Currency crisis in Lebanon: A new exchange rate policy will cause massive difficulties | Business | Economic and financial news from a German perspective | DW

Lina Boubess, 62, has not missed any demonstrations since the outbreak of the economic and financial crisis in Lebanon in October 2019.

Although she earned the title “Mother of the Revolution” due to her constant participation in all the anti-government protests in Beirut, Boubess told DW that her life had changed drastically over the past three years and that ‘she had become a full-time campaigner to support the next generation.

“Before the economic crisis, I could afford to travel abroad every month. I had a luxurious life. But now I can’t afford it. I have to think about how to get by here .I don’t have a credit card.The banks stole our money,” she said.

Although Boubess can still afford to buy food, she doesn’t know what will happen later.

“My whole life has changed. That’s why I’m on the streets,” she said.

Boubess is concerned about the announcement of the government’s plan to reduce the official exchange rate from 1,507.5 Lebanese pounds per US dollar to 15,000 Lebanese pounds, which is 10 times more than the current official exchange rate.

“It will be terrible for people. Everything will cost more. I wonder where people are. It will be high for me and for everyone,” she said.

Protests in Lebanon show no signs of abating as the country’s economic crisis takes its toll

Why the new exchange rate is essential

On September 28, Finance Minister Youssef Khalil announced that the Lebanese government plans to gradually increase the official exchange rate from November 1. The current rate of 1,507.5 Lebanese liras has been pegged to the US dollar for 25 years.

Khalil’s announcement to adjust the official exchange rate is relevant for several reasons.

Since the 2019 economic crisis, the Lebanese authorities have officially devalued the local currency for the first time. Second, the measure represents the first progressive step towards the unification of multiple exchange rates.

Moreover, the unification of exchange rates is one of the preconditions for the release of the financial aid of 3 billion dollars (3.09 billion euros) resulting from an agreement between Lebanon and the Monetary Fund (IMF) concluded in April.

Lebanon’s exchange rate jungle

Over the past three years, Lebanon’s local currency has lost more than 95% of its value; the inflation rate has exceeded 200% and the United Nations Economic and Social Commission for Western Asia (UNESCWA) estimates that the multidimensional poverty rate in Lebanon has almost doubled from 42% in 2019 to 82% in 2021 .

During this time, the Lebanese people had to deal with multiple exchange rates. In addition to the official exchange rate set at 1,507.5 liras, there is the so-called Lollar rate used to withdraw deposits from banks and currently set at 8,000 Lebanese liras. Then there is the central bank Sayrafa rate used by commercial banks and forex traders, set at 29,800 Lebanese liras (at the time of writing). Finally, there is the parallel market rate, currently set at 39,800 Lebanese pounds, which reflects the real value of the US dollar.

Wassim Maktabi, an economist and researcher at The Policy Initiative in Beirut, told DW that Khalil’s announcement is not binding, and there is currently little to suggest it will happen.

“He sees this announcement as a step in the right direction to meet the requirements. However, it is not in line with IMF conditions as the ministry is only adding another exchange rate instead of unifying the other rates. existing,” he said.

Although the ministry has not yet clarified the practical implications and timing, the consequences of the new official exchange rate will have a massive impact on people’s daily lives.

Lebanese citizens gathered outside a Beirut branch of Blom Bank to support a depositor who is taking hostages and demanding the withdrawal of his deposit.

Bank robberies by depositors who want their money back are a sign that the Lebanese are becoming increasingly desperate

The move is aimed at increasing state revenue, said Farhat Farhat, a Lebanese economist and co-founder of the Union of Lebanon Depositors, which was established in 2019. He told DW the government would use it to raise the salaries of his local party officials.

“I think there will be a depreciation of the local currency because the employees will use the surplus of their wages to buy more imported goods. Therefore, the commercial bank deficit will increase.”

As Lebanon is highly dependent on imports, increasing the rate of customs duties and value added tax (VAT) would lead to an increase in the prices of goods, a spike in inflation and an increase in the parallel market rate.

How exchange rate policy affects bank depositors

Some 2,000 kilometers (1,242 miles) from Lebanon, Richard Nahas, a Lebanese national who has lived in Dubai since 2010, worries about the implications of the new exchange rate.

The 44-year-old computer engineer said the consequences of unifying the exchange rate would be dramatic as half of his savings are in Lebanese pounds and therefore subject to further depreciation.

“I am in a bad situation because my savings protected me if I needed it. But now I cannot withdraw my money from the bank. I have no solution if I have problems here”, he told DW.

Meanwhile, Nahas’ parents in Lebanon became increasingly depressed over the situation and rising inflation, he said.

“They were considered middle class people before the economic crisis because they could live off their savings. But now with inflation and the new exchange rate coming, they won’t be able to. They can’t go to the doctor or buy medicine. I have to help them. But I’m not in a good situation like before,” he said.

Lebanese Prime Minister Najib Mikati reassured his fellow citizens that the gradual implementation of the new exchange rate would initially exempt bank balance sheets and home loan repayments.

But Maktabi noted that the government had decided to exempt banks from implementing the new exchange rate to avoid increasing banks’ losses and forcing them to bear the large costs they have been trying to avoid ever since. 2019.

As a result, the immediate effects of the new customs tax exchange rate will hit citizens’ wallets.

Economist Farhat urged the government to find a fair solution for people whose deposits are stuck in banks, such as giving depositors with less than $20,000 in the bank access to their money to deal with inflation and rising prices.

However, some depositors have started to take matters into their own hands to get their money back by attacking banks with weapons or toy guns.

“They are forced to do this because they need money to eat and go to the hospital. I completely understand them,” Nahas said.

Edited by: Rob Mudge

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