Lebanon government says central bank broke law with fuel subsidy decision

Lebanon’s caretaker prime minister said on Thursday the central bank had broken the law by deciding to remove fuel subsidies, and the damage done would outweigh the benefits of preserving the mandatory reserves which the bank is trying to protect.

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

President Michel Aoun summoned central bank governor Riad Salameh while caretaker prime minister Hassan Diab called an emergency cabinet meeting.

Since the onset of the crisis, the central bank had been effectively subsidising fuel by using its dollar reserves to finance imports at exchange rates well below the rates on the parallel market, draining the reserve.

The central bank defended its decision to offer credit lines for fuel imports at the market rather than subsidised exchange rates, saying it told the government a year ago that it would need new legislation to use the mandatory currency reserve.

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.

“This proves the necessity of moving from subsidising commodities, which benefits traders and monopolists, to supporting citizens directly,” the bank said.

Diab said he was opposed to subsidies being ended before an alternative was on offer, and progress was being made towards rolling out a prepaid cash card for the poor and the decision could have waited until it was available.

“It is a decision that contravenes the law,” he said on Twitter, referring to the June law establishing the cards. “Its damages are much greater than the gains of protecting the obligatory reserves in the central bank” because it would take the country into the unknown.

Gebran Bassil, who heads the party founded by Aoun and is his son-in-law, called the move a sudden and unilateral step and urged his followers to get ready to mobilise.

“The governor is the governor of the central bank, not the governor of the Lebanese republic, and it is not for him to take strategic and fateful decisions that touch the security of the country and its social security,” Bassil said in a televised broadcast.

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The central bank announced its decision late on Wednesday and said it would apply from Thursday. No new fuel prices were issued on Thursday by the energy ministry, which typically sets them each Wednesday.

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

While sharply higher prices would make fuel less affordable for the growing number of Lebanese poor, some economists say crippling fuel shortages should be alleviated for those who can pay, by removing the incentive for smuggling and hoarding.

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 ruling elite has failed to chart a course out of the crisis, Lebanon’s worst since the 1975-90 civil war, even as supplies of fuel and medicine have run out.

They have been at loggerheads over how to parcel out seats in a new government to replace the one that quit in the wake of last year’s catastrophic Beirut port explosion.

The central bank’s reserves have sunk from more than $40 billion in 2016 to $15 billion in March. The fuel subsidy costs about $3 billion a year.