BEIRUT (`) – When Moheidein Bazazo opened his mini-mart in Beirut in 1986, during some of the fiercest fighting in Lebanon’s civil war, he didn’t expect it to thrive. But a few years later, he had shelves full of groceries and needed 12 employees to help him run a busy business.
Those days are over. Bazazo now mostly works alone, often in the dark, to reduce his electric bills. Regular customers struggle to make ends meet and as they buy less, so does he, leaving some shelves and fridges empty.
With Lebanon’s economy in shambles and its currency in freefall, Bazazo spends much of his time trying to keep up with a fluctuating exchange rate. Companies like his are increasingly relying on one of the world’s most trusted assets – the US dollar – as a means of weathering the worst financial crisis in its modern history.
“I used to live comfortably, and now I’ve got about $100 left after I’ve covered the store’s expenses,” Bazazo said, typing numbers into a calculator. “Sometimes it feels like working for free.”
The Lebanese pound has lost up to 98 percent in value since the end of 2019, and now most restaurants and many shops require being paid in dollars. The government recently started allowing grocery stores like Bazazo’s to do the same.
While this “dollarization” aims to ease inflation and stabilize the economy, it also threatens to push more people into poverty and deepen the crisis.
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This is because few in Lebanon have access to dollars to pay for food and other necessities at such prices. But endemic corruption means politicians and financial leaders are resisting the alternative to dollarization: long-term reforms of banks and government agencies that would end wasteful spending and boost the economy.
Other countries like Zimbabwe and Ecuador have turned to the dollar to combat hyperinflation and other economic woes, with mixed success. Pakistan and Egypt are also grappling with plummeting currencies, but their economic crises are largely linked to an external event – Russia’s war in Ukraine, which has pushed up food and energy prices.
Lebanon’s woes are largely self-inflicted.
As the country felt the effects of the COVID-19 pandemic, a deadly 2020 Beirut port explosion, and Russia’s invasion of Ukraine, its central bank simply printed more currency, eroding its value and sending inflation skyrocketing .
Three quarters of Lebanon’s 6 million people have fallen into poverty since the crisis began in 2019. Crippling power outages and shortages of medicine have paralyzed much of public life.
Currency shortages prompted banks to limit withdrawals, trapping the savings of millions of people. It has left some in desperation to rob banks to forcibly take back their money.
The damage of recent years has been compounded by decades of economic mismanagement that have allowed the government to spend well beyond its means. The head of the country’s central bank was recently charged with embezzling public funds and other crimes.
The powdered Lebanese pound fluctuates almost hourly. Although officially pegged to the dollar since 1997, the pound’s value is now determined by an opaque black market rate that has become the standard for most goods and services.
Last month its value fell from around £64,000 per dollar to 88,000 on the black market, compared to the official rate of 15,000. To make matters worse for a country that relies on imported food, fuel and other products denominated in dollars, the government recently tripled the amount of tax – in Lebanese pounds – that importers have to pay on these goods.
This will likely lead to further price increases. For small businesses, this could mean products being sold at a loss just minutes after being stacked on the shelves.
Dollarization might give the illusion of greater financial stability, but it will also widen already huge economic inequalities, said Sami Zoughaib, economist and research manager at the Beirut-based think tank Policy Initiative.
“We have a class that has access to dollars … (and) you have another segment of the population that earns in Lebanese pounds and whose income has now been completely decimated,” Zoughaib said.
The transition to a more dollar-dominated economy was made not by government decrees, but by corporations and individuals refusing to accept payment in a currency that was steadily depreciating.
First, luxury goods and services were priced in dollars for the wealthy, tourists and private generator owners who have to pay for imported diesel. Then it was most restaurants. And now grocery stores.
Acting Economy Minister Amin Salam said the Lebanese pound has been “used and abused” over the past three years and dollarization of grocery stores will bring some stability to fluctuating exchange rates.
As more and more people and businesses reject local currency, the dollar is gradually becoming the de facto currency. The lack of confidence in the Lebanese pound has become irreversible, said Layal Mansour, an economist who specializes in financial crises in dollarized countries.
“People are fed up with fluctuations in the dollar exchange rate and have to spend a lot of time changing it, so it’s convenient, on a societal level, better to use dollars,” Mansour said. “This is the end of the Lebanese pound as we know it.”
Without a strategy to solve the economy’s underlying problems, “the government is allowing this to happen,” said Lawrence White, an economics professor at George Mason University.
Dollarization means the central bank can’t print currency that fuels inflation, and a more reliable currency could inspire more confidence for businesses. But many people could come under further pressure if Beirut officially adopts the greenback as its currency.
Millions in Lebanon who have tolerated the dollarization of luxury items may not respond in a similar way to groceries, which have already risen in price at some of the fastest rates in the world.
Over 90 percent of the population earns their income in Lebanese pounds, according to a 2022 survey by the International Labor Organization and the Lebanese government’s statistics agency to cover medical costs.
They would have to be paid in dollars to adjust adequately, which most companies and employers, particularly the Lebanese state, lack.
Public school teachers have been on strike for the past three months because their salaries barely cover the fuel cost of commuting to work. Telecom workers are threatening to walk out because their wages have not been adjusted to reflect the falling Lebanese pound.
Lebanon is far from ready to implement the reforms needed for an International Monetary Fund bailout, such as restructuring banks and inefficient government agencies, reducing corruption and establishing a credible and transparent exchange rate system.
Zoughaib, the Beirut-based economist, said he feared the lack of sound political and economic reforms means dollarization would likely only deepen poverty and make it even more difficult for families to pay for health care, education and food.
Bazazo, the market’s owner, acknowledges that dollar pricing will help him manage his finances and cut a small portion of his losses, but worries it will drive some customers away.
“Let’s see what happens,” Bazazo said with a sigh. “You’re already complaining.”
` business writer Paul Wiseman in Washington contributed to this report.
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