The Lebanese government will offer dollars to importers of materials essential to rebuild the shattered city of Beirut at a rate more than double the official currency peg that still governs most Lebanese people’s salaries, amid hyperinflation caused in part by the government’s economic mismanagement and corruption.
A central bank circular issued July 6 set the fixed exchange rate for importers and manufacturers of essential food items at 3,900 lira to the dollar, higher than the official peg of 1,507.5 to $1 that the government continues to promote despite black market rates of 7,500 to 8,000 to $1.
Aluminum, wood, and glass – all essential materials needed by people to reconstruct Beirut following the widespread destruction caused by a massive blast in the port on Tuesday – will now fall under this circular, Nassib Ghobril, chief economist at Byblos Bank, told Al Arabiya English.
Faced with dwindling foreign currency reserves after decades of economic mismanagement, the central bank must now prioritize and “has to choose how to support companies and individuals who have damages,” added Ghobril.
The rate will affect the prices of the essential goods for the Lebanese population as they attempt to recover, with many already suffering from a drop spending power as the black market rate of the lira has rocketed while prices continue to rise in shops.
Images have surfaced showing the widespread destruction caused by the massive blast in #Beirut’s port to the neighborhoods of Mar Mikhael and Gemmayze, home to some of the city’s most popular restaurants and bars.— Al Arabiya English (@AlArabiya_Eng) August 5, 2020
See the damage here. #Lebanonhttps://t.co/LmabDIKnaU
Hyperinflation takes its toll
As dollars needed to buy goods for the import-dependent country began to dry up in mid-2019, the official peg slipped. Last month, Lebanon became the first Arab country to enter hyperinflation.
Reverting to its reserves, Lebanese banks continued to block depositors from accessing their US dollars after nationwide anti-government protests broke out last October.
The government, defaulting on its $1.2 billion Eurobond in March, entered into talks with the International Monetary Fund to restructure its $90 billion debt and has asked for a $10 billion bailout, and is also hoping to cash in on $11 billion in soft loans pledged at a 2018 donor conference.
However, the government has failed to enact the required reforms to release the desperately needed funds, with critics blaming corruption and cronyism.
The country’s central bank has long refused to officially devaluate the currency despite setting various rates below the black market rate to try to tamp down inflation, including the 3,900 rate for importers of essential food items.
Recovery plan appears unsustainable
As well as subsidizing imports of essential goods, the central bank has said it has instructed banks and financial institutions to extend exceptional dollar loans at zero interest to individuals and firms affected by the explosion.
But according to experts, the loans will not be enough.
“The actual interest-free loans don’t matter, so remember they’re lending the money in lollar – or virtual currency that can only be moved around in Lebanon,” economist Dan Azzi told Al Arabiya English.
Since the Lebanese pound began to tumble, banks have implemented a series of illegal and ad hoc capital controls, limiting depositors’ ability to access or transfer funds holed up in Lebanese banks abroad.
Azzi said that unless the loans are able to be transferred outside the country to pay a supplier or an importer who would be able to bring in wood or glass, the loans are a nominal step.
“It’s helpful in paying salaries and stuff like that, for stuff within Lebanon, but it’s not useful to import supplies to fix a shop that just got blown up,” he said.
Ghobril, the chief economist at Lebanon-based Byblos Bank, added that the loans are the first step to supporting individuals and businesses who suffered property damages in the blasts, although some aspects of the details remain unclear.
But other analysts have pointed to the government’s disastrous economic governance as making it unlikely that it can steer the recovery.
“The Lebanese government is definitely not able to provide a recovery package, it has lost all credibility and legitimacy not only amongst the people but amongst foreign governments,” said Nadim El Kak, a Researcher at the Lebanese Center for Policy Studies (LCPS), who noted that the government was already unable to provide long before the crisis.
With the country’s foreign reserves critically low – the product of years’ worth of government negligence and corruption – it is unclear how the new rate and interest-free loan plan will be sustainable.
The currency’s nosedive has translated into slashed salaries and families prioritizing putting food on tables rather than buying other items, including medicine. As families can no longer afford to pay school fees or make minor home or business repairs, they now face the gargantuan task of rebuilding entire homes.
While ordinary Lebanese have taken up brooms and hit the streets to sweep away the rubble, the government has been seemingly absent – with French President Emmanuel Macron visiting disaster-stricken areas of Beirut before his Lebanese counterpart.
“The Lebanese people clearly realize that they have no one but themselves to take care of them, they are the ones mobilizing on the ground, rebuilding, cleaning. Traditional parties of the state don’t have the means, nor are concerned about the plight of the people there,” said El Kak.
And while Ghobril said to expect to see additional central bank circulars issued in the coming days as authorities grapple with how to rebuild a broken country, with anti-government protests erupting on Thursday evening, it seems many Lebanese people have lost already lost faith.
Watch: Lebanese security forces fire tear gas to disperse dozens of demonstrators gathered in front of the parliament building protesting the government’s incompetence in the wake of the deadly Beirut explosion.#BeirutExplosion #Lebanonhttps://t.co/8JUrerzkck pic.twitter.com/NkD42StiTB— Al Arabiya English (@AlArabiya_Eng) August 7, 2020