BELIEF, Debt Crisis, Fiscal Deficit, Economic Update

Fiscal Policy Impacts of the 90% Currency Devaluation

12:00 | 28 February 2023LIMS output
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Fiscal Policy Impacts of the 90% Currency Devaluation

On February 1, Lebanon officially devalued the Lebanese pound by a staggering 90% from its existing official rate of 1,507 Lebanese pounds (LBP) per US dollar to the exchange rate of 15,000 LBP to the dollar. Despite this substantial shift, the new exchange rate still falls considerably short of the current parallel market rate, which is roughly 57,000 LBP to the dollar. 

LIMS indicated that importers will bear a significant impact from this procedure. Previously, they would convert the value of their imported goods into dollars at an exchange rate of 1,507 LBP to the dollar. Now, the goods’ prices will be converted at a rate of 15,000 LBP, resulting in higher custom duties. The new rate also creates accounting-related problems. For example, a merchant who imported goods worth $100 would have previously recorded 150,000 LBP as the value. However, at the current rate of 15,000 LBP, the merchant should record a value of one and a half million LBP, leading to an imaginary profit of 1,350,000 LBP, which will be taxed. Employees used to pay income tax based on specific brackets by converting their salaries paid in dollars, into 1,507 LBP. However, with the new exchange rate of 15,000 pounds, higher brackets will apply.

LIMS explained that the new exchange rate will not lead to a significant increase in the money supply due to the capital controls imposed by the central bank, which set limits on withdrawals and conversions. However, the value of the LBP is still expected to continue its decline in the black market. This is because in the past six months, the Lebanon’s central bank, Banque du Liban, has doubled the amount of LBPs in circulation from 40 trillion LBP to 80 trillion LBP by the end of 2022.

LIMS argued that the exchange rate applied to imports should be aligned with the black-market rate, but simultaneously tariffs should be repealed or at least lowered to no more than 2%.

  • A Greater Collapse Of The LBP…What Are The Repercussions Of The 15,000 For The Lebanese? February 1, 2023: Anbaa, TV Interview AR
  • Lebanon Raised Official Price Of The Dollar…What Will Happen With Taxes And Bank Withdrawals Is Not Reassuring! February 6, 2023: Lebanon 24, Article AR
  • Absence Of A Budget Makes Things Worse! February 7, 2023: Beirut24, Article AR
  • Fakrajian: To cancel The Income Tax, Because More Than 80% Of Lebanese Have Become Poor, February 9, 2023: Asswate, Article AR
  • Customs Revenues Decline Despite Pricing Of The Dollar At 15,000 LBP, February 27, 2023: MTV, TV Interview AR