Lebanese turn profit selling US dollars in exchange shops, raise hyperinflation alarm

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Lebanon’s central bank last week dumped US dollars into the economy in a bid to stabilize the exchange rate that has spiraled in recent months, but with multiple exchange rates in place, Lebanese could turn a profit for selling the freshly bought dollars for a better rate and getting more Lebanese lira for their buck.

The central bank announced it would dump $4 million a day into the system, with individuals eligible to get $200. US dollars are used alongside the local currency in Lebanon, and a shortage of dollars has spurred inflation and left people scrambling to get their hands on the precious greenbacks. Informal capital controls placed on bank accounts have made it nearly impossible for depositors to access dollars in their bank accounts.

While technically still pegged at 1,507.5 to $1, the local Lebanese currency has been subject to sharp inflation in recent months and has reached as high as 7,000 lira to the dollar in some areas.

Lebanon could be on a path toward hyperinflation, warned Jamil Chaya, assistant professor in finance at Rafik Hariri University.

Other experts Al Arabiya English spoke to agreed that hyperinflation could be seen in Lebanon.

Hyperinflation is one part of a worst-case scenario for an economy. People in countries that have experienced hyperinflation see their purchasing power eroded and unable to purchase goods as the value of their currency rapidly disappears.

In perhaps the best known example of hyperinflation, Germany experienced inflation rates in excess of 30,000 percent a month following the World War One, with photos showing Germans burning money to keep warm as the value of the currency fell below the cost to purchase wood. But Lebanon is still a long way from seeing rates fall this far.

Where Lebanese could sell lira for 3,950 to the dollar at the exchange shop, some discovered that they could then sell those $200 they just bought for a higher rate in lira. Customers could pocket 200,000-400,000 lira, according Chaya.

For families that are already hurting, “it would be worthwhile to wait at the exchange house to get that extra income for the month,” Chaya said.

The central bank has intervened in an attempt to stabilize the rate by introducing various rates for exchange shops, importers, cash transfers, and money received from abroad. Imports of fuel, wheat, and medication are subsidized at the pegged rate.

Economists say that these multiple pricing mechanisms create arbitrage opportunities. Officials intervened to try to end this cyclical pattern, but as long as multiple rates exist, there will be ways to profit from the system.

“It’s all about getting the best rate,” said former banker Dan Azzi.

In theory, arbitrage, the financial term for buying an asset then immediately selling it in another market for a higher price, if left to its own devices should force rates to converge.

“Arbitrage is the great stabilizer,” Chaya said.

But when prices cannot move freely, like exchange rates at currency shops in Lebanon, prices cannot converge, and this disparity is one reason the currency could continue to devalue, he said.

Deeper problems

Similar loops – another term for when people withdraw dollars and sell them in the parallel market for profit – also made an appearance in mid-2019, but Nassib Ghobril, chief economist at Byblos Bank, told Al Arabiya English the country’s problems are much deeper than these technicalities.

“What we have now is a severe confidence crisis, it’s a crisis that started toward the end of 2017 between the private sector and the government due to the government decision to raise taxes on consumption, income, profits and capital gains, as well as on fees on formalities with the public sector,” he said.

“That results in a redistribution of income from the private sector to the public sector.”

Government solutions so far, like injecting hard currency in the economy, is merely a “localized measure” but doesn’t tackle the root cause of the problem, he said.

He said any solution must restore confidence and attract fresh currency into the system, and completing a deal with the International Monetary Fund – where negotiations are currently ongoing – would be one step toward pulling the country back from the brink.

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Last week, a financial adviser working with Lebanon’s government quit as he said there was “no genuine will” to reform.

The international community for years has demanded reforms from Lebanon before disbursing loans or other financial aid. Ghobril said that a deal with the IMF will bring credibility to a reform plan. Before beginning talks with the IMF, the government adopted a plan that a spokesperson for the IMF has called “a good starting point.”

When asked how to unify the exchange rate, Ghobril said “It’s a question of confidence, reforms, and credibility,” noting that it was Lebanon’s deep structural problems that caused the country to fall into its current economic crisis.

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