The Banque du Liban questioned its policy of the PEG of the Lebanese pound against the dollar imposed in 1997 with a fixed rate of 1507 LL / USD at the time, rate still officially in force today, with the publication yesterday, a new circular, Circular 157 dated May 10, allowing the floating exchange rates of the local currency against foreign currencies for commercial banks.
The Banque du Liban had nevertheless promised that the floating of the Lebanese pound against the dollar would not occur without prior agreement with the IMF in January 2021. The governor of the Banque du Liban Riad Salamé himself agreed, that same month, that the policy of the PEG or the maintenance of parity was no longer relevant after the local currency lost more than 90% – or even more than 100% – of its value, going from 1507 LL / USD as the official exchange rate to 15,000 LL / USD, less than 2 months ago due to speculative movements against the local currency.
The exchange rate should thus be determined by the Sayrafa electronic platform which was initially to be inaugurated on April 16 and which is still not open. Even if the mechanisms for determining the exchange rate is currently unknown, the Banque du Liban indicates that this platform, intended for official stockbrokers and commercial banks, aims to regulate the various foreign exchange markets that appeared after the taxation. by the Association of Banks in Lebanon, an informal capital control in November 2019.
The latter then reacted immediately by drastically limiting currency exchanges until the entry into force of this directive, leading banking establishments to suspend all sales of currency, in particular to importers, and thus causing shortages of certain goods on the local market.
تعميم_أساسي_رقم_157_موجه_للمصارف_10_5_2021_2This decision could also lead to a further deterioration of the parity of the Lebanese pound against the dollar on the local market, if the supply and demand mechanism is really respected, even if it could help to unify the different prices of the currency. local against the greenback. While some claim that the Lebanese banks could reduce their significant losses with this measure, it also appears to be one of the main demands of these institutions before the parliamentary finance and budget committee which is currently discussing a project, this official capital control times.
The ABL delegation has, in fact, asked this parliamentary committee to allow banks to give Lebanese pounds instead of foreign currencies. for withdrawals from accounts denominated in foreign currencies, even if they indicate that they fear the inflationary effect that would result from such a measure.
PEG policy, the aggravating factor of the economic crisis
The fall of the local currency seems in fact inevitable because of several factors with one thing in common, that of maintaining an artificial parity. The Lebanese pound has been artificially overvalued for 25 years with an incoming financial flow supporting the local currency and public debt without real wealth creation. The real parity of the Lebanese pound against the dollar has never been that of 1507 LL / USD but rather close to 3,000 LL / USD according to econometrics models. This difference has led to an involuntary significant indebtedness of the population to the detriment of their savings. Without realizing it, with each purchase, the Lebanese indirectly paid double the prices compared to the means available to their economy. If the price of an imported commodity was $ 100, for example, in reality that price would reach $ 200 for the economy. This system could only be maintained thanks, initially to the savings of the population, then to the constant cash inflow of the diaspora and to the help of the conferences of Paris II and III until the breaking point.
This same policy of the PEG has favored the establishment of a dollarized economy with 80% of bank deposits in foreign currencies to the detriment of a local currency, more controllable and possible adjustments via, for example, a soft devaluation instead of severe correction that we have been witnessing for 2 years.
Even if they deny any involvement in the economic crisis, Banque du Liban officials have used the PEG policy to attract foreign capital to Lebanon in order to maintain an economic system that is non-competitive and unsustainable in the long term, what some describe as being, rightly, a Ponzi scheme with high rates, with the immediate consequence of the loss of competitiveness of the local Lebanese worker, indirectly inducing an increase in unemployment for example and the almost deliberate destruction of local industries other than those of the banking sector. The policy of the PEG was therefore the Dutch disease from which Lebanon suffered. with as factors, the export of our gray matter which benefits foreign economies instead of benefiting the local economy and which in return led to a cash inflow supporting the overvaluation of the Lebanese pound against the dollar.
Once the financial flows were reversed as from January 2019, the economic reality always eventually prevailing, the fall of the Lebanese pound and the economic crisis was inevitable, leading the population – first in denial – to become aware the real scale of the situation revealed first of all by shortages of greenbacks, however necessary to finance the imports of goods, Lebanon being a net importing country
