I participated in a meeting with BDL Governor Riad Salameh yesterday in which I had the opportunity to ask some of the questions that I have. Well, mainly one question, but an important one. Below is a summary of this Q&A.

BDL owes about $80bn in dollars to the banks (over next 10-yrs) but only has $20.6 billion in reserves (according to BDL). How does BDL expect to repay the $50bn difference, which is growing every day from accrued interest and as BDL reserves are drawn down to fund imports?

BDL does not have enough real assets with which to repay these liabilities and there is no possibility of it earning enough dollar profits in 10 years to repay it. So aside from using accounting gimmicks, how can this actual cash expense be repaid at some point in the future?

BDL has indicated in past statements that it will repay these amounts using seigniorage profits. @AndyKhalil1 previously described the traditional meaning of seigniorage profits. It traditionally means the profit from creating bank notes. https://twitter.com/AndyKhalil1/status/1255451090344083456?s=20

But as I understood it yesterday, BDL views seigniorage profits in a fundamentally different way than the traditional meaning.

According to BDL, most of these dollar liabilities (resident dollar deposits, specifically) are deposits that were converted from LBP to dollars.

So these were never real dollars in the sense that they weren't actual, real dollars entering the system. They were just computer entries. I will not comment on the fact that this type of conversion was allowed to occur for so long in the first place (and is still being allowed).

So it doesn't appear as though BDL feels the obligation to return this money in the form of actual, real dollars, but in the same "computer entry" dollar (call it Local Dollar) which it was in the first place.

Unless I'm mistaken, to BDL, "seigniorage" seems to mean creation of Local Dollars, and not real dollars (which it obviously can't create) or even LBP (which it can create).

Accordingly, Local Dollars are dollars that can be transacted in domestically in Lebanon using credit cards or cheque bancaire, for example, but cannot be transferred abroad or used for imports because they are not real dollars.

The Local Dollar is essentially a second local currency, a twin of a Lira but with different characteristics. I didn't get enough details around what those different characteristics would be as it could be structured in many different ways.

For ex, is BDL proposing an official "Local Dollar" currency that is treated differently from real dollars? Are there permanent capital controls to prevent Local Dollars from being withdrawn as bank notes or transferred abroad? Can these Local Dollars be withdrawn in LBP then?

Or are the Local Dollars indistinguishable from real dollars, so long as the demand for bank notes, transfers abroad, and imports is limited.

Is this sustainable or even practical? What are the consequences for growth, inflation, the exchange rate, etc.?

What happens to non-resident deposits, which were "real" dollars & not "computer entry" dollars? What happens to ANY dollar deposit that was originally a real dollar, among which are some resident deposits? Are these bailed-in? Are they bailed-out and repaid? Not sure.

It doesn't appear BDL believes it needs a bail-out by the state using state-assets or otherwise.

BDL's focus is on "fixing" its own balance sheet and not the balance sheets of the banks, who face tons of problems that this doesn't touch on.

...including the fact that customer deposits are due "now" but Banks' deposits at BDL are repaid over 10-yrs. Or the impact on bank balance sheets of the govt default on Eurobonds & T-bills, or NPLs, etc.

Has anyone here seen this approach used before by any Central Bank?