As protests flare-up across the country, the Lebanese lira’s downward spiral continues, jumping from 3,000 to 4,300 lira to the US dollar in the last five days alone. Nothing can seem to stop the lira’s plunge in the near- to medium-term future, experts say, as attempts to stabilize the Lebanese currency remain unserious and chaotic.
The rescue plan approved by the Lebanese government to pull the country out of its worst economic and financial crisis in decades is based on an exchange rate of 3,500 Lebanese lira to the US dollar, an official source told Reuters Thursday.
Lebanon’s currency peg, in place for the last three decades, is unraveling. The Lebanese lira has lost over 65 percent of its value since last October.
“It’s been impossible to buy $50,000 in the last few days. There are simply no dollars available on the black market,” said a food importer speaking on condition of anonymity.
The lira’s depreciation against the dollar is the result of supply and demand dynamics, with dollars scarce and a demand that is growing, people have lost confidence in the lira, explained financial expert Mike Azar.
The dollar shortage continues to deepen after the government announced its decision to default on its $90 billion debt. The default slashed the assets of Lebanese banks and the central bank, which carry the debt, with a total estimated loss of over $60 billion.
Starved for fresh dollars, the banks have refused depositors from withdrawing dollars from their accounts. Global lockdowns to slow the spread of coronavirus only worsened the banking situation in Lebanon.
New economic plan
While the political class, that today passed an economic reform plan, bickered over the roadmap, the central bank took limited and expedient measures in an attempt to stabilize the spiraling currency. Prime Minister Hassan Diab’s capital control law and economic plan appear to have triggered further haggling between various political factions that back the cabinet.
The central bank issued a series of circulars instructing depositors to withdraw Lebanese lira from foreign-currency accounts at a market rate determined by banks, which is double the official pegged rate of 1507 lira to the dollar. The central bank also instructed money transfer companies that they should pay recipients in lira instead of dollars.
“You can’t control the Lebanese lira rate with gimmicks or by police violence. The use of daily circulars and of law enforcement to close down exchange shops is indicative of the [central bank] having lost control of the market,” added Azar.
The country can only draw in fresh dollars through diaspora remittances in the short term on by restoring productivity in the long run, which would boost exports as well as attract foreign direct investments. Diaspora remittances have been on the decline, which partially contributed to Lebanon’s current dire situation.
Lebanon’s gross domestic product contracted by 2 percent in 2019 and is expected to contract by 12 percent this year.
Estimated between $17-20 billion in most recent years, Lebanon’s trade deficit systematically drained foreign currency out of the banking system. Former banker Dan Azzi explains that tariffs need to be introduced to alter and reduce dollar spending to reduce the trade balance deficit to zero.
“We have to cut the number of foreign workers in Lebanon who transfer their dollars out. We need to remove oil subsidies because this would limit the use of luxury or large cars,” he said.
The only way to stop the lira depreciation is thought rapid economic reforms, restarting the flow of dollars into the economy, and by restructuring the banking sector, underlines Azar.
Lebanon’s corrupt political class has continuously failed to make essential economic reforms, namely in the electricity and telecommunication sectors. Successive governments have also refused to make enough improvements to the ease of doing business and to the country’s infrastructure, which would put an end to their lucrative system of kickbacks.
“Actions such as the lirification of dollar deposits is only going to depreciate further the Lebanese lira against the dollar. We could end with a dollar at 20,000 or 50,000 lira, if this continues,” warned Azzi.