable within a two-year maximum period and deposited at the Banque de France.
- The Bank must pay to Great Lebanon and to Syria royalties on the amounts received during the previous year in terms of products and revenues of banknotes' guaranty, this being in the proportion of 48% and 52% respectively.
- The Bank became the financial agent of both governments.
- The Bank was to grant the States of Syria and Great Lebanon no-interest loans, reimbursable at the end of the concession.
THE CONVENTION OF MAY 29, 1937
RENEWAL OF THE ISSUING CONCESSION OF THE LEBANESE POUND
The Convention of January 23, 1924, was to expire on March 31, 1939. Meanwhile, the political status of the signatory states had changed.
On November 1936, a treaty of friendship and alliance was signed between France and Lebanon for a 25-year period. As a result of successful negotiations between Lebanon and the Bank about the renewal of the concession to issue the currency for a 25-year period, the convention of May 29, 1937, was ratified on June 7, 1937.
Following are the most important points of this Convention:
- The Lebanese currency is the only legal tender in Lebanon, and the public authorities commit themselves to maintain its parity against the French currency. The currency unit is the Lebanese pound, equivalent to 20 francs.
- Starting January 1, 1940, the banknotes issued under the Convention of January 23, 1924, were to be replaced by special banknotes marked "LEBANON".
- The coverage of " LEBANON " banknotes in circulation is distinct from the coverage of banknotes issued in Syria. And the royalty to be paid by the Bank to the Lebanese Treasury is to be directly determined according to the circulation of Lebanese banknotes.
- The share of gold coverage due to the Lebanese Republic, according to the books of the Issuing Department on March 31, 1939, is to be determined by the representative of the French Republic in Lebanon and Syria.
- The Issuing Department is a distinct entity, entirely independent from the other departments of the Bank. A separate accounting is to be used for issuing and withdrawing banknotes.
- The ceiling of currency-issuances, set at 25 millions pounds, is repealed
- Pursuant to Article 4, the coverage of banknotes in circulation include the following elements:
- Monetized gold or ingot gold; in the overall coverage, the counter-value in gold must equal, at least, 10% of the value of banknotes in circulation on the 25th of June of the previous year;
- An mandatory deposit in francs at the Central Treasury in Paris, the value of which being between 25% and 26% of the value of banknotes in circulation, with interest of 1,75% per annum at least.
- A no-interest advance of 250 000 Lebanese pounds, is to be granted by the Bank to the Lebanese Republic.
- Securities issued or guaranteed by the French Government, redeemable within a five-year maximum period.
- A commercial paper portfolio with a nominal value not exceeding 12% of the value of banknotes in circulation.
- The totality or a portion of the current account loan granted by the Bank to the Lebanese Republic.
- A sight deposit account in francs at the Central Treasury in Paris, with interest rate equaling, at least, the deposit rate on individual accounts. The balance of this account must not exceed 6% of the value of the banknotes in circulation.
- From the products and revenues of the banknote coverage, the Bank must pay to the Lebanese Republic a royalty to be calculated in a specified manner.
- On the implementation day of the Convention, the Bank must pay to the Lebanese Republic an amount of 250 000 LBP, reimbursable to the Bank at the end of the concession.
PEGGING THE SYRIAN AND LEBANESE POUNDS TO THE STERLING AND THE FRANC
Between 1939 and 1943, the control of the foreign trade and exchange system had been modified by a number of decrees. For this purpose, the French authorities established the Foreign Exchange Office at the Bank of Syria and Lebanon, and all exchange operations were subjected to its control.
In 1941, the allied forces occupied Syria and Lebanon. A monetary agreement was concluded between the British Government and General De Gaulle, in which the official rate of the French franc was set against the sterling (Â£1 = 8,125831), with freedom of conversion between both currencies. Consequently, the Syrian and the Lebanese currencies became pegged to both the sterling and the franc.
The pegging of the Syrian and Lebanese pounds to the sterling (Â£1 = LBP 8,125831) has had positive effects, given the sharp fluctuations of the franc and its successive devaluations. Between 1920 and 1940, the Syrian and Lebanese pounds had lost, according to some estimates, about 70% of their value against the dollar because of their pegging to the franc, which, during the period, had registered a decline against the dollar.
Thanks to this Agreement, the military authorities were able to easily meet their needs in local currency for financing their expenses in Syria and Lebanon. The authorities used to hand foreign currencies to the Foreign Exchange Office, and the latter used to give them back pounds obtained as loans from the Bank of Syria and Lebanon. Then, the Foreign Exchange Office converted the foreign currencies into French francs at the Central Treasury of Free France for keeping them in an account opened in the name of Bank of Syria and Lebanon, in order to cover the increasing issues of Syrian and Lebanese pounds.
THE FRENCH-ENGLISH-LEBANESE-SYRIAN PROTOCOL OF JANUARY 25, 1944
PROTECTION OF THE LEBANESE POUND AGAINST THE DEVALUATION OF THE FRANC
In 1943, a new era of monetary independence started in Lebanon as a consequence of the newly-obtained political independence.
In 1944, talks were started between the British government and the French Committee for National Liberation concerning a devaluation of the franc against the sterling. In order to avoid a depreciation of the Lebanese and Syrian pounds, the French-English-Lebanese-Syrian Protocol was signed in Damascus on January 25, 1944, setting the parity of the Lebanese pound at Â£1 = LBP 8.83 = FF 176.60, a rate that could not be modified without prior consultation with the Lebanese and Syrian governments.
Thus, when the financial agreement between France and Great Britain was signed on February 8, 1944, setting the exchange rate of the franc at FF 200 against the sterling, the Lebanese pound was not devalued as it happened in the past, the free purchase of sterlings having been maintained. In consequence, the official rate of the Lebanese pound was maintained at LBP 8.83 against the sterling, and against the French franc, it stood at FF 22.65. Moreover, the pound was convertible in franc as well as in sterling.
In case of a devaluation of the franc, the French Committee for National Liberation was committed to maintain the counter-value in sterling of the assets in francs of the Bank of Syria and Lebanon, including those recorded as coverage of the currency in circulation in Lebanon. However, the French government informed Lebanon, by a letter dated March 15, 1946, that it was no more possible to keep a system of free sterling transfer in Syria and Lebanon. Then, by a letter dated August 30, 1947, the French government deemed preferable to officially terminate the Agreement of January 25, 1944, which had become obsolete.
LEBANON JOINING THE IMF AND THE WORLD BANK
On April 22, 1947, Lebanon became member of the International Monetary Fund and of the World Bank (the International Bank for Reconstruction and Development).
Since Article 4, Section (a) of the IMF Articles of Agreement stipulated that each member should set the parity of its currency in relation to gold, or to the dollar rate on July 1, 1944, Lebanon informed the IMF Managing Director in 1947 that its national currency, the Lebanese pound, was pegged to the French franc by virtue of the 1937 Agreement, which grants the Bank of Syria and Lebanon the concession to issue the Lebanese pound.
Thus, the parity of the Lebanese pound was to be expressed in gold, taken as a common denominator, or in US dollar based on its rate of July 1, 1944.
In accordance with the agreements of January 25, 1944, the Lebanese pound was equivalent to FF 54.35, whereas the franc parity declared to the IMF was 7.46113 mg of gold and FF 119.10669 for one dollar. Thus, the parity of the Lebanese pound was set in gold at:
54.35*0.00746113 = gram 0.405512
and in dollar at:
100:2.19148 = cents: 45,6313
By virtue of Decree NÂ° 9581/K of August 1, 1947, the Bank of Syria and Lebanon was designated as the depository of the IMF assets in Lebanese pound, in accordance with the provisions of Article XII, Section 2(a) of the IMF Articles of Agreement.
As a result of the IMF membership of Lebanon, Decree NÂ° 15105/K of May 27, 1949, included provisions on the currency coverage in gold, and in foreign currencies at market rates different from the official rates.
This decree stipulated:
- The opening of two accounts in the name of the Treasury at the Bank of Syria and Lebanon. At the official rate of the Lebanese pound, the balance of the gold coverage was to be recorded in the first account and the balance of the foreign-currency coverage in the second account.
- The opening of two no-interest-bearing accounts in the name of the Treasury at the Bank of Syria and Lebanon. The differences between the purchase/sale prices of gold and its official rate were to be recorded in the first account, as well as the differences between the official rate of gold and the rate adopted for recording entries in the gold coverage account. Thus, when this account showed a credit balance it was an integral part of the coverage, but when it showed a debit balance it remained at the Bank in the name of the Treasury. Moreover, a debit balance was not to exceed the official value of the coverage in gold.
- The differences between the purchase/sale prices of foreign currencies included in the coverage and the official rates of these foreign currencies were to be recorded in the second account, as well as the differences between the new official rate of each foreign currency and its rate as adopted for recording in the coverage account, following the same mechanism used in the first account
LEBANESE-FRENCH MONETARY AGREEMENT OF JANUARY 24, 1948
TERMINATION OF THE LEBANESE POUND COVERAGE IN FRANC
On January 24, 1948, the Lebanese and French governments signed a monetary agreement to which Syria refused to participate. Under this agreement, the official rate of the Lebanese pound was the rate declared to the IMF. Then, due to the Syrian opposition to the Agreement and to the severance of the customs union between both countries, the Lebanese pound became independent from the Syrian pound.
In a next step, Lebanon created the Foreign Exchange Office, a control body attached to the Ministry of Finance. Controlling exchange operations was limited to some hard foreign currencies, with free exchange for other currencies, but these restrictions were gradually removed by the Government.
With this Agreement the coverage of the Lebanese currency in French franc came to an end. The balances in franc owed to Lebanon were of two kinds:
- A " blocked " portion amounting to 9 billion francs, to be used in settling rights from the sale of French governmental properties to the Lebanese government. In case the franc drops against the sterling, this portion was to be compensated at the rate declared to the IMF.
- A second portion amounting to about 4 billion francs, with no compensation rights. It was accepted by Lebanon for financing its imports from France and for implementing other transfers. This has resulted in a devaluation of the Lebanese pound against the sterling by 44%, a proportion equal to the franc devaluation against the sterling during the year 1948.
THE MONETARY LAW OF MAY 24, 1949
CREATION OF A LEBANESE POUND COVERED UP TO 50% BY GOLD AND BY FOREIGN CURRENCIES CONVERTIBLE IN GOLD
A new law was needed to define the new status of the Lebanese pound and to sanction its autonomy in the context of the above French-Lebanese Agreement and the IMF Articles of Agreement. In consequence, the Monetary Law was promulgated on May 24, 1949.
- According to the IMF rules, the Lebanese pound rate was set at 402.512 mg of gold. An exchange stabilization fund was created under the supervision of the Ministry of Finance, in cooperation with the Director of the Issuing Department at the Bank of Syria and Lebanon. However, interventions in the market by this fund were rare, and its stabilization efforts were focused on the dollar as the main currency of transactions and payments, and as a monetary standard for other currencies. During the first stage of exchange liberalization, the Lebanese pound showed a remarkable stability, with minimal fluctuations of in its average rate.
- The 1949 Law modified the currency-issuing system that was effective since the promulgation of the 1937 Law 1937. It stipulated that the coverage in gold and in foreign currencies convertible to gold must represent, at least, 50% of the coverage of the issued currency, the remainder consisting of government securities or commercial papers.
In order to enhance the value of the pound and to encourage capital inflows to Lebanon, the currency-issuing body (Bank of Syria and Lebanon) continued to increase its gold assets, so that the coverage rate in gold reached 92.2% in December 1961.
THE CODE OF MONEY AND CREDIT
THE CONCESSION TO ISSUE THE LEBANESE POUND IS TRANSFERRED TO A CENTRAL BANK, THE BANQUE DU LIBAN
Since the Convention of May 29, 1937, concerning the concession to issue the Lebanese pound was coming to an end in 1963, Lebanon decided to create a central bank. The Code of Money and Credit was promulgated by Legislative Decree NÂ° 13513 of August 1, 1963. It established the Banque du Liban as a moral person of public law, bestowed with the privilege of issuing the national currency.
The Code repealed restrictions on exchange operations and capital movements, and the rate of the Lebanese pound was set in pure gold, as provided in Article 2. On the other hand, Article 229 provided for the following:
- Until a new rate for the Lebanese pound is set in agreement with the IMF, a real exchange rate that is as close as possible to the market rate - called the " provisional legal rate " of the Lebanese pound - was to be adopted against the dollar whose rate was set at 0.888671 gram of pure gold.
- The gold coverage of banknotes issued by the Central Bank was to be recorded at the " provisional legal rate ".
- The differences between the value of the coverage in gold and in foreign currencies at the provisional legal rate, on the one hand, and the real rate of these gold and foreign-currency assets, on the other hand, were to be governed by the provisions of Decree No. 15105/ K of May 27, 1949, until the transfer of these elements to the Central Bank.
Article 69 determines the coverage of the Lebanese pound in the following manner:
- In order to ensure the coverage of the Lebanese pound, the assets of the Central Bank must include funds in gold and foreign currencies that are, at least, equal to 30% of the total value of the issued currency and sight deposits, on condition that the ratio of coverage in gold and foreign currencies is not inferior to 50% of the value of the issued currency. However, the assets of the Central Bank in Lebanese currency are not taken into account in computing both ratios.
- Periodical financial statements are to be prepared in accordance with Decision No. 883 of March 27, 1973, taken by the Minister of Finance in agreement with the Banque du Liban, on the basis of the US dollar valued at 42.2222 Troy ounces of pure gold, and on the basis of the average closing rates of foreign currencies at the corresponding dates.
- The procedures used for adopting a new gold rate against the US dollar and for adopting foreign-currency market rates against the Lebanese pound were confirmed by Legislative Decree No. 6104 of October 5, 1973.
- In accordance with Legislative Decree No. 6105 of October 5, 1973, the Government was empowered to set, in consultation with the Banque du Liban and the IMF, a new provisional legal rate for the Lebanese pound for a six-month period from the promulgation date of the said law. (The Government did not use this prerogative).
Similarly, by virtue of the same law, the gold and foreign-currency assets included in the balance sheet of the Banque du Liban had to be revalued on the basis of the new provisional legal rate, and the resulting differences were subject to the provisions of Article 115 of the Code of Money and Credit.
As for hard currencies included in the State revenues, they were to be computed on the basis of the new provisional legal rate, and the State external expenses continued to be transferred at the free market rate.
At present, the coverage of the Lebanese pound is secured with gold (9,222,000 ounces) and dollar reserves. This is due to the fact that economic activity is mainly carried out in dollar, with a very high dollarization rate of bank deposits. On the other hand, it is worth noting that a partial pegging of the Lebanese pound to the euro might be considered in the near future, depending on the development of economic and commercial activities of the country.
Sources: - Joseph Oughourlian - " One currency, one State, History of the Lebanese currency" - The Code of Money and Credit.