March 28, 2021
Dr. Said Elfakhani has tracked the fall of the LBP since it unhinged from the pegged dollar rate in October 2019. He spoke to us about the mysterious plateaus and lurches downward that have confounded and impoverished so many.
Why, after seeming to hold stable for a period at 9,000 to the dollar, did the LBP suddenly drop to 10, then 11, then 13,000? What caused this most recent drop, as it seems the underlying political-economic issues are the same?
First, no model can accurately determine the intrinsic value of the LBP, or any currency. Hence, the true value or price floor is not currently known, but it is certainly not 1,500 to the USD. There is no factual data that can justify a particular value, generally, and even less so for Lebanon. Currencies are usually valued in proportion to one another, like the LBP to the dollar. Supply and demand determines price and is dictated by many factors, like the ratio of one country's inflation rate and average per capita income to another, government fiscal and monetary policy, balance of payment and trade balance, public confidence in the future, respective interest rates, and the respective reliability of banking systems.
The Lebanese Central Bank had been trying to defend the 1,500 rate by balancing the amount of dollars entering Lebanon against those leaving the country (incoming dollars represent demand for LPB, whereas outgoing dollars represent the contrary). In 2019, Lebanon imported $20 billion worth of goods and services, but exported $3 billion. This trade balance deficit would, by itself, kill the value of any currency. But remittances and money attracted by high interest rates made up the shortfall. Eventually, those cash inflows dried up and exposed the economy's hollow foundation. We don't produce enough locally to satisfy local demand, so we need to keep importing, but we can't import as much as before because of the devaluation; that's lowered living standards.
Lebanon doesn't have enough land to support much agriculture. Mostly we rely on services and tourism for generating much of our national income. More political instability means less tourism. We used to receive a lot of Gulf Arab tourists. That's all dried up. Foreign aid too is very limited because of political issues. So where will the cash come from?
If I'm an importer and I want wheat sold on the international market in dollars, I and all the other wheat importers will be on the hunt for dollars. We'll crowd around the exchange office. The money changer, who has a limited amount of dollars, will auction what he has. The importers, and anyone else chasing dollars to buy paint, oil, or food from abroad, will bid up the price. The money changer will sell his or her dollars to the highest bidder, thus the new lower price of the Lebanese pound. Can you speak to the most recent uptick from around 9,000 to 13,500?
9,000 is a fictitious number. There are all kinds of signals that those importers and others standing in lines at the money changer are paying attention to. When rumors circulate that there aren't enough dollars, the price of dollars goes up. When the media announces that there's still no government—and by extension no rescue plan—the price goes up. But when [Prime Minister] Hariri visited [President] Aoun, the price fell from 15,000 to 10,500 in an hour on the assumption that government formation is imminent. What's the correct USD price? It could be 10,000 LBP It could be 100,000.
When the government defaulted a year ago on its foreign debt, the pound crashed. No one wanted to bring any more dollars into Lebanon. Now foreign exporters want advance payment from Lebanese importers for all goods and services, from basic necessities to luxury items. Meanwhile, importers have a hard time paying at all because of the financial controls in place. They need to have a foreign bank account or to smuggle the money out in bags. On the other hand, they will have to demand dollars for their local sales. Hence, more downward pressure on the Lebanese pound.
And who should bear the losses? It must be the banks and the government, not the Lebanese depositors. The banks lent to the government, which defaulted on the banks, who then defaulted on depositors. The government is a bad debtor. It has run a budget deficit for the past 30 years. And it's been printing money to pay its debt, meaning, again, downward pressure on the pound.
What's the solution? What can be done to halt the crash right now?
Money or capital is cowardly, as they say. Faith must be restored in the Lebanese economy to attract cash. A government must be formed to attract cash infusions in the short-term. But international agencies such as the IMF will not jump in without a clear reform plan.
Positive surpluses in trade balance and balance of payment will shore up the pound, which requires dollars. CEDRE1 money, which would come in installments over five years if reforms are implemented, can help, and so can the diaspora. But they won't send money until they recoup what they've already invested.
In the long term, the economy must be restructured away from services toward something more balanced. In my opinion, our salvation lies in completing land and sea border negotiations with Israel-Palestine and Syria, and producing oil and gas. I am confident that many international investors would be willing to advance Lebanon sizable hard currencies in seven or eight-year loans, which is the time it would take to produce and sell oil and gas. Other steps include developing an independent judiciary and finding a solution for Syrian refugee, and eventually Palestinian refugee, issues. This is the way to recovery. Otherwise, the local productive economy remains weak. It is easy to destroy, but is much harder to rebuild.
* CEDRE (Conférence économique pour le développement, par les réformes et avec les entreprises) was an international conference in support of Lebanon development and reforms, hosted by France on April 6, 2018
1 CEDRE (Conférence économique pour le développement, par les réformes et avec les entreprises) was an international conference in support of Lebanon development and reforms, hosted by France on April 6, 2018