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

Currency’s Deterioration Creates Worry and Confusion

11:37 | 30 March 2023LIMS output
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Currency’s Deterioration Creates Worry and Confusion

The Lebanese pound (LBP) witnessed excessive volatility in dropping to 143,000 LBP to the dollar before regaining some ground to 95,000 LBP to the dollar, after the central bank’s announced that it would start selling the local currency at 90,000 LBP to the dollar, on the Sayrafa currency exchange platform. Some voices started blaming money exchanges accusing them of manipulating the currency to make profits at the expense of everyone else and argued for restricting money exchange operations to banks

LIMS showed that currency devaluation is the main reason behind poverty in Lebanon. The collapse of purchasing power had a significant impact on people’s ability to afford basic necessities, which has led to lifestyle changes. Therefore, the poverty rate doubled from 40% pre-crisis to nearly 80% today. However, blaming money changers for raising the exchange rate is counterproductive a scapegoat tactic. The continuous currency devaluation is due to the incessant increase of the currency in circulation. The uncertainty surrounding the central bank governor’s end of term, the ongoing banking crisis, and the long-term bank strike also fueled the devaluation given the loss of trust. As for restricting money exchange to banks, it would reduce competition and liquidity in the foreign exchange market leading to higher transaction costs for every operation.

LIMS added the appreciation of the Lebanese pound in the second half of the month is due to the central bank’s intervention deciding to buy Lebanese pounds for LBP90,000 to the dollar at the sayrafa platform. Since the central bank is using banks dollar deposits as foreign exchange reserves, this intervention would lead to further bank losses and eventually higher haircut on depositors.

To put a stop to the dramatic deterioration of the LBP, LIMS suggested that the first step should be to halt the printing of more money. This could be accomplished either through passing a law to prohibit the pumping of more LBP into the market or by the central bank change of policy. Additionally, the central bank should refrain from using foreign currency reserves. Failure to take these steps will result in continued sharp fluctuations in the exchange rate and the further devaluation of the LBP.

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