Devaluation of the LBP, A Horror Story Come True?

Monday, January 11, 2021

By the end of 2019, the Lebanese were facing a grim situation no matter how they would look at it. On the political front, unrest was the new "ordre du jour". Economically, the country was agonizing and this impacted also society. Environmentally, the last quarter of the year had been terrible on green spaces and the beginning of 2020 brought on more issues to be dealt with, such as the Covid health circumstances. From the first lockdown of the country in March 2020 till the timid returning to work by the end of spring, the local currency, the Lebanese Pound (LBP), had lost more than 50% of its value against the US Dollar. And thus, against other major foreign currencies like the Euro.

The first major issue at hand is that the LBP had been pegged to the USD since the 1990s to stabilize it and curb its volatility after the 1975 civil war. The country adjusted, as the Lebanese mostly do, and the businesses dealt with dual currencies at the fixed rate of 1500 LBP to the USD. In most countries of the world, if not all, you use the local currency when buying or selling anything locally. In Lebanon, one had the "luxury" to deal with multiple currencies, sometimes the Euro, the British Pound (GBP) or the Swiss Franc (CHF) would be accepted as a way of cash payment. Needless to say, you could open a bank account in any of the major world currencies and that money would be accessible to you in cash should you need to withdraw it for a transaction. However, this whole bubble started bursting when the new cabinet formation was delayed again and again and the protestors demanded loud and clear that reforms to impede the gangrenous corruption of most state agencies. Less USD were flowing in and the trade balance started undergo major changes. Especially with banks not able to supply customers with enough cash in foreign currencies, mainly in USD.

And here comes our second major issue. Lebanon imports more than 80% of its consumed goods and relies heavily on them. One can understand the importation of cars for example, since Lebanon does not have a car industry. Importing brands was also a local "pride". How many times would you hear someone say: name any brand, no matter how exclusive, and it would certainly have a local distributor. Lebanese have always been merchants and open to other cultures and ways of life. This obviously requires that they can consume the same products and services as any ordinary citizen of Paris, New York or Tokyo. However, when it reaches the level of importing fruits and vegetables that can be grown locally? And sometimes at a lower price than the local production? There you can see that something was not right. And with the flagrant currency issues at hand, certain brands were not imported anymore. By the summer of 2020, some items were not to be found on the local market anymore. And how would that be even possible when banks wouldn't let one access the money on the accounts, first in foreign currencies and then also in LBP.

Let's start with some pointers on the advantages and disadvantages of devaluating a currency in general.

Advantages:

- more local products can be exported because their value has changed and they become more competitive on external markets

- the local economy can hence be boosted from more exports

- local interest rates can be cut down because the Central Bank does not need to attract more deposits / investments in the local currency.

Disadvantages:

- imports will be more expensive and this will lead to an inflation on the local markets

- the buying power of the local population will decrease as their wages and the money at hand will have less value

- international investors might be scared and resort to capital flight to protect their interests.

In the case of Lebanon, the situation gets sort of more complex. I hear you already thinking, what ya don't say? We never do things by the book, do we? Relying on importations to consume, suddenly, the Lebanese had to face astronomical rates for the USD against the LBP, which made a lot of people think twice before acquiring pretty much anything. Regular salaries were worth peanuts all of the sudden, while daily consumables were priced 5 times their prices a couple of months earlier. It is worth the mention that several rates for the USD against the LBP are available: the official state rate, which remains unchanged. The bank's rate for your foreign currency accounts that you can access with a strict limitation and restricted online services. The black market's rate, which is what traders and vendors are relying on to price the goods, regardless if purchased prior to the crisis or not. A lot of people are now below the poverty line and can barely make ends meet. Especially with the Covid situation that is crippling the country and its struggling economy / industries. More on my view on the Covid frenzy here.

Some people, who had access to USD in cash, were able to make use of the new parity to pay off loans / debts contracted in LBP. Others invested in a new car, new furniture, or even a new property. Since banks have restricted outward transfers and are not even issuing letters of credit for importers, this can be seen as a way to get one's money out of the banks. Let's stop and think of this for a moment. While these transactions have each time triggered a tighter retaliating grip of the banks on the people's funds, they have sort of allowed the capital to circulate. Did this create any wealth? Probably not much. The new car has lost value from the first tire spin out of the dealership. The new furniture is nice but what was done with the previous / older one? And that new property, be it a flat, a house or a simple plot of land, will cost in maintenance and other fees and taxes to remain up keep. Another way of getting hold of USD in cash was dealing with checks at a third of their value, i.e. I issue a check from my account for let's say the amount of USD 15.000 and the exchanger will pay me USD 5.000 in cash. The USD is valued at 8500 LBP on the black market, which is more than double of what the bank will pay me, in LBP, when I want to withdraw my hard earned USD deposited at the branch. This brings about a question: if checks will not be honored in the near future, what is making exchangers take that risk of offloading their cash? Consider this thought for a moment... On another hand, many are currently stashing the cash in their homes, because the trust in the banking system is lost, to say the least. This is unfortunately leading to more burglaries than ever. So we're not out of the woods just yet!

Amidst chaos and harsh living conditions, the Lebanese, once again, get creative. They start producing more products locally. Many personal initiatives sprout and aspire to contribute to the "buy and sell local" concept. This helps the economy keep functioning. At minimal levels but that's a start! We are all aware that the upcoming 5 years are going to be dire and somber. Additionally, a group of experts in economics, finance and law proposed a replacement to the failing banking system in the name of Shreek, which in Arabic means Partner. This network aims at establishing "alternatives to the current banking and financial systems, based on the cooperative and solidarity principles", as seen on their About page. When someone joins, they become a partner, not a customer, and they will participate to the decisions of the organization with their right to vote. Presently, you need to be recommended by one of the existing partners to become a member and start saving money securely and becoming returns on your participations. Aside from the yearly membership fees, you will not be charged for contributions. The member will also have access to online payment solutions and online transactions, which the regular banking system is currently restraining. Shreek can also assist in accessing financial support and claims to be very transparent when it comes to its transactions and handling. In view of all of this, and despite the fact that the local currency has lost so much of its value, the Lebanese people remain resilient in exploring new ways and trying to make a decent living. How long will this spirit remain untamed? Only the future will tell...

Link to the Financial Crisis / Devaluation clipart

Link to the Central Banker cartoon

Link to cartoon of "Delaying Devaluation Burdens Economy"

Post filed under

Banking

Cogito

Corruption

Currencies

Devaluation

Economics

Financial Awareness 101

Lebanon

Lifestyle

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Comments

Since I live in Brazil, is

Permalink Submitted by Sophie (not verified) on Tue, 2021/01/12 - 10:35pm

Since I live in Brazil, is hard for me to really understand the economical struggle a lot of people are going through in Lebanon. This enlightened me in various aspects, with a not too pessimist point of view. The way you stated the advantages too and how people are dealing with the changes really gives out hope for the better!

Light and darkness co-exist.

Permalink Submitted by MC on Wed, 2021/01/13 - 1:11pm

Light and darkness co-exist. We cannot focus on one and disregard the other...

sehr interessant

Permalink Submitted by Steffen (not verified) on Tue, 2021/02/02 - 1:13am

Beiträge wie diese, die Einblicke, Ängste, Umstände und kleine Lösungen beschreiben und aufzeigen finde ich sehr interessant. Der Libanon ist für viele (nicht im Libanon lebende) ein "schwarzes Loch" - lediglich große Ereignisse von Explosionen, Demonstrationen oder die korrupte Politik werden in den Weltmedien etwas aufgearbeitet.