ERASE, Currency Crisis, Inflation and Currency Devaluation, Economic Update

Money Exchangers Accused of Devaluating the Lebanese Pound Arrested

11:50 | 28 February 2023LIMS output
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Money Exchangers Accused of Devaluating the Lebanese Pound Arrested

In the wake of the Lebanese pound’s (LBP) record-breaking surge to 65,000 LBP against the US dollar on the black market, the financial prosecutor ordered the arrest of money exchangers who are deemed responsible for exacerbating “the collapse of the national currency”.

LIMS explained that blaming speculators and money exchangers for the LBP’s collapse is inaccurate. The government tried this excuse back in 2020 and the LBP kept on collapsing and had to roll back the decision. Even today, after the arrest of the exchangers, the LBP lost more value. Money exchangers reflect the reality of the market and provide the needed liquidity. Their arrest shrinks the quantity of dollars available in the market and worsens the devaluation.

The main reason for the collapse is the oversupply of the local currency. The central bank has been printing more money to reimburse dollar deposits in LBPs and to finance the government’s budget deficit. The increase in the money supply led to the decrease in the value of the LBP, caused the demand for the dollar to rise, and fueled the currency devaluation. The currency collapse requires a comprehensive solution, including the central bank’s stoppage of printing LBPs and the government’s return to a sustainable fiscal trajectory.

LIMS added that the Central Bank of Lebanon sometimes intervenes in the market to purchase dollars by selling LBPs, especially when foreign exchange reserves fall under a certain level. Other times the central bank steps in to withdraw the surplus of LBPs loosing foreign exchange reserves. This ineffective policy, branded as a managed float and advised by the IMF, increases volatility and fails to stop the LBP’s devaluation or the loss of the remaining dollar reserves.

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