Beirut, Lebanon- For more than two years, due to the depletion of hard currency and the depreciation of the Lebanese pound, Lebanese with U.S. dollar accounts in the country’s banks have faced severe restrictions on withdrawals. Therefore, when the Lebanese Central Bank issued an order last month to more than double the exchange rate of the Lebanese pound withdrawing US dollar deposits, chaos ensued.
At a bank, staff and security personnel struggled to hold down the door, and retired and off-duty soldiers rushed in to withdraw savings at a better interest rate. An off-duty soldier in military uniform crawled in under their legs.
Although measures such as the directive may temporarily relieve angry savers whose life-long savings are trapped in the country’s bankrupt banks, experts say it may lead to a soaring inflation rate-reaching an annual rate of 174% in October ——It gets worse. That’s because the central bank-Banque du Liban-may print more pounds to keep up with the surge in demand.
But as the elections are scheduled for May, experts say that such band-aid measures may prevail because politicians try to please angry voters while they delay meaningful reforms, which may be deteriorating. It has been more than two years since the economic and financial crisis has been cleared, and it will not show signs of deepening until 2022.
Sick for many years
In December, the Central Bank ordered to increase the exchange rate of Lebanese pound withdrawals from U.S. dollar savings accounts from 3,900 pounds to 1 U.S. dollar, and then to 8,000 pounds to 1 U.S. dollar. But as a sign of how much Lebanese are eager to release their savings, this ratio is still a huge discount to the current market value of Lebanese currency.
At the beginning of the Lebanese New Year, the value of the British pound in the parallel market reached a record low of 30,000 to 1 U.S. dollar. A month ago, it was trading at 23,000 pounds to 1 U.S. dollar.
The latest downward spiral brings the value of the country’s monthly minimum wage to $22.50. But experts point out that these are just the latest signs of chronic diseases in economies that are dying for many years.
“This is indeed the way this country has operated for more than a decade,” senior financial adviser Mike Azar told Al Jazeera. “Now we can feel its impact more than before because we have less funds to hide the impact of this mismanagement.”
As early as 1997, the official value of the Lebanese pound was about 1,500 to 1 U.S. dollar to prevent hyperinflation after the civil war and maintain investor confidence in the country’s reconstruction process.
However, even if the British pound plummeted in parallel markets, depreciating more than 95% since October 2019, the official link still exists.
Experts say that Lebanon’s dual currency system ultimately failed because the country has long suffered from financial mismanagement and corruption. The economy began to rely almost entirely on tourism, banking, and diaspora remittances to generate income and earn foreign currency.
In August 2019, as remittances dried up, banks began to set withdrawal limits on U.S. dollar accounts, triggering panic among depositors. By late October of that year, protests swept the country.
Since then, things will only get worse. The COVID-19 pandemic has destroyed the tourism industry. Then came the devastating Beirut port bombing in August 2020. At the same time, Lebanon’s politics has been paralyzed. Successive governments have failed to provide a reliable economic reform plan that is a prerequisite for the release of much-needed billions of dollars in financial aid, including an International Monetary Fund (IMF). Rescue.
The country’s banking system is basically insolvent. The government estimates that the sleepy financial sector has lost between 68 billion and 69 billion U.S. dollars since the currency crisis broke out.
Jobs disappeared, thousands of companies closed down, and the value of savings accounts evaporated along with the country’s middle class. It is estimated that three-quarters of the population now live in poverty.
Lebanese companies that somehow manage to keep their doors open face the struggle to adjust prices to a currency with no bottom in sight almost every day.
Azar told Al Jazeera: “Because the exchange rate fluctuates so much and the future cannot be foreseen, it is difficult for companies to price their goods and services in Lebanese pounds.”
Without real reform…
Since the outbreak of the financial crisis in 2019, Lebanon has adopted a small number of official and informal exchange rates, and official pegged exchange rates have become futile. Even Riad Salameh, president of the Bank of Lebanon, thinks so.
Salameh was once known as a financial wizard. Now, a large number of people condemn him because they think he has mismanaged the financial management of depositors’ funds and the country’s foreign exchange reserves.
As far as Salame is concerned, he has shifted the responsibility for failing to speed up the financial reform plan to the government.
The main exchange rate in Lebanon is the parallel market exchange rate, which expands and contracts in accordance with political and economic development and lacks transparency. The authorities have been working hard to crack down on exchange offices that use opaque exchange rates, and the central bank is also trying to persuade them to adopt a regulated exchange rate platform called Sayrafa.
With no viable currency stabilization measures and lack of supervision, financial adviser Michel Kozah told Al Jazeera that Lebanon is in a “vicious circle.”
“The Sayrafa platform is throwing away U.S. dollars-these are depositors’ money,” Kozah said. “Even banks have their own interest rates based on the platform. This is crazy.”
In the absence of a viable recovery and restructuring plan, the Lebanese authorities rely heavily on tourists in summer and winter to bring hard currency into the country, while Lebanese living abroad send money to their families to help pay their bills.
at the same time, The financial pressure of ordinary Lebanese It will only intensify as the government goes bankrupt.
Since last summer, the central bank has gradually eliminated subsidies for wheat, gasoline, fuel and medicines.Fill up the tank Now the cost is equivalent to the monthly minimum wage.
“They are just delaying things, and I think the central bank’s notice is to please angry depositors. [parliamentary] election [in May],” Koza said. “But what you need is a package of reforms, and ultimately an IMF plan. “
Azar also expressed similar views, adding that if a plan is implemented early, strong social protection and job creation may offset the negative effects of inflation. crisis.
“If any necessary reforms cause difficulties for certain parts of society, such as raising electricity prices or removing other subsidies, as part of the plan, a social safety net and other support will be provided,” he said. “You will also receive external financial support, economic growth and employment opportunities, which will increase people’s purchasing power.”
The worst is not over
An International Monetary Fund delegation will visit Beirut in less than two weeks to continue negotiations, although the Lebanese government has been working hard to implement any key economic and administrative reforms, including forensic audits of the central bank, capital control laws and rationing Card plans to offset the impact of the cancellation of subsidies.
Kozah said Lebanon has not experienced the worst inflation. Approximately 500,000 workers in the public sector and security agencies are still being compensated at the official pegged exchange rate, and the Lebanese authorities intend to continue to phase out subsidies when the central bank’s reserves are depleted.
“They will have to adjust wages in the public sector. They will not pay in dollars, but they will inevitably get paid at a price they can afford,” Koza explained. “The U.S. dollar will reach 50,000 pounds-if not more.”
Given that luxury goods retailers have begun to accept payments only in U.S. dollars, Hazard even questioned the viability of the fluctuating Lebanese pound as a currency.
“Even if we wake up tomorrow, the government makes plans and executes them correctly. Is it reasonable to expect people to deposit their life savings in pounds in Lebanese banks again?” he asked. “At this point, more than two years after the implementation of a single reform and the resulting total collapse of the lira [Lebanese pound]It is difficult to find a feasible way to restore people’s confidence in the lira, which is a prerequisite for maintaining its utility as a functional currency. “