By Lynn Khaddaj | Staff Writer
The Lebanese Lira went through countless fluctuations throughout history. Before the civil war, the U.S. dollar was worth 3 Lebanese liras. Later on, the Lebanese lira rate decreased rapidly in 1992 when it went over 2500 L.L.. After the appointment of Prime Minister Rafik Hariri, it was pegged to the dollar at a rate of 1507.5 L.L./$ and was successfully fixed until 2019.
After the worldwide financial crisis in 2008, many banks suffered due to lenders advancing loans to poor creditors that had a high risk of default. Lebanon, at that time, didn’t indulge in such practices, which led to a financial boom where it attracted many opportunities and investors from abroad. Even citizens benefited from this boom as the dollar supply increased.
In August 2019, Lebanon officially was rated CCC+ (previously was B-), which affected investments in the country, as it became a risky and unattractive country for foreign investors. At that time, the pressure on the fixed exchange rate increased, which created a parallel rate in the black market. This two-rate market issue weakened the central bank reserves that couldn’t defend the official fixed exchange rate. In addition, the unsustainable sovereign debt, the high trade deficit, and deposit outflow all severely pressured the economy. For the first time since the pegging of the Lira, people lost confidence in the local currency and demanded their deposits back from the bank.
Furthermore, the revolution on October 17th, 2019, aggravated the situation. Lebanese Citizens panicked about losing their money deposits and demanded them back by what we call a “run on the bank.” Word came out that the country couldn’t pay its Eurobonds, and after missing the payment, Lebanon was in default. All banks in Lebanon couldn’t cooperate with all the demands since only 15% of deposits are reserved in the bank while the other is turned into loans given to other citizens.
For that reason, there was a shortage of dollar cash to be given to depositors, and many people lost their money and its value due to the high inflation. At that time, there was no policy exertion by the central bank to eliminate this two-rate fluctuation, as it didn’t increase interest rates, nor did it regulate the financial flows from capital markets into and out of a country’s capital account (capital control).
As the inflation increased, the economic effects worsened on the people, and most wages became worthless compared to the dollar rate. As a result, many businesses went bankrupt as the cost of production increased significantly. Lebanon is dependent on its imports, and it only produced a small percentage of the country’s overall consumption, which inevitably affected all businesses since they had to import using U.S. dollars.
In September 2021, the International Monetary Fund distributed SRDs to many countries worldwide. Amongst those was Lebanon, as we got a share of 1.3 billion dollars. That money was used to supply the market with dollars in hopes of stabilizing the Lira rate in 2022, as it exceeded 30,000 L.L. on January 9th, 2022. By injecting U.S. dollars into the market, the central bank stabilized the rate at about 20,500 for some time, and banks started to allow purchasing US dollars in exchange for L.L. The plan was to fix this rate until the elections and in hopes of additional aid from the IMF.
Unfortunately, that plan wasn’t sustainable due to the ongoing Ukraine Russia war, which has caused a worldwide disruption. Oil prices have increased significantly in the past month, which severely worsened the situation in Lebanon. In addition, political instability in Lebanon also affected the exchange rate, and as of 25 March 2022, the exchange rate increased to 24,000 LL./$. Without the intervention of the Central Bank in their attempt to stabilize the rate, the political instability could’ve led to a significant increase in the exchange rate of the Lebanese lira as it could’ve gone over 40,000 LL./$.