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The Worst is Yet to Come in Lebanon’s Exchange Rate Madness

Ali Nour
Lebanese Journalist
March 3, 2021
If you think the current crisis is bad, imagine what is yet to come once the BDL removes subsidies on fuel, medicine and wheat.

One does not need much analyzing to understand the direct relation between the consecutive collapses in the Lebanese Pound (LBP) exchange rate on the one hand, and the hardship the vast majority of Lebanese is experiencing on the other.

With the increase in the black market exchange rate to over 10,000 LBP for a US dollar, the value of the minimum wage dropped to less than $68, one of the world’s lowest in terms of actual value. Note that, before the crisis, the minimum wage of 675,000 LBP was worth some $450, which means that the Lebanese currency in one year and three months lost around 85% of its value.

Regarding salaries, the minimum salary in government jobs declined from some $633 before the crisis to some $100 today, according to Beirut-based research and consultancy firm Information International. At the high end, salaries effectively dropped from some $3000 for a Directors General position before the crisis to less than $478 today.

As a result of the currency collapse, the Gross Domestic Product (GDP) per capita fell to some $228 a month, which is the same as in 1994. In other words, in 15 months the Lebanese lost what it took them 26 ears to gain.

A picture shows the value in Lebanese pounds of a 100 US Dollar bill on the black market exchange rate (1,500,000 LP) in Beirut on March 16, 2021. – Lebanon is battling its worst economic crisis since the 1975-1990 civil war. The national currency is in freefall, while poverty and unemployment are on the rise. The Lebanese pound has lost more than 88 percent of its value against the dollar on the black market in 18 months of crisis. While the currency remains officially pegged at 1,507 Lebanese pounds to the greenback, the exchange rate has shot up to about 15,000 on the black market. (Photo by JOSEPH EID / AFP)

Consequently, the country has joined the world’s lowest ranks in terms of minimum wage, along such countries as Afghanistan, Sri Lanka, Angola and Sudan. Lebanon’s dependence on imported consumer goods only aggravates the per capita fall in income in comparison to countries that have witnessed a similar crisis in recent years. Due to the decrease in the local production of goods and the dependence on imports, a decrease in the LBP exchange rate will have an immediate effect on market prices and negatively affect people’s purchasing power.

The Upcoming Catastrophe

The worst thing is that the worst thing is yet to come. So far, the prices of fuel, medicine and wheat have remained immune, despite the fall in the LBP exchange rate, as importers could count on US dollars provided by the Lebanese Central Bank (BDL) based on the old exchange rate.

The BDL also helps to import a bunch of goods within the subsidized food basket with dollars provided to importers based on the exchange rate 3900 LBP to the dollar.

It is noteworthy that the availability of fuel at a subsidized price currently still protects other economic sectors from inflation. Fuel, for example, for both private power generators and the national power provider Électricité du Liban (EDL), while the real cost of shipping and producing is currently not included in existing prices either.

It has become obvious, however, that the BDL cannot continue to subsidize such imports, as its foreign currency reserves are rapidly depleting.

As the country is likely to remove subsidies during the next three months, or at least reduce them gradually in preparation of removing them, the Lebanese should prepare for the worst case scenario in terms of a reduction in purchasing power.

A removal of subsidies essentially means that importers will have to go to the black market for their dollars to be able to import these products, which consequently will greatly increase in price.

The brutal rise in international oil prices (some 70% over the past year) will only severe the crisis’ intensity. A big rise in prices is expected for local derivatives. Based on the price of imported fuel today and the current exchange rate on the black market, the price of a can of gasoline could reach up to 100,000 LBP. In case subsidies are removed, a monthly subscription on a power generator could cost up to 800,000 LBP a month.

Yet, the issue that will arguably multiply the crisis the most is the expected increase in people’s electricity bill, if the BDL decides to remove the subsidy on the fuel imported to produce electricity. Worse, there is the very real possibility of a total and absolute power cut, if the BDL fails to provide the dollars needed to finance the cost of buying fuel, renting power producing ships and maintenance contracts.

A protester draped in the national flag faces off with the police during a demonstration outside the entrance of the American University of Beirut, in the Lebanese capital’s Bliss street on December 29, 2020, against the decision by a number of universities to adopt a new dollar exchange rate to price tuition. (Photo by ANWAR AMRO / AFP)

In short, the current crisis combined with the high-flying dollar will only burgeon after the removal of subsidies, especially seeing the absence of any official vision for alternative subsidy mechanisms, which could compensate for these dangerous developments.

The one exception is the World Bank loan program allocated to Lebanon’s poorest families. However, this suffers from many flaws, the most prominent of which is the limited extent of expected aid and the inability to encompass most families affected by the crisis.

The Further Fall of the LBP

In addition, the removal of subsidies is expected to accelerate the collapse of the LBP. Until the beginning of last November, the BDL had spent approximately $5.7 billion to subsidize the import of fuel, medicine, medical equipment, wheat and food items, in addition to subsidizing the government’s expenses in dollars.

After the removal of subsidies it is expected that importers will move to the black market to obtain their much needed dollars. It is only normal that such an increase in demand will lead to an imbalance in demand and supply, and an additional increase in the dollar exchange rate.

In this context, the BDL has already moved towards the gradual removal of subsidies on some food products and medical equipment. This is mainly what contributed during the past weeks to the increase in the dollar exchange rate, as importers turned towards the black market.

Hence, it is likely that the pressure on the LBP will multiply once Lebanon enters the phase of subsidies removal or reduction.

Lost Responsibility

There are many reasons behind the consecutive collapses of the LBP: the BDL that continues to print banknotes; the state borrowing to finance its expenditures; the BDL continuing to print banknotes to settle the state’s local currency debts due to the banks; banks entering the black market to obtain the dollars needed to have sufficient liquidity at correspondent banks, according to the BDL requirements for recapitalization.

All these developments contributed to the increase in LBP liquidity, and the reduced amount of dollars on the market, whereas the upcoming subsidies removal will only increase the monetary collapse. For the time being, all available data signal that these factors will continue to pressure the LBP exchange rate, especially seeing the absence of any government plan to deal with the crisis. It is the absence of such a plan that gave the BDL governor free reign in dealing with the crisis and the budget deficit … at the expense of the LBP.

With every additional decrease in the LBP exchange rate, the value of wages will continue to decline and purchasing power will continue to fall, while the percentage of people living in poverty will increase to new record levels.

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