Lebanese businesses learning to live with dollarisation

Reuters/Mohamed Azakir

• ‘If you’re paid in pounds, you’re ruined,’ says Beirut businessman
• Public sector workers do side jobs to generate dollar income
• Payments in cash and banks avoided 
• Country’s IMF financing unlikely anytime soon

Lebanon’s pound, which has fallen 98 percent against the dollar on the black market, will depreciate further unless policymakers enact meaningful reforms and restructure the country’s moribund financial industry. 

Such actions seem unlikely, with Lebanon’s caretaker government seemingly unable to resolve an economic crisis the World Bank describes as among the worst since the 1850s.

Meanwhile, the pound’s plunge has led to a de facto dollarisation of the economy. 

“If you are paid in pounds, you’re completely ruined – outside the public sector everybody here is fully or partially paid in dollars,” said Nizar Haddad, an architect based in Beirut.

“Public sector workers are doing side jobs to generate a dollar income.”

For the first two years of the currency crisis, which began in earnest in 2019, Haddad’s firm compromised with clients so that they could pay half in dollars and half in pounds.

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Now, though, he bills customers only in the US currency, and has reduced his fees significantly. 

“A project that would cost clients $10,000 now only costs them $6,000,” said Haddad. 

Few businesses accept anything but cash, said Haddad. 

“We don’t use the banks anymore unless we have to – we won’t trust them at all,” he added. 

Lebanon’s banks had long enjoyed easy profits, reinvesting customers’ dollar and pound deposits in high-yielding central bank instruments that the regulator spent funding Lebanon’s worsening budget and current account deficits, subsidising imports and making interest payments. 

But as dollar inflows from the Lebanese diaspora and foreign tourists slowed, the central bank and commercial lenders could no longer service their debts.

Banks imposed unofficial capital controls to prevent customers withdrawing their money, while the government estimates financial sector losses at $72 billion, or nearly double Lebanon’s real GDP last year. 

Meanwhile, a parallel market emerged to reflect the pound’s true value. This was trading at 65,000 to the dollar as of February 9. 

That contrasts with the official rate – the pound was pegged at 1,507.50 to the dollar from 1997 until February 1 when the central bank changed it to 15,000.

Another rate, Sayrafa, applies to international card transactions made in Lebanon, including ATM withdrawals, and was at 43,600 to the dollar on February 8.

“Changing the official rate to 15,000 is meaningless – it’s just a random number,” said Hussein Cheaito, an economist at The Policy Initiative and a non-resident fellow at The Tahrir Institute for Middle East Policy.

Reuters/Mohamed Azakir

“It creates market distortions and as long as there are more market distortions the currency will continue to depreciate. The lower the central bank’s foreign currency reserves fall, the more volatile the pound will become.”

As of November, central bank foreign currency reserves had dwindled to 15.68 trillion pounds, or $10.4 billion based on the previous official exchange rate. Reserves were $34.6 billion in October 2018. 

The pound’s plunge also caused triple digit annual inflation. 

“If you’re a business and you have to price in pounds, if the black market rate today is 65,000, you will price at a higher rate to give yourself a little margin to avoid losses if there is further devaluation,” said Mike Azar, a Beirut-based financial advisor and former economics professor at Washington’s Johns Hopkins University School of Advanced International Studies.

“You’ll adjust your prices on the way up, but if the rate falls, you’ll be very slow to adjust prices downwards because you’re afraid you’ll have to reprice upwards again tomorrow – you raise prices in anticipation of further depreciation, helping create the inflation you’re trying to mitigate against.”

International Monetary Fund

Lebanon’s enduring political stalemate means the country remains without a president and has still to activate a $3 billion IMF rescue programme, provisionally approved last April, that depends on implementing various reforms including ending the currency peg. 

“There’s very little likelihood that Lebanon will get that programme and the financing tied to it anytime soon,” said Patrick Curran, a senior economist at Tellimer.

“The IMF is unlikely to accept anything short of a market-determined freely floating exchange rate.”

Analysts agree there is no limit to the pound’s decline. 

“What’s the catalyst for it to bottom out? As long as there aren’t enough dollars in the economy to satisfy demand – which will continue to be the case without an IMF programme in place and a financial sector restructuring – then demand for dollars will outstrip supply,” said Curran.

Meanwhile, more economic sectors are becoming dollarised and cash based. Supermarkets have lobbied to price food in dollars. 

“I don’t think dollarisation is a good policy, but the damage that the political parties have caused is to such an extent that dollarisation is inevitable,” said Azar.

“I see a lot of benefit in having a local currency if it’s managed correctly but, in Lebanon, the pound is being used to make people’s lives worse, not better.”

An option would be to create a so-called currency board in which Lebanon would commit to a “credible” peg to an anchor currency, likely the dollar, according to a December 2021 European Commission report. 

Lebanon would hold reserves in the anchor currency of at least the same value as the total domestic money supply so that any amount of Lebanese pounds could be converted into dollars. 

One glimmer of light ahead is the fact that the latest Blom Lebanon Purchase Managers Index (PMI), published earlier this month, rose for the first time since October, albeit only marginally and still below the 50 mark.

“The situation in Lebanon is deeply troubling and reflects the dire circumstances that many people in Lebanon are currently facing, said Stephanie Aoun, research analyst at Blominvest Bank.

“While most indicators were leading to further deterioration in the private sector after the holiday season, surprisingly however, the PMI jumped slightly from 47.3 in December 2022 to 47.7 in January 2023.”

“The index rise is mainly driven by unexpected upticks in output and new orders. In fact, a severe depreciation in the domestic currency against the US dollar drove private sector businesses to raise their prices in January.”