Lebanon to Devalue Its Currency By 90%
Riad Salameh, the governor of the Lebanese Central Bank, has announced that the Arabic nation is going to move forward with a new official exchange rate of 15,000 pounds per US Dollar from 1st February. This will devalue the Lebanese pound by 90 per cent, the last official rate alteration that took place 25 years back.
The previous official rate was 1,507, and the newly changed rate was 15,000. Considering the realistic scenario on grounds, 15,000 is far better than 57,000, the rate at which the pound is being circulated.
According to analysts’ expectations, the nation’s broader economy won’t be much affected. The economy is already being dollarised at a very high pace, and the majority of currency trading takes place at a parallel market rate.
After the pound split in 2019 from its rate of 1,507, it has constantly lost its value which has already come close to 97 per cent.
Salameh has told media houses that the country’s commercial banks will witness a fall in their equity when pounds are converted to the dollar at the rate of 15,000 instead of 1,507.
This change will drastically affect the banking institution’s equity exposures. The timing cannot be worse as the banks are strangled after the country’s financial implosion in 2019.
The governor has even sent a relief measure to the bank. The banks will be provided with a five-year window to swallow up the losses they incurred from currency devaluation.
IMF bailout agreement
Salameh backed his decision to rate change to 15,000 with the agreement made with the International Monetary Fund. Last year the Lebanese authorities and International Monetary Fund (IMF) decided on drafting an agreement that laid the foundations for a three billion dollar bailout to have a breather amidst the financial disaster.
The IMF ordered the Lebanese authorities to amalgamate the exchange rates on a priority basis. They have also ordered the authorities to tackle the ongoing losses in the financial sector amounting to $70 billion. These losses are fruits of the tree, which was nurtured for decades of extravagant expenditure, widespread corruption, and mishandling of operations.
The long-term approach adopted by the draft is taken with scepticism. Mike Azar, an analyst at One, said that the orders to refurbish the losses in a span of five years are quite conflicting. He said this in context to IMF’s direction to tackle the losses on an urgent basis. He further added that the banks are incapable of doing this on a medium-term basis. Hence the Central Bank has provided them with a five-year timeframe.
He warned that in the absence of a proper renovation plan for the banking structure, banks would raise money from shareholders to make up for the losses, or they might just shift the burden onto the innocent depositors, who will be granted the opportunity to withdraw from dollar accounts in local currency.
Since August 2019, the Lebanese liquidity crisis has seemed evident. This financial crisis was fueled further by the corona pandemic and also the Beirut port explosion, both in the year 2020. The ongoing crisis was strangled again by the US sanctions on Lebanese money exchanger Hassan Moukalled on charges of having business interests with the Iran-backed terrorist organisation Hezbollah.
Lebanon views the IMF as the only saviour to help them reinstate stability back into their financial system. The change in the exchange rate single-handedly won’t stabilise the Lebanese crisis of not having access to the dollar easily.
Earlier to this time, capital restrictions were never imposed on the country. Banks have restricted capital flows in their systems by limiting the withdrawal of dollars and Lebanese pounds.
The Lebanese economy is turning into a cash economy. Cash is now king in Lebanon. An economic expert at Lebanese research group Information International, Mohammad Chamseddine, has warned that the transition to a cash economy is the right path toward the disintegration of an economy.