CORRECTED-Banks draw fresh dollars to Lebanon with high interest deposits

(Corrects minimum deposit amount in 10th paragraph to $5 million from $20 million)

BEIRUT, July 11 (Reuters) - Lebanese banks are drawing fresh dollars to the country by offering high interest rates on large sums blocked for three years, bank economists said on Thursday, a move aimed at supporting central bank reserves that have been in decline.

The Lebanese banking sector has in recent years conducted similar operations in coordination with the central bank. The operations have been dubbed “financial engineering”, with the fresh dollars deposited at the central bank.

The latest operations began around two weeks ago and continue.

“We will see an improvement in deposit growth on one hand, and an improvement in the foreign currency reserves of the central bank as a result of those operation,” Marwan Barakat, chief economist and head of research at Bank Audi, said.

Marwan Mikhael, head of research at Blominvest Bank, said: “At least it will stabilise the reserves because what we are passing through is a deterioration of confidence and the main task of the government now is to be able to restore confidence.”

The International Monetary Fund, in the concluding statement of a mission visit to Lebanon last week, said deposit inflows to Lebanon had virtually stopped and the central bank’s foreign reserves had decreased by around $6 billion since early 2018.

This was despite continued central bank financial operations and partly due to Eurobond principal and coupon payments made by the central bank over the same period, it said.

Nassib Ghobril, chief economist at Byblos Bank, said banks were offering incentives to large depositors to attract fresh capital from abroad.

Banks are offering an annual 14% interest rate on the deposits, Barakat said. The minimum deposit had initially been $20 million but was subsequently reduced to $5 million, Barakat said.

Mikhael said Blom Bank was offering an interest rate of 13.5% on a minimum investment of $5 million.

The IMF statement said the central bank should gradually phase out its financial operations once fiscal adjustment and the subsequent decline in yields demanded by investors allow it to do so.

The Lebanese government, which has one of the world’s heaviest public debt burdens, aims to cut the deficit to 7.6% of gross domestic product in 2019 from more than 11% last year in a budget that will be voted on in parliament next week. (Reporting by Tom Perry and Angus McDowall, Editing by William Maclean)