BELIEF, Banking Crisis, Capital Controls, Economic Update, Haircut

Official Devaluation of the Currency and Debate over Capital Controls

12:22 | 30 November 2022LIMS output
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Official Devaluation of the Currency and Debate over Capital Controls

Starting on February 1, the Lebanese pound will be officially devalued by 90%, from 1,500 to 15,000 Lebanese pounds (LBP) for each dollar. Despite the large devaluation, the new rate will not reflect reality since the dollar is traded at 40,000 LBP on the black market. The official devaluation will impact depositors that placed their dollars at the bank before October 2019. Currently, they are only allowed to make withdrawals in LBP at unfair exchange rates of 8,000 or 12,000 LBP up to a certain monthly limit (typically the first $400) and at the official 1,500 LBP for amounts beyond that limit. This multiple exchange rate scheme has led to a haircut of 70% to 96% on withdrawals.

LIMS explained that increasing the withdrawal rate to 15,000 LBP will give depositors the impression that they are receiving a larger amount and a lower haircut. Yet, in reality, these withdrawals come from expanding the money supply. In turn, this will only lead to further LBP depreciation on the black market, widening the gap with the official rate.

Such a multiple exchange rate regime is applied because banks have imposed capital controls on their clients. Depositors have the chance to recover part of their money, only if they accept the unfair exchange rates. At present, the Lebanese parliament is studying a capital control proposal to unify the conditions and limit the discretion of banks. The main articles subject to debates concern the scope of the exceptions to capital controls and the special committee that would oversee it. LIMS clarified that capital control measures are supposed to be temporary—a policy that should have been in place 3 years ago at the start of the banking crisis. However, the current law is being treated as a goal by itself, not a means to an end. Moreover, the law is not aiming to protect depositors’ rights. In fact, it is legalizing the current banks practices, barring depositors from accessing their funds, while giving the government and central bank the authority to spend said funds. Unfortunately, the central bank and government have wasted around $20 billion of the originally $30 billion in reserves at the central bank and under capital controls they will consume the rest.

LIMS Media Interviews:

  • Mardini To LebTalks: The Capital Control Does Not Protect Lebanese Deposits, November 8, 2022: Lebtalks, Article AR
  • Exchange Rate Of 15K For Withdrawals, If Implemented Soon, Will The Situation Improve Or Deteriorate Further? November 8, 2022: MTV, TV Interview AR
  • It Is Unfair To Hold The Depositor Responsible For The Losses And Consequences That The Monetary Crisis Has Reached And To Protect The Government And Banque Du Liban, November 8, 2022: VDL, Radio Interview AR
  • Capital Control On The Joint Committees’ Table Again, November 26, 2022: VDL, Radio Interview AR
  • New Capital Control: Confiscation Of Depositors’ Remaining Dollars, November 28, 2022: Al Joumhouriya, Article AR