BEIRUT / LONDON, July 23 (Reuters) – The governor of Lebanon’s central bank inflated the institution’s assets by more than $ 6 billion in 2018, according to his audited annual accounts, highlighting the extent of engineering financial used to help support the country’s economy.

The 2018 financial statements, a copy of which was seen by Reuters, were signed with reservations by EY and Deloitte last month and were not made public.

The accounts show how the central bank managed to balance its books while helping finance a steadily growing government deficit, including recording assets of 10,270 billion Lebanese pounds ($ 6.82 billion) described as “seigniorage”. on financial stability ”.

The accounts indicated that Governor Riad Salameh “determines on an annual basis the amount to be allocated from the balance of seigniorage liabilities to deferred interest charges and other financial costs”.

Most central banks record seigniorage, generally defined as profit from printing money, as an income stream. But Lebanon’s central bank was recording expected seigniorage profits as an asset, according to annual financial statements for 2018, prepared by the central bank and reviewed by EY and Deloitte.

“The article about seigniorage is utter fiction,” said Steve H. Hanke, professor of applied economics at Johns Hopkins University.

A central bank expert who has followed Lebanon’s financial crisis for years, Hanke said Lebanon’s central bank used the category of “other assets” to hide losses on loans to the government.

Salameh did not respond to detailed questions that were emailed to his office.

Deloitte declined to comment. EY did not respond to a request for comment.

An outline of the central bank’s accounting approach was first published by the Financial Times.

Explaining why they signed the accounts with qualifications, EY and Deloitte listed a number of factors, including the inability to confirm all deposit balances and the inability to conduct an in-person inventory of the gold reserves of the Bank.

In addition, Deloitte and EY said the central bank uses an accounting and financial reporting framework adopted by its own board, rather than International Financial Reporting Standards (IFRS). They stated that their own audit had been carried out in accordance with international auditing standards.

The unusual approach of the central bank is permitted because there is no global standard for central bank accounting.

FINANCIAL ENGINEERING

During Salameh’s 27-year tenure, the governor used what he called “financial engineering” to keep Lebanon’s public finances afloat and defend the pound’s peg to the US dollar, mainly by attracting dollars from local banks at high interest rates.

The International Monetary Fund called Lebanon’s central bank a “fulcrum of financial stability” in an October 2019 report “but at the cost of intensifying sovereign-bank ties, which poses risks to the stability of the sector. bank and increases its balance sheet while protecting the banks. “Profitability. “

Salameh publicly defended the strategy.

“This engineering, we were forced to do it to buy time for Lebanon, so that Lebanon can reform,” he said in a televised address in April.

But an economic crisis that led Lebanon to default on its foreign currency debt and saw the currency fall by 80% has shaken its reputation as a pillar of stability, and Salameh has become a hotbed of anger for street protesters. .

Prime Minister Hassan Diab said on Tuesday that recovery specialist Alvarez & Marsal would conduct a forensic audit and KPMG and Oliver Wyman a financial audit of the central bank in a dispute over the extent of the financial losses to which the institution is confronted.

The 2018 report shows a number of methods used to inflate the assets and minimize the liabilities of the central bank, which the government and the IMF, from which Lebanon seeks support, estimate $ 50 billion in the red.

In addition to unorthodox seigniorage accounting, the central bank also recorded supposed profits on government loans. The cost of interest paid to banks at rates between 10% and 20% was meanwhile constantly deferred, accumulating huge future debts, according to statements.

The statements also mention that the central bank buys treasury bills from banks with an unamortized deferred premium, which means they should be treated as a liability on the central bank’s balance sheet.

“Central banks don’t have strict rules like companies do, IFRS or GAAP,” said Mike Azar, a senior financial advisor based in Lebanon, referring to international accounting standards.

“But there are good practices to follow. The first is not to show losses and the resulting negative capital as bogus assets. “

GOLD RESERVES

Talks with the IMF that began in May are on hold as the government and the central bank clash over the scale of the financial system’s losses – estimated at nearly $ 69 billion by Alain Bifani, a former member of the Lebanon’s negotiating team with the IMF – and how they should be shared.

The most recent data from the central bank shows that its assets stood at $ 152 billion last month. According to research by Credit Libanais, this included “other assets” valued at $ 48.2 billion in mid-June, 61% more than a year earlier, an increase the investment bank attributed. seigniorage, open market operations and an appreciation of gold reserves.

Statements from 2018 showed the central bank held gold worth £ 10.61 trillion, although auditors said they were unable to perform a physical inventory due to of a “policy which gives exclusive access to senior executives of the bank”.

An accountant, who requested anonymity, said this should have raised a red flag given the central bank’s asset position and credibility were under scrutiny.

The accountant also said that it was not a good practice for the central bank’s financial statements to be released so late.

A September 2018 IMF document said more than half of central banks release their statements within nine months of their fiscal year end.

Asked about the 2018 report, Bifani, the second member of the Lebanese IMF team to resign last month, after 20 years as managing director of the finance ministry, said auditors failed to conduct an inspection. physical gold reserves of the central bank for years.

“As far as I know, for the past 30 years they have not been allowed to take an inventory of the gold reserves,” he said.

“The most glaring thing is the way they hide the losses. He tries to inflate his strengths as much as possible. (Edited by Catherine Evans and Carmel Crimmins)