What’s happening in Lebanon?
The banking crisis, currency exchange, and economic unrest.
Thumbnail image: Beirut, Lebanon, Nov 28, 2019- Protesters, wearing masks of Lebanon’s Central Bank governor Riad Salameh, demonstrate amid the country’s worst economic crisis in decades. Karim Naamani.
On June 11, 2020, protestors in Tripoli, Lebanon’s second-biggest city, set the central bank on fire with petrol bombs. At times where the nation is facing one of its worst economic states with hunger crimes, rampant unemployment, and hyperinflation, the nation’s unstable financial systems are largely to blame.
Foreign currency revenues in Lebanon had begun to dry up because of political upheaval in Syria, where unrest often spills over as a result of the lasting civil war, as well domestic anti-government protests. (Hubbard, NY Times, 2020). This was problematic, as Lebanon exports almost nothing, and relies mainly on tourism, remittances, and loans among other sources to keep its foreign reserves and currency exchange rate stable. Such a decline in revenues prompted Lebanon’s Central Bank, in collaboration with commercial banks, to begin an initiative they called “financial engineering”, where banks offered interest rates as high as 14% to attract foreign savings in the country- increasing their foreign currency inflows (Financial Times, 2019). The problem with this system is that it was inherently unsustainable- the higher interest rates bank would offer, the more deposits they would need to pay back this interest.
In early 2019 the system began to crack. There was increasing pressure on the fixed exchange rate of the Lira as Lebanon struggled to maintain foreign currency to support the Lira*, and the head of the Central Bank issued orders to all money transfer offices to pay cash in Lira instead of in dollars (Koffman, Forbes, 2020). Demand for dollars continued to increase, however, and a black market for dollars began to form (Egyptian readers can draw parallels to their dollar crisis before the floatation of the pound in 2016).
Amidst protests in October against government corruption, as well as complications of COVID-19, economic conditions were further exacerbated- flow of foreign currency from remittances stopped (Hubbard, NY Times May 10,2020), unemployment rose and with it personal funds hit rock bottom, fuel began to be increasingly depleted, and the shortage of dollars plunged Lebanon into famine as the state is unable to import grain and meat (Koffman, Forbes, July 9, 2020).
This severe economic unrest skyrocketed demand for the dollar, as those holding Lira rushed to buy dollars- driving up the black-market rate to as high as 8,000 LBP/ 1 USD at the time of writing- an 82% devaluation. (Lira Rate, July 17, 2020). In this case, the dollar responds locally like a regular good - where increased demand and limited supply will simply increase prices to meet this higher amount of supply.
Lebanon’s economic problems have been accumulating for years through over-reliance on debt to pay state bills, as well as failure to enact economic reforms that could have strengthened the economy and unlocked access to international aid. Moving forward there needs to be extensive structural reforms, banking sector reforms, and above all a unified reform willingness and agenda for both the central bank and the government.
Notes for further understanding:
* Countries need to maintain foreign currency in order to pay back foreign imports using the local currency of the importer. These foreign exchange reserves are also important to stabilize currencies at a fixed rate (severe fluctuations in currency levels negatively affects the people of the country), maintain liquidity, which is essentially just another term for fluidity of use of the currency (in case of emergencies or drops in trade), as well as other reasons necessary to keep a country’s economy in good shape. The Central Bank supplies foreign currency in ways that make sure that the country is able to pay back its foreign debt and gain more foreign investments. Foreign investments are one important way to keep a stock of foreign reserves. Read more about this process here and the IMF’s guidelines for governments here.
Citations and sources for further reading:
Hubbard, Ben. “Lebanon's Economic Crisis Explodes, Threatening Decades of Prosperity.” The New York Times, The New York Times, 10 May 2020, www.nytimes.com/2020/05/10/world/middleeast/lebanon-economic-crisis.html.
Koffman, Tatiana. “Lebanon's Currency Crisis Paves The Way To A New Future.” Forbes, Forbes Magazine, 10 July 2020, www.forbes.com/sites/tatianakoffman/2020/07/09/lebanons-currency-crisis-paves-the-way-to-a-new-future/#6a01022b6a17.
Mounzer, Lina. “The Great Lebanese Ponzi Scheme.” The New York Times, The New York Times, 2 Dec. 2019, www.nytimes.com/2019/12/02/opinion/lebanon-protests.html.
Reuters. “Banks Draw Fresh Dollars to Lebanon with High Interest Deposits.” Financial Post, Financial Post, 12 July 2019, www.financialpost.com/pmn/business-pmn/banks-draw-fresh-dollars-to-lebanon-with-high-interest-deposits.
TRTWorld. Why the Central Bank and the Government Are at War in Lebanon, TRT World, 7 July 2020, www.trtworld.com/magazine/why-the-central-bank-and-the-government-are-at-war-in-lebanon-37943.
“USD to LBP in Black Market: Dollar to LBP.” Lira Rate, 17 July 2020, www.lirarate.com
