Dollars make life harder in Lebanon’s cash economy

• Dollar banknotes make up over half of Lebanon’s economy
• Cash use hinders economic growth and worsens inequality
• GDP down 60% since 2019

At the checkouts of a busy supermarket on Souraty Street in west Beirut, waiting customers count their dollars. Since the economic crash of 2019, paying by card has fallen out of favour and, increasingly, so has the Lebanese pound. 

The largest national note, the LBP100,000 bill, is currently worth just $1.07 at market rates. Paying for a weekly shop with pounds means handing over a large bundle of notes.

While both currencies are widely accepted, those with the means prefer the greenback.

The World Bank put the dollarised cash economy at just under 50 percent of GDP last year and independent economists say it is now higher.

And since March 1, the government has allowed supermarkets to cater for those who can still access foreign exchange by pricing their goods in dollars.

It is the latest expansion of what the World Bank calls a “pervasive and growing dollarised cash economy.” The bank says this is hindering Lebanon’s latent recovery and exacerbating inequality.

• IMF seeks urgent reforms to avert crisis in Lebanon
• Lebanon’s export orders rise for first time in two years

Lebanese people still cannot fully access their foreign exchange funds held in local banks – from so-called “lollar” accounts. People are allowed $400 a month in USD and another $400 in pounds. Individual banks allow additional withdrawals in lira.

But the exchange rate used in these is LBP15,000 to the dollar, so account holders take a big hit each time they withdraw in local currency. 

“Before October 2019, this was not a cash economy,” says Marwan Barakat, group chief economist and head of research at Bank Audi. “You had a very big banking sector.” 

Transactions made in dollars were the exception rather than the norm. “Most transactions were made in pounds,” says Ali Bolbol, head of economic research at Blominvest Bank.

On the eve of the crisis, cash dollars in circulation made up around 10.7 percent of GDP, according to a report the bank published in 2021.

But as the scale of the banking crisis became apparent, Bolbol says, “people took out as much money as they were able to hoard in their houses.” 

Reuters/Mohamed Azakir

Barakat said that the decision to allow supermarkets to price in dollars has created “a kind of equilibrium in the markets.” It may be a reason why the exchange rate with the pound has remained roughly stable since March. 

But the decision also contributed to a cost of living crisis.

Inflation rates for March reached a record high of 268.78 percent year on year, compared to 189.67 percent in February.

“The market is pricing based on what a minority of the population can afford,” says Sami Zoughaib, a research manager at Policy Initiative, a Beirut-based think tank. 

According to an International Labor Organization study in 2022, fewer than 10 percent of Lebanese workers earn their salary in dollars.

And while the World Bank estimates that between $6 billion and $7 billion of remittances flow into Lebanon each year, at the last count their recipients accounted for only 15 percent of the population. 

Wages for those earning Lebanese pounds have drastically decreased since the start of the crisis. In 2019 the public sector minimum wage was LBP675,000 a month, the equivalent then of $448.

While cabinet approved last month the latest in a string of public sector pay rises, bringing the minimum wage to LBP9,000,000 a month, on the parallel market this is worth just $96.

Though GDP has dropped from $51.95 billion in 2019 to $21.6 billion in 2022 and is expected to fall further this year, many businesses which earn in dollars have managed to “maintain their income and actually decrease costs”, Zoughaib says. 

Over that same period the proportion of people living in poverty has jumped from 8 percent to 55 percent. “There is more affluence in Lebanon than some of the major metropolises in the world,” Zoughaib says. “But it’s blocks away from people who are barely getting by.

“Lebanon has essentially developed a system that creates pockets of affluence and oceans of misery.”

• Lebanon’s tourism minister hails $9bn revenues
• US official says Lebanon has ‘no other way out’ than IMF deal

The rise of the cash economy has heightened concerns over money laundering.

On June 12 Amin Salam, economy and trade minister, told CNBC that Lebanon narrowly missed being placed on the Financial Action Task Force’s ignominious Grey List at the end of May.

The country was given a one-year grace period to implement reforms at the banking level and reduce reliance on cash.

The Central Bank has introduced its “Sayrafa” platform, which sells dollars at a discount against the parallel market to pull pounds out of circulation, and to discourage speculation.

The platform launched April 3 2020 to bring order to the forex market. 

Since then the World Bank says Sayrafa’s customers have made over $2.5 billion in arbitrage profits although the platform has only achieved “short-lived” improvements to monetary stability.

In its May 16 report, the World Bank denounced Sayrafa as “a case study in the kind of weak, and often counterproductive, policies implemented by the Lebanese authorities since the outbreak of the crisis”.

Dollarisation is also undermining the central government by sapping its ability to make basic interventions like adjusting interest rates.

“To have an effective monetary policy you need to have less dollarisation,” Bolbol says.