The collapse of the Lebanese pound has stopped.. What are the reasons behind the low exchange rate of the dollar?

Beirut

- The decline in the exchange rate of the dollar against the lira caused a shock in Lebanon, and in less than two weeks, they restrained the lira from a resounding collapse. The exchange rate of the dollar gradually declined from 33,000 to below 23,000, breaking expectations of the continuation of the lira's collapse without ceilings.

Analysts find that the improvement of more than 10,000 pounds is artificial and political before the government approves the 2022 budget, and that it is not permanent, and others believe that the Central Bank of Lebanon has proven its ability to control the money market, activating the role of its “banking” platform, as its circulation of the dollar for the first time recorded higher numbers. Blair from trading on the black market.

However, this “improvement” did not cancel out the painful facts for the Lebanese, including: the prices of basic commodities such as food, fuel and medicine have risen since the fall of 2019 by about 1,400%, inflation rates have exceeded 700%, and the domestic product has shrunk to more than half of its value, and the lira has lost more than 90% % of its value as a result of the absence of trading at its official price (1507 liras), the minimum wage equivalent to 29 dollars, and its general average about 66 dollars, and the electricity crisis is deepening and state utilities are witnessing a historical dissolution.

Central intervenes

The drop in the dollar exchange rate is linked to the announcement by Central Bank of Lebanon Governor Riad Salameh, in the middle of this month, of his agreement with Prime Minister Najib Mikati and Finance Minister Youssef Khalil to allow commercial banks to buy dollars from him without a ceiling at the rate determined by his “exchange” platform.

Accordingly, Salameh expanded the powers of banks in Circular 161, which was issued in mid-December 2021, and allowed banks to pay cash withdrawals to their customers, within the approved limits, in cash dollars at the “exchange” rate.

The logic of speculation prevailed in the monetary market throughout the crisis, but the value of the lira has recently improved, according to observers, as a result of the Central Bank absorbing the monetary mass in lira, and the increase in demand for it and its retreat from the dollar.

The intervention of the Central Bank of Lebanon to reduce the dollar exchange rate facilitates agreement on an exchange rate in the budget and eliminates the gap with the black market (Reuters)

How do experts read the central procedures?

Nassib Ghobril, head of the Economic Research and Analysis Department at the Lebanese Bank, Nassib Ghobril, considers that the Central Bank’s measure aims to control the exchange rate, and that allowing banks to buy dollars without ceilings and sell them to their customers, individuals and institutions, led to an injection of dollars, and was accompanied by the return of the two parties of Hezbollah and the Amal movement to the government as a positive factor. to discuss the budget.

He told Al Jazeera Net that the goal of pumping liquidity is to reduce the exchange rate in the parallel market to cancel the margin with an exchange platform, and to encourage the purchase of dollars from banks.

For her part, the academic and researcher in banking laws Sabine El-Kik points out that central banks usually resort to such measures in exceptional and detailed circumstances, to have a shocking impact on the money market.

It finds that the Central Bank's move is not reformist, but rather a technical intervention with artificial effects, and it does not fall within the usual natural techniques of central banks, which reinforces doubts - in its opinion - about its timing.

She wonders why he has not intervened in the market in this way since the beginning of the collapse of the lira, when its cost was lower and the monetary mass of the lira did not reach this inflated size.

She told Al Jazeera Net that the rapid improvement in the price of the lira did not result from economic foundations that enabled its position in timing, effect and method.

The researcher and economic journalist Mounir Younes agrees with her, adding to Al Jazeera Net that the central procedure has objectives, including:

• Proving his ability to break the rising cycle after the exchange rate exceeded 33,000 pounds to the dollar.

• Stirring fear and psychological anxiety among the owners of the dollars hidden in the houses, and pushing them to sell their dollars before the exchange rate drops further, to withdraw them from the market.

• Pushing towards a moderate exchange rate to approve the budget, and to negotiate with the IMF.

• The PA and the Central Bank seek to calm the popular climate ahead of the elections, and to suggest that the monetary and economic situation is heading for improvement.

Lebanon suffers from a severe shortage of the dollar as a result of factors including:

• Commercial banks have imposed illegal restrictions preventing depositors from obtaining their dollar deposits since the end of 2019.

• The mandatory reserve of the Central Bank - which is the mandatory investment of commercial banks with it from depositors' money - recently decreased to about 12 billion and 700 million dollars, and before the crisis it was about 32 billion dollars.

• The public debt has exceeded 90 billion dollars, some of which is due to be paid in lira, and the state has debts in Eurobonds alone amounting to about 39 billion dollars, and the last bond is due to be paid with its interests in 2037.

 Where does the central dollar come from?

Munir Younes reports that the Central Bank has pumped so far (through circular 161) about 150 million dollars, and it is likely to be through 3 sources: money changers, money transfer companies, and part of the mandatory reserve.

He said that those who benefit from the injection of dollars are the banks because they have a profit rate, the major traders who hold billions in pounds, and the speculators due to the lack of sufficient information about the size of the money market.

Nassib Ghobril adds other sources of the dollar at the Central:

• He obtained one billion and 100 million dollars from the withdrawals of the International Monetary Fund in September 2021 (noting that the Fund wished to rationalize its use in productive sectors).

• The Middle East Airlines, owned by the Central Bank, recently announced its profits, extending from 2011 to 2020, with 700 million dollars, of which 440 million dollars reached the Central Bank.

• The Central Bank has operations that enhance its revenues in foreign currencies, knowing that the sources of foreign currency reserves have completely dried up after the influx of foreign deposits stopped, and the government defaulted on the Eurobonds payment in March 2020.

Yunus denounces the Central Bank's scattering of the mandatory reserves, "because it is the right of depositors whose money the banks have withheld."

Gabriel rejects the approach, recalling that the Central Bank spent about $9 billion on subsidizing basic commodities, but it went to traders and smugglers.

Ghobril said that the Central Bank's measures since the outbreak of the crisis have filled some vacuum of the executive and political authority, and it must be met with structural reforms instead of holding it responsible for the collapse.

Sabine al-Kik refuses to speculate on the sources of the Central Bank's dollars, describing it as a "black box", because in her opinion no one knows the truth of what it has, and therefore "all its numbers and operations are questionable by international institutions and those familiar with monetary policies due to the lack of transparency of its operations."

The decline in the dollar exchange rate is linked to the announcement by the Governor of the Central Bank of Lebanon to allow commercial banks to buy dollars from it without a ceiling (Reuters)

The dollar and the budget

Lebanon is awaiting the next government session (tomorrow, Monday) to discuss the draft general budget for 2022, which is of great importance in preparation for official negotiations with the International Monetary Fund, and in terms of the exchange rate that the government will adopt for electricity, communications, the customs dollar and other operational expenses.

Therefore, Munir Younes finds that the central intervention to reduce the dollar exchange rate facilitates agreement on an exchange rate in the budget and eliminates the gap with the black market. He expects the government to adopt several exchange rates for the budget under the ceiling of the "exchange" rate.

He considers that the Central Bank is buying time with politicians due to the importance of the “exchange” rate on several levels: the circulation of dollar deposits (paid in the lira instead of the dollar), the distribution of losses, the IMF negotiations, and the elections next May.

Sabine El-Kik doubts that the government will succeed in convincing the IMF about the budget, because - according to her - he wants a budget that includes radical reforms, starting with the unification and liberalization of the exchange rate, passing through social security and linking it to an economic plan, even with an average term of about 3 years.

She stated that the government, the Central Bank and the banks may evade the liberalization of the exchange rate, because their assets are valued according to it, and they do not want to expose their losses and eroding capital.

Will the central bank's ability to reduce the dollar exchange rate last?

Nassib Ghobril says that the Central Bank’s procedure is temporary and positional and does not claim a solution, and it ends at the end of the month, and may extend it, while the solution lies in canceling the reason for the existence of a parallel market, developing a recovery plan and formally negotiating with the IMF, so that the wheel of the economy returns and the Central can build its reserves.

Munir Younes finds that the measure of the positive and permanence of the Central Bank's measure is its reflection on the Lebanese consumer who suffers from dollarization of the value of various commodities, and wants to obtain a cheaper food and drug basket, while the chaos controls the market, and the high prices are rampant due to the weakness of the regulatory authorities.

He said that the Central Bank does not have many options, and it works by patching to reduce the speed of the great collision, "because whoever brought the country to this juncture will not make solutions."

Sabine Al-Kik expects that the dollar exchange rate will record a big jump as soon as the Central Bank stops pumping dollars, because “the effects of its interventions are short-term, and its positive shocks to the exchange rate may later be met with negative counter-shocks due to the absence of an integrated plan politically, monetary, economically and socially.”