The Impact of Rising Gold Prices on the Balance Sheet of the Lebanese Central Bank: A Legal and Accounting Analysis.

 

The Impact of Rising Gold Prices on the Balance Sheet of the Lebanese Central Bank: A Legal and Accounting Analysis.

 

 

Judge Mohamad F. Fawaz

LL.M., MBA, DEA.

 

This piece analyzes the practical legal and accounting implications of the fluctuation in gold prices on the Balance Sheet of the Banque du Liban (BDL). The Interim Balance Sheet as of 31 March 2025 shall be taken as a practical example. It focuses on the “Re-valuation Adjustment (Articles 75 & 115 of C.M.C.)” entry pursuant to Articles 114, 115, and 116^[1] of the Code of Money and Credit (CMC), and evaluates how fluctuations in gold prices may be used to write off losses and deferred expenses without resorting to deposit haircut.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1. Introduction

 

In the context of Lebanon's ongoing financial crisis, the structure and interpretation of the BDL’s Balance Sheet is of paramount importance. A critical accounting entry—“Revaluation Adjustment (Articles 75 & 115 CMC^[2])”—reflects unrealized gains or losses arising from price fluctuation in in BDL's gold and foreign currency holdings.

 

II. Relevant Balance Sheet Items

 

In accordance with the Balance Sheet released by BDL, the following key items are relevant:

 

Assets (in LBP thousands^[3]):

• Gold: 2,536,494,194,054 (in green)
• Foreign Reserve Assets: 960,089,447,185 (in green)
• Securities Portfolio: 554,699,433,838 (in green)
• Revaluation Adjustment (Arts. 75 & 115 CMC): 2,623,809,125,553 (in blue)

Liabilities:

• Financial Sector Deposits: 7,612,593,595,537 (in green)^[4]
• Revaluation Adjustment (Arts. 75 & 115 CMC): 0 (in blue)

The interim balance sheet uses an official USD/LBP exchange rate of LBP 89,500 per USD which is equal to the market exchange rate, as per Decision No. 48/4/24 of BDL’s Central Council dated 15^th of  February 2024.

 

III. Method of Calculating the Revaluation Adjustment

 

From an accounting perspective, the Revaluation Adjustment is calculated based on the net foreign position of BDL which is : Gold+Foreign Reserve Assets+Securities Portfolio−Financial Sector Deposits.

If the result is negative, the Revaluation Adjustment is recorded on the assets side, reflecting an unrealized loss. This is currently the case, with a Revaluation Adjustment asset of LBP 2 623 trillion. If the result is positive, the entry appears under liabilities, indicating an unrealized gain to be distributed pursuant to Article 116 CMC^[5].

 

IV. The Effect of Increasing Gold Prices

 

Currently, the Balance Sheet, specifically on the liability, financial sector deposits substantially exceed the total of gold, foreign reserves, and securities portfolio, leading to a negative net foreign position explaining the large unrealized loss on the asset side. As such, unless the government intervenes to reduce the deposits (implementing a haircut on the deposits at the commercial banks) the only viable path to reduce the revaluation gap is through a rise in the value of BDL’s gold holdings.

 

Impact scheme:

Increased market price of gold →Higher LBP valuation of BDL’s gold reserves →Improved asset position →Reduction of the Revaluation Adjustment (asset) →Transition toward a neutral or positive Revaluation Adjustment (liability).

 

Given the scale of the current imbalance, a doubling of the global gold price would likely be required to offset the existing gap and push the Revaluation Adjustment into a credit position.

 

V. Legal Implications of a Positive Revaluation Adjustment

Should the revaluation entry eventually move to the liabilities side, Article 116 mandates the following distribution:

• 20% retained as a mandatory Treasury deposit with BDL.
• 80% transferred to the Treasury’s general account, for use in early redemption of existing sovereign debt, including Treasury bonds issued pursuant to Decrees No. 581 (1949) and 3453 (1950), and any subsequent debt instruments issued under Article 116.

 

VI. Conclusion

The Revaluation Adjustment entry, governed by Articles 114 to 116 CMC, reflects the existing tension between the Central Bank’s liabilities and its real-asset backing. In the absence of governmental solutions and in order to avoid deposit haircuts, the only realistic rebalancing strategy lies in the continuous increase of asset values, particularly through a rise in the price of gold.

 

From a legal and financial perspective, gold thus appears not only as a hedge, but as an instrument of monetary re-equilibration, enabling BDL to restore solvency indicators and providing the State with room for maneuver in debt management.

 

 

Biography

 

Mohamad Fawaz is a judge and a published author in the field of Finance Law and International Law. He serves as a member at the Legislating and Consultations Body (LCB) at the Lebanese Ministry of Justice that provides the executive branch (Council of Ministers – Ministers) with legal consultations.

He is an International Consultant and an International Law fellow (United Nations), a lecturer of corporate finance law at the University of London LL.M Support Program at Beirut Bar Association, a Chevening scholar and a fellow at International Justice Sector Education and Training program.

Mohamad fawaz holds a Bachelor’s degree in Lebanese law and a Master’s degree in banking law and Capital Markets from Université Saint Joseph (USJ), an LL.M in corporate finance law from the University of Glasgow, and an MBA from the Lebanese American University (LAU).