The Lebanese Lira and the US Dollar

The price of the US dollar recorded the level of 4,200 pounds until the end of April for the first time in the parallel market in Lebanon, which is suffering from a financial crisis that has wiped out half of the value of the local currency. The informal market has become a major source for obtaining hard currency since Lebanon entered a crisis 7 months ago, as the currency moved away from the official peg rate of 1507 approved nearly two decades ago. The lira began to fall since the Corona pandemic forced the country to impose a general isolation in the months of March and April, coinciding with the strict measures of banks that led to the freezing and paralysis of the movement of deposits, and then the return of the revolution / chaos to the street.

In the past, the relative stability of the exchange rate of the lira, along with banking secrecy and rational interest, constituted the key to the strength of the Lebanese economy, in addition to the factor of confidence. As its exchange rate ranged between two and three pounds and fifty piasters until 1985, which led to an increase in the bank accounts of the wealthy Lebanese, the Gulf and the whole world. Accordingly, the Lebanese banking and financial sector was considered one of the largest banking sectors compared to the size of the national economy, as the combined assets of the sector amounted to four times the GDP of Lebanon.

The price of the Lebanese currency has been stable for decades, and this was the focus of the Lebanese monetary policy. In 1997, the dollar was fixed at a price of 1507.0 pounds, which is known as the fixed exchange rate system, and this is based on the central bank’s ability to stabilize. He was always keen to have enough dollar reserves to buy the lira and vice versa. It is known worldwide that Lebanon is based on economic openness, which made it an important center for attracting funds through services, banks, media and tourism, followed by the equation of the stability of the lira, as most of the depositors preferred to deposit their money in the fixed Lebanese pound against the dollar with high interest, until the events of 17 came. October 2019.

On the other hand, the main problem lies in the country's politics. Sectarianism, corruption, and regional conflicts pressed from time to time to produce tremors that the country quickly overcame, except for the wrong financial policies and their exorbitant price that plunged Lebanon into the cycle of sustainable debt. The Lebanese debt has now reached about $90 billion, which is equivalent to 150% of the estimated GDP of $55 billion, and this is the third highest percentage in the world after Japan and Greece. And debt service (i.e. the interest that the state pays on debt) until 2019 = 7 billion dollars, which constitutes a burden of 30% of its annual budget estimated at about 20 billion dollars, and this service will represent more than 60% of the state budget by 2021, according to the estimation of the Fund International criticism.

However, the stability of the exchange rate of the lira deepened the vulnerability of the Lebanese economy. The decline of a country's currency usually leads to a competitive increase in the country's exports of goods and services. However, in Lebanon, the stability of the price of the lira made imports cheap compared to the local product, which weakened it, especially since the country suffers from chronic lack of collection, smuggling, waste and corruption of all kinds, and an increase in continuous borrowing from abroad and dependence on donations from the Gulf countries without putting forward industrial and agricultural plans for development and productivity. But everything turned around during 2018 – 2019 after the occurrence of regional changes in the region and global political trends, the infusion of approved Gulf money into Lebanon has stopped, the absence of the Paris conferences to support Lebanon, the failure of the CEDRE conference, and the failure to neutralize the country from conflicts in the region. It became without support, and the economic hemorrhage began, coinciding with the waste, theft, and nepotism that is as old as Lebanon.

In light of these weaknesses, the only way to finance the state was for banks to lend to successive governments, which in turn pumped cash into the economy. So the economy began to depend entirely on the circulation of bank deposits, which in turn depended on the factor of confidence and were proud of the stability of the currency. Now, in the absence of all these factors and the absence of the productive sector in various fields, the lira has begun to collapse. Confidence plummeted customers began to withdraw their deposits, only to discover later that there was a scarcity of dollars and a loss of hard foreign currencies, which is a basic support for the lira. Panic spread even more, and the influential people started transferring their money in billions abroad, with a historical flight of the dollar exchange rate until it exceeded the threshold of 4,000, referring to the number of 10,000 for .to. This led to an insane rise in commodity prices and a decline in the purchasing power of salaries and end-of-service compensation in light of inflation and the absence of rescue plans, which are impossible to implement, even if they exist.

As for the solutions, they are reactions so far in blaming each party on the other. As the Banque du Liban disavows all the details of the decline in digital data while presenting vague numbers that the current government has not been able to refute until now, and the banks do not find themselves concerned with dealing with the issue, as they limit the crisis to the issue of public debt and state reform without addressing the reality of the monetary crisis afflicting the country. . Gaining time or wasting it is the sole objective of all parties so far.

As for the Lebanese state, it is known that it annually issues securities in order to finance itself. It is a debt in Lebanese pounds at a rate of 60%, and in dollars at a rate of 40%, and the payment is made with high interest rates of about 9% for the pound and 7% for the dollar. This debt is secured by the majority of Lebanese banks and the Bank of Lebanon, where the two parties own approximately 85%. This means that the state is still applying an official peg to the lira at 1507 to the dollar for primary commodities such as fuel, wheat and medicine.

Fixing the exchange rate at the level of 1507 a long time ago is an economic and technical error, in addition to that this trend was supported by all parties by raising interest on treasury bonds and deposits in pounds, while it was supposed to employ these funds in building a strong economy that supports the price of the pound according to market principles. . Instead of directing investors and major capitalists in investment projects, they were encouraged to increase their wealth through rent. when the benefits of Lebanese treasury bonds reached the level of 45% in the mid-nineties, and there was a heavy purchase of bonds by the Lebanese, Arabs, and even local banks, wealth accumulated in one sector, and the country was emptied of its basic financial and investment energies, and thus job opportunities declined, and all this was considered at the time a luxury! Accordingly, debts accumulated in excess of 90 billion dollars.

In the end and as a reminder, foreign exchange reserves in Lebanon amounted to 33 billion dollars in 2017, and in 2019 it reached 25 billion dollars, while experts expect it to reach 19 billion because of the crisis, at a time when the total debt owed by Lebanon by the end of the year exceeds 2020 more than $6.5 billion. Now, according to official sources, the foreign exchange reserves are sufficient for 7-8 months. Will the Banque du Liban print more paper money, including the 500,000 LL denomination? He usually resorted to the Russian Goznak company as an option to print his money for about ten years, as printing a package containing 2,000 papers cost the state about 100 euros. As for knowing the amount of Lebanese money printed in Russia, it is very difficult due to the strict secrecy.