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Lebanon steps back from plan to slash official exchange rate

REUTERS/Mohamed Azakir
The new rate represents a haircut of around 70 percent

Lebanon has stepped back from plans to slash its 25-year-old official exchange rate with one closer to the market rate, ministerial and political sources said Thursday, amid fears of a backlash from the public.

Caretaker finance minister Youssef Khalil told Reuters on September 28 the state would re-peg the dollar from 1,507 to 15,000 pounds in a step towards unifying the varied exchange rates that have emerged since the country entered an economic crisis in 2019.

Khalil had initially said the switch would occur on November 1, but his ministry later said it would depend upon parliament approving a financial recovery plan, which it has still not done.

“Political disagreements stopped the move. No one in the country wants to bear responsibility for it,” a finance ministry source told Reuters on Thursday.

The source said that caretaker premier Najib Mikati was unwilling to greenlight the peg change until powerful Shiite parties Hezbollah and Amal were on board. A source from Mikati’s office confirmed the prime minister’s reluctance to move without those parties’ buy-in.

“It would be hard to implement this now,” a source from one of the Shi’ite parties told Reuters.

Lebanon has descended into one of the worst economic crises encountered by any nation during the past two centuries. The Lebanese pound has lost more than 95 percent of its value and the country’s poor make up more than 80 percent of the population.

In April, Lebanon agreed with the International Monetary Fund on a list of reforms to be implemented in order to gain access to relief funding – including unifying the exchange rate.

On Thursday, the lira was trading on the parallel market at a rate of 37,500 pounds to the US dollar and on the Central Bank’s exchange platform 30,100, while the official peg remained at 1,507.

Byblos Bank’s chief economist Nassib Ghobril said a new peg would have “far-reaching” effects on the economy and should be coordinated with Lebanon’s Central Bank and the International Monetary Fund (IMF).

“Its impact would affect the balance sheets of banks, of the recapitalisation process, of loan repayments, of the private sector and of regular citizens – in addition to the impact on inflation and on prices,” Ghobril told Reuters.

Politically, Lebanon faces the unprecedented situation of having a caretaker cabinet with limited powers and no president.

“The political considerations dominate, that’s a fact – and the cost is the delay in reforms,” Ghobril said.