It will take more than a change in the exchange rate to pull Lebanon out of its deep crisis

The Lebanese currency has been pegged to the US dollar at the rate of 1,507.5 Lebanese Pounds (LBP) to the dollar since 1997. The Ministry of Finance was due to revise the official exchange rate to 15,000 LBP tomorrow (November 1).

The change represents one of the conditions the International Monetary Fund (IMF) has planned for the country to obtain $3 billion in financial aidand one try to unify the country’s multiple unofficial, but widely used, free market exchange rates.

Some, however, fear the move will do more harm than good for a currency that has rapidly devalued over the past three years, especially at a time of political uncertainty as President Michael Auon has just resigned. , largely symbolically, one day before the end of his mandatewithout a successor on the horizon.

“It will be terrible for people. Everything will cost more,” Lina Boubess, a 62-year-old activist who has been called the “mother of the revolution” for her constant presence at protests since the start of the country’s economic crisis in 2019, says DW last month.

Brief history of Lebanon’s economic collapse

In the aftermath of the 1975-1990 civil war, Lebanon accumulated insurmountable public debt to rebuild, except that much of that money never actually contributed to public services, but simply kept a powerful elite comfortable while promoting income inequality. Like a recent World Bank analysis title “Lebanon Public Finance Report: Ponzi Finance?” noted, the fixed exchange rate played a role in creating an illusion of wealth.

But the illusion of stability was shattered in 2019, when persistent underfunding of public services led the government to attempt to raise taxes on tobacco, gasoline and even Whatsapp calls, rather than targeting the wealthiest segments of the population. The later manifestations sparked capital flight from the country’s wealthiest while other sources of foreign income, such as tourism, dried up, leaving massive public finance debt completely exposed. So Prime Minister Saad Hariri even resigned for, in his words“make a big shock to settle the crisis.”

SinceLebanon has struggled to import food and fuel, a situation made worse by the covid-19 pandemic and the war in Ukraine, while banks have imposed limits on the amount of funds their customers can access, which which has led some depositors in desperate need of cash to take matters into their own hands and rob banks to access their own funds. Three quarters of the population are estimated plunged into misery. Despite various attempts to support the value of the currency, the Lebanese pound fell in black market that the country was shaken by the liquidity crisis.

The Lebanese crisis, in the words of the IMF mission chief

“The Lebanese economy remains severely depressed in the face of the continued stalemate on much-needed economic reforms and high uncertainty. GDP has contracted by more than 40% since 2018, inflation remains in triple digits, reserves of exchange rates are declining and the parallel exchange rate has reached LBP 38,000 per USD Amid collapsing incomes and drastically reduced expenditures, public sector institutions are failing and basic services to the population have been drastically reduced. Reduced Unemployment and poverty are at historically high rates. —Ernesto Ramirez Rigoafter his visit in September 2022.

Mapped: Lebanon’s debt

Image for article titled It will take more than a change in the exchange rate to pull Lebanon out of its deep crisis — Chart: Ananya Bhattacharya

Other IMF conditions target the banking sector

For years, local private banks have been lending to the central bank of Lebanon at extremely high interest rates. The major private banks control almost all the assets of the banking sector, and for 18 of the top 20 banks, their main shareholders belong either to the current ruling political class or to their inner circle. Before the collapse of the economy, the banks convinced customers to exchange their greenback savings for local currency with high interest rates on the latter.

The banks have been center of public outrage due to imposing withdrawal caps, restricting the flow of customer money, and being closed for long periods of time. So, along with the changes in the exchange rate and the approval of the 2022 budget, the IMF demanded several reforms in the area.

On the one hand, the government must approve a banking restructuring strategy that “recognizes and deals with the sector’s significant losses from the outset, while protecting small depositors and limiting the use of public resources”.

Second, the country must reform its bank secrecy law to “bring it into line with international standards to fight corruption and remove obstacles to effective restructuring and supervision of the banking sector, tax administration, and the detection and investigation of financial crimes and asset recovery. Adopted in 1956, the bank secrecy law prohibits the disclosure of any information regarding customers of Lebanese banks, except in rare circumstances such as bankruptcy filings, lawsuits between the bank and the customer, or money laundering investigations. But experts believe it hampers transparency.

Lebanon’s finance ministry clarified that the implementation of the new exchange rate depends on the approval of a long-delayed financial recovery plan, Bloomberg reported.

The economic crisis in Lebanon, in figures

82%: Lebanon’s multidimensional poverty rate in 2021, up from 42% in 2019, according to the United Nations Economic and Social Commission for Western Asia (UNESCWA)

36,600: The Lebanese pound will buy a US dollar on October 31 on the parallel market

95%: value that the Lebanese lira has lost over the past three years

10 times : how much food prices have increased since 2019

10 times: increase in the cost of imports as the 2022 budget fixed them at the new exchange rate

200%: inflation in lebanon

80%: Share of cereal imports from Ukraine-dependent Lebanon. Russia’s war in Ukraine sent prices skyrocketing

1 million: Syrian refugees among the population plunged into poverty

70: inspectors available to monitor businesses to prevent illicit price gouging and hoarding

$90 billion: Lebanon’s public debt defaulted in March 2020; 170% of its GDP, one of the highest in the world

Exchange rate exception

In order not to further harm banks, Lebanese Prime Minister Najib Mikati said that the gradual rollout of the new exchange rate exempt two categories:

? Bank balance sheets

?️ Housing loan repayments

But with no way to protect customers’ frozen bank accounts, increase in bank robbery incidents may not let go.

Wait, what happens to the Lebanese government now?

Since its independence from France in 1943, the Lebanese government followed an unwritten “gentleman’s agreement” which suggests that the president should be a Maronite Christian, the prime minister a Sunni Muslim and the speaker of parliament a Shia Muslim. With Aoun’s term ending today (October 31), parliament should have found a replacement, but he failed to reach consensus four times, and now finds itself in a political stalemate.

In the event of a presidential vacuum, the Lebanese government replaces it. Only the firm operating in guardian ability most would not govern firmly and implement economic reforms quickly. Jhe constitutional crisis on top of the economic crisis is not promising.

“Prospects for an IMF deal were already dim before the next power vacuum and Aoun’s departure,” said Nasser Saidi, economist and former Minister of the Economy. “There is no political will or appetite to undertake reforms.”