The fall of the Lebanese Pound, mirror of an exsanguinated economy

LEBANON. While it has been without a government for the past six months, the previous one being content to manage day-to-day affairs, Lebanon's economy is sinking further and further. On Tuesday, March 2, 2021, the Lebanese pound fell to its lowest historical level against the US dollar. The parity, on the parallel market and according to the local press, now exceeds £10,000 for $1. The fall of the local currency continues inexorably since the summer of 2019.
However, for the past twenty years, the official rate, still prevailing on the site of the Bank of Lebanon (BDL), remains fixed at 1,507.50 pounds for one dollar.

This last episode of a macabre series comes in the midst of a full assessment of the financial situation of banks conducted by the Bank of Lebanon (BDL). An operation carried out under strong international pressure. The restructuring of the banking sector has become unavoidable if the country wants to hope to receive the massive support long promised, but conditional on reforms. This concerns in particular the $10 billion granted by the International Monetary Fund (IMF) to revive the country. This aid will only be paid out on three conditions set during the summer of 2020 by Athanasios Thanos Arvanitis, Deputy Director of the IMF's Middle East and Central Asia Department: "restructure the public debt, strengthen the tax system, bail out the banks". He even added, "It is necessary to reform the economy, in particular public enterprises, and improve governance and transparency".

Meanwhile, withdrawals in the banks are still capped, money transfers abroad prohibited, credits inaccessible.

The Central Bank had given the banks until Sunday, February 28, 2021 to increase their capital by 20% and to raise their liquidity abroad. They were therefore forced to withdraw dollars from the market, causing, according to the daily Al-Akhbar, a new fall of the pound due to its indexation to the US currency.


 

The local currency had already suffered a sharp depreciation in 2020, which led to three-digit inflation and thus price increases. But also the arrest, in May 2020, of Mazen Hamdane, responsible for the monetary operations of the BDL, which came after the arrest of the president of the money changers' union accused of currency speculation. At the same time, Riad Salamé, Governor of the Bank of Lebanon, denounced "the promises of reforms that the State did not fulfill for political reasons". He added, "I don't know if there was really a will for reforms, but I know that the Central Bank has always demanded them".

In January 2021, the governor was heard by the Lebanese public prosecutor after a request for legal assistance from Switzerland investigating alleged money transfers he had made to the country. On France 24, again in January 2021, Riad Salamé defended himself, claiming to be "a scapegoat. We do the financing, and the law obliges us to finance, but we don't do the spending and we have no power to create reforms". He rejected any responsibility of the BDL in the liquidity shortage, attributing it essentially to massive imports of more than $65 billion (€53.8 billion) between 2017 and 2019 orchestrated by the State. During this TV interview, the Governor of the Banque du Liban stated that "2.6 billions $ had left the country since October 2020 of which 1.6 billions $ for banks and 1 billions $ for Lebanese people". According to him, "during the last twelve months, the Lebanese have withdrawn about $ 30 billions from bank accounts.

A few months before, at the end of November 2020, Alvarez & Marsal gave up its forensic audit of the BBL, which was essential to unblock the international funds of the economic rescue plan. The audit firm invoked a problem of access "to the information and documents necessary to start implementing its mission".

 

At the beginning of December 2020, a few months after the catastrophe of the August 4, 2019 explosions in the Port of Beirut, the Conference in Support of the Lebanese Population led to the adoption of a framework called 3RF for Reform, Recovery, Reconstruction. It was supported by a financing facility (Multi-Donor Trust Fund) from the World Bank, the United Nations and the European Union. At the time, UN Secretary General Antonio Guterres stressed: "The Lebanese people have also been waiting too long for the formation of a new government, which will have the capacity to implement the reforms needed to lead Lebanon on the road to recovery". Since then, nothing has changed.

According to the World Bank, 45% of the population lives below the poverty line and 22% below the extreme poverty line. During the economic and health crises, the Lebanese have seen their salaries fall (because they are paid in Lebanese pounds) and their purchasing power plummet.
With the depreciation of the currency, and the drying up of dollars in its reserves, the Central Bank can no longer compensate the difference between the import price and the price at the official rate thanks to subsidies on foodstuffs (more than 300 products) paid in dollars. These are mainly fuel, wheat and medicines which represent, according to Lebanese government figures, 11% of the average household basket. These subsidies, at a cost of $700 million per month while the BDL has only $19.5 billion in foreign currency reserves of which $17.5 billion are mandatory reserves (September 2020 figure), are likely to disappear, further complicating the inflationary situation on prices.

In January 2020, the World Bank granted $246M (€203.50M) in emergency aid to the country, in the form of money transfers and access to social services for 786,000 Lebanese.

 

The economic and social crisis, reinforced by the effects of the Covid-19, the arrival of large numbers of refugees (1.7 million, mostly Syrians), but also a sclerosis of power incapable of reacting, pushes a population into exasperation. It has been mobilizing against the political class since October 2019 and the first demonstrations against the corruption of politicians and very difficult living conditions. The anger resumed with greater intensity at the beginning of March 2021 with the depreciation of the pound.

Lebanon (6.2 million inhabitants) has been in a situation of suspension of payments since March 2020 and has the third largest debt in the world. Its GDP declined by 19.2% in 2020.

At the beginning of February 2021, a survey by the United Nations Conference on Trade and Development (UNCTAD) revealed that Lebanon was nevertheless the Mediterranean developing country with the highest productive capacity, ahead of Tunisia and Montenegro. The institution gave it a Productive Capacity Index (PCI) of 33.7 (out of 100) against 31 for Jordan, 30.5 for Morocco, 27.8 for Algeria and 24.7 for Syria.