By Lisa Barrington
BEIRUT (Reuters) - Lebanon's central bank chief said he will ensure local banks comply with a U.S. law targeting Hezbollah's finances, weeks after a bomb attack at a major Lebanese lender that had begun closing accounts linked to the militant group.
Riad Salameh told Reuters the U.S. law must be enforced to keep Lebanon's banks within the global financial system and stabilize the hugely indebted economy as neighboring Syria's civil war hits tourism and growth.
"Of course this (law) has created a lot of tension in the country, and the tension was not good for Lebanon, but overall we have preserved the objectives that we had in mind," he said.
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Passed in December, the law threatens to bar from the U.S. financial market any bank that knowingly engages with Hezbollah, designated a terrorist organization by the United States. It has led to a standoff between the central bank and Hezbollah, which views it as a breach of sovereignty.
Salameh and the U.S. Treasury have repeatedly said the Hezbollah Financing Prevention Act is not designed to hurt Lebanon's economy or to unjustly prevent members of Lebanon's Shi'ite community from accessing banking services.
Hezbollah, whose fighters played a major role in forcing Israel to withdraw from southern Lebanon in 2000, enjoys strong support among Lebanese Shi'ites. Its members include government ministers, MPs, and local councillors.
Salameh would not comment on how many accounts had been closed so far, or how many were under investigation.
"The process is being respected by the banks and a Special Investigations Commission is looking individually at every request to close accounts that they deem are in contradiction with the law," Salameh said.
With government debt of 136.7 percent of GDP in 2015, the third-highest among countries rated by Fitch, confidence in Lebanon's central bank -- seen as one of the only effective institutions in the weak state -- is vitally important.
"The banking sector in Lebanon is the cornerstone of stability in the country," said Salameh, who took office in 1993, making him currently the world's second longest-serving central bank head after Uzbekistan.
"Lebanon is funded by its banking sector only."
COST OF WAR
Battered by regional instability and a huge refugee burden Lebanon's traditional economic resilience is being put under ever increasing strain.
Salameh forecasts growth of 1.5 to 2 percent for 2016, in line with a World Bank projection of 1.8 percent but far below the 8-9 percent growth rates seen in the years before 2011.
Political paralysis that has kept the post of president vacant for over two years is also testing confidence in the country and curbing foreign direct investment (FDI).
FDI, a key source of foreign exchange, dropped to about 5 percent of GDP in 2015, compared to 12.5 percent of GDP in 2009, according to central bank and World Bank data.
"The Syrian presence ... in terms of displaced population has created costs for Lebanon which is reflected in the economy," Salameh said. "It has also created less consumption and investment ... because many Gulf citizens don't come anymore to shop in Beirut or to buy real estate in Lebanon due to the war in Syria."
Fitch cut Lebanon's credit rating to B- from B last week, citing political risks and the deepening toll Syria's civil war is having on Lebanon's economy and politics. It was last rated B- in 2006, during the conflict between Israel and Hezbollah.
Laws to allow oil and gas exploration, which could raise revenues to help cut the deficit, or public-private partnerships to revive crumbling public services, have been stalled by the political impasse that has also left the presidency vacant.
"Lebanon needs to put its act together (on reforms)," Salameh said. "The time we are wasting is costly."
He said the central bank will keep stabilizing the economy for "as long as it takes" for the government to become more effective, pass a budget and tackle the structural deficit.
"The other scenario is not good for Lebanon and it is much more costly than the costs we are incurring as a central bank to maintain confidence of the markets."
Confidence in the central bank remains high and should ensure Lebanon can continue to fund itself, he added.
"You can see that from the stability we are witnessing in interest rates charged on Lebanese debt that are much lower than comparable rated countries in the world," Salameh said.
"I think this confidence has been preserved. We didn't see pressure to change Lebanese pounds into foreign currencies. This year we expect growth in (bank) deposits by almost 5 percent.
"Of course, we would have been much happier if there were not ... these laws that create tension in our market."
(Reporting by Lisa Barrington; Editing by Dominic Evans and Catherine Evans)