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Lebanon’s ailing economy is limping into the new year | Economic and business news

Beirut, Lebanon – For more than two years, people in Lebanon with US dollar accounts with the country’s banks have faced strict withdrawal restrictions as hard currencies dried up and the value of the Lebanese pound plummeted. Chaos ensued when the Lebanese central bank passed a directive last month that more than doubled the exchange rate for Lebanese pound withdrawals on dollar deposits.

At one bank, employees and security guards were struggling to hold the front door open when retired and off-duty soldiers stormed in to withdraw savings at a cheaper rate. An off duty soldier in military clothing crawled under her legs to get inside.

While measures like the directive could temporarily calm disgruntled depositors whose life savings are trapped in the country’s dysfunctional banks, they are likely to exacerbate soaring inflation – which hit 174 percent annualized in October. That’s because the central bank – Banque du Liban – may be able to print more pounds to keep up with increasing demand.

But with the elections scheduled for May, experts say such pavement measures are likely to prevail as politicians attempt to ingratiate themselves with angry voters as they move behind significant reforms that could put an end to an economic and financial crisis that unfolds has been solidifying for more than two years and will not show signs of deepening until 2022.

Sick for years

The December central bank directive raised the exchange rate for withdrawals of Lebanese pounds from dollar savings accounts from £ 3,900 to $ 1 to £ 8,000 to $ 1. But as a sign of how desperate the Lebanese are to free up their savings, that rate is still a massive discount to the current market value of the Lebanese currency.

Lebanon started the new year when the value of the pound hit a new all-time low of $ 30,000 to $ 1 in the parallel market. A month earlier it was trading at £ 23,000 to $ 1.

The latest downward spiral brings the country’s monthly minimum wage to $ 22.50. However, experts point out that these are just the latest signs of chronic illness in an economy that has been ailing for years.

A protester poses during a demonstration against the growing economic hardship in Sidon, Lebanon, on Jan. [File: Ali Hashisho/Reuters]

“This is how the country has been run for over a decade,” Mike Azar, a senior financial advisor, told Al Jazeera. “Now we are feeling the effects more than before because we have less money to hide the effects of this mismanagement.”

In 1997, the Lebanese pound was officially valued at around $ 1,500 to $ 1 to keep post-civil war hyperinflation in check and to maintain investor confidence during the country’s rebuilding process.

But that official peg persisted even as the pound crashed in parallel markets and lost more than 95 percent of its value since October 2019.

Lebanon’s dual currency system ultimately failed because the country has long suffered from financial mismanagement and corruption, experts say. The economy relied almost entirely on tourism, banking, and remittances from the diaspora for revenue and foreign exchange.

In August 2019, as remittances dried up, banks began putting withdrawal limits on dollar accounts, causing panic among depositors. Protests swept across the country in late October of the same year.

It has only gotten worse since then. The COVID-19 pandemic has weakened tourism. Then came the devastating explosion in the port of Beirut in August 2020. Meanwhile, Lebanon’s politics remained paralyzed as successive governments failed to come up with a credible economic reform plan that is a prerequisite for delivering much-needed billions in financial aid, including an International Monetary Fund (IMF ).

The country’s banking system is largely insolvent. The government estimates that the lethargic financial sector has lost between $ 68 billion and $ 69 billion since the currency crisis began.

Jobs have disappeared, thousands of businesses have failed, and savings account values ​​have disappeared along with the country’s middle class. It is estimated that three quarters of the population now live in poverty.

Companies in Lebanon that have somehow managed to keep their doors open are faced almost daily with adjusting their prices to a currency with no bottom in sight.

“It is very difficult for companies to price their goods and services in Lebanese pounds because the exchange rate is so volatile and there is no view of the future,” Azar told Al Jazeera.

In the absence of real reform …

Since the financial crisis began in 2019, Lebanon has introduced a handful of official and informal exchange rates, with the official exchange rate obsolete. Even the Governor of the Banque du Liban, Riad Salameh, sees it that way.

Salameh was once hailed as a financial magician. Now a large section of the population condemns him for his financial mismanagement with the depositors’ money and the country’s currency reserves.

A look shows the central bank building in BeirutThe Central Bank building in Beirut, Lebanon [File: Mohamed Azakir/Reuters]

For his part, Salameh has blamed the government for failing to push ahead with a financial reform plan.

The dominant exchange rate in Lebanon is the parallel market rate, which expands and contracts due to political and economic developments and which lacks transparency. The authorities have struggled to crack down on currency exchanges operating at the opaque rate, and the central bank struggled to convince them to launch their regulated exchange rate platform called Sayrafa.

Without viable currency stabilization efforts and a lack of oversight, financial advisor Michel Kozah told Al Jazeera that Lebanon is in a “vicious circle”.

“The Sayrafa platform throws away dollars – that’s depositors’ money,” Kozah said. “And even the banks have their own tariffs based on this platform. It’s crazy.”

In the absence of viable recovery and restructuring plans, during the summer and winter, Lebanese authorities rely heavily on tourists bringing hard currency into the country and Lebanese overseas transferring dollars to their families to pay the bills.

In the meantime, the financial pressure on ordinary Lebanese has only increased as the government has gone bankrupt.

Since last summer, the central bank has been phasing out subsidies on wheat, gasoline, fuel and medicines. Filling up a petrol tank now costs the equivalent of the monthly minimum wage.

“They’re just delaying things, and I think the central bank circulars are supposed to please disgruntled depositors before the [parliamentary] Choose [in May]“Said Kozah. “But what you need is a full reform package with an IMF plan at the end of the day.”

Azar shared similar views, adding that strong social protection and job creation could have offset the negative effects of inflation if a program had been put in place earlier in the year the crisis.

“If any of the reforms needed put certain parts of society in trouble, such as increasing electricity tariffs or removing other subsidies, the plan would provide a social safety net and other support,” he said. “You would also have external financial support, economic growth and jobs, which would increase people’s purchasing power.”

The worst is not over yet

An IMF delegation will be visiting Beirut in less than two weeks to continue talks to offset the effects of the subsidy lift.

And Kozah says Lebanon has not yet seen the worst inflation. About half a million public sector and security workers are still being compensated at the official exchange rate, and the Lebanese authorities want to continue phasing out subsidies as the central bank’s reserves run dry.

“You will have to adjust salaries in the public sector. They are not paid by the dollar, but they are invariably paid at a price that they can afford to live at, ”Kozah said. “The dollar will hit 50,000 pounds – if not more.”

Azar even asks whether the volatile Lebanese pound is still viable as a currency as luxury traders have begun to only accept payments in US dollars.

“Even if we wake up tomorrow and the government puts together a plan and does it correctly, is it reasonable to expect people to put their savings back in pounds sterling in Lebanese banks?” He asked. “At this point, after more than two years of delay in implementing a single reform and the resulting total collapse of the lira [Lebanese pound], it is difficult to see a viable way to restore confidence in the lira, which is a prerequisite for maintaining its usefulness as a functional currency. “

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