The collapse of the Lebanese Pound

The Lebanese dollar deposits are imprisoned in the banks. Government regulations prohibit the money from being withdrawn from the same owners. As result, individuals and companies have started protesting for their money, whether local or foreign currency. To ease dollar transactions, mainly for importers, the central bank decided to raise the liquidity ceiling.

However, this could make it harder for the banks to meet their obligations to depositors. The central bank also took a pointless decision. It ordered commercial banks to demand to any client that took more than $500,000 out of the country last year needs to repay some of that money back. Bringing money out of the country to not come back to it, is considered a violation of the regulations.

However, it doesn’t seem like working. None of the customers is intending to obey the order. Nor any new infusion of dollars from the International Monetary Fund seems coming. As long as there’s no secure economic reform plan, no country will feel safe to send a dollar to the Lebanese state. The only aid the government is getting from other countries, is for dealing with the pandemic crisis. But that isn’t even enough to cover day-to-day needs, and much less a repayment of the government’s debts to the hospitals.

The country’s worst economic crisis

The Lebanese pound hit the lowest level ever compared with the dollar. This is the result of a deep economic crisis. It has thrown over half of the population into poverty and has caused protests to happen. The pound had been pegged to the US dollar at 1,500 since 1997. However, the country’s worst economic crisis since the 1975-1990 civil war has come now.

Money exchangers claimed that the Lebanese pound was trading at nearly 1507 Lebanese pounds to the US dollar on the black market. Before the latest news, the pound had briefly stabilised at 8,000-8,500 to the US dollar, and in July, it reached 9,800 to the dollar. The devastating depreciation came as the central bank started reviewing Lebanon’s lenders, under international pressure for reform. As part of a series of demands, it had given them a Sunday deadline to increase their capital by 20 percent.

A central bank committee agreed on the creation of deadlines for the Bank of Lebanon to take appropriate measures in regard to this situation. If these requirements were not met, newspapers will have intervened. They would have declared that the currency plunge was partly fault of the commercial banks. It was the outcome of commercial banks sucking dollars out of the market, to meet the financial demands of the central bank. Of course, due to the crisis, primary goods prices, such as the ones for food and water, went up over 50 percent, causing the population to live in pure poverty.

The arising of protests

The results of this situation, ended up in protests. Protesters proceeded to block off roads in the capital, Beirut, and many other parts of the country. People have the need to speak up in front of such an economic disaster. Additionally, demonstrations were seen in Tripoli in the North, Saida in the south, and Bekaa in the east.

The economic crisis also had affected the neighbouring country of Syria, whose currency hit a low record as well. An addition to the economic catastrophe caused by a decade-long civil war. The exchange rate reached 4,000 Syrian pounds to the US dollar in Damascus. One of the main channels for the Syrian government to the external market, is Lebanon. Therefore a crisis in Lebanon has consequences also in Syria. Several areas in Syria are controlled by the government under Western sanctions. They have long relied on Lebanon as a conduit for dollars.

The consequences of a non-functioning government

Notably, Lebanon has been without a fully functioning government since the outgoing premier Hassan Diab, after the explosion at Beirut port in 2020. It added a new misery to a state which was already on its knees by the economic crisis.

Since 2019, with the impact of the worst economic collapse in Lebanon, the pound began to gradually decline against the dollar, ending with a severe liquidity crisis. Banks stopped providing depositors with their money in dollars. That resulted in discomfort and protests by the same depositors, of course. The official exchange rate is still equal to 1507 pounds to the dollar.

The record declined in the exchange rate the day after the Bank of Lebanon announced the revision of the conditions of banks. This, after the expiration of a deadline set for the banks to increase their capital. In the summer of 2020, the Central Bank asked banks to increase their capital by 20% by the end of February 2021. It was also required to form a free foreign account. That in case of any liabilities with respective banks abroad of not less than 3% of total foreign currency deposits. In case those banks failed to adhere to these standards, their shares will have become the property of the Bank of Lebanon.

The results of the currency collapse

Recently, local newspapers reported that the acceleration of the lira has collapsed due to a set of events. On top of that, banks withdrew very large amounts of dollars from the market. They ensure they did that to spread confidence, compensate losses and upgrade the economic wheel. However, some banks that had subsidiary banks, sold them. In order to be able to secure liquidity to other banks, which relied on the US currency, an increase in dollars was demanded.

In the meantime, the Lebanese Pound has been collapsing even more. The political parties still haven’t decided what to do. There is no way to stop this deteriorating situation. Supporting the Lebanese poor population, who is burdened with inflation, is not enough. The decline in the local currency has consequences in the prices of goods, foods and everything that is imported from abroad. Commodity prices have increased by 144%. Therefore, more than half of the population is below the poverty line. It is unacceptable, if the goal of the country is growth in prosperity. Lebanon needs order and new reforms now. In order to give the country and the population a new future to look forward to, poverty and corruption need to stop.

Pierre El Sokhn

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