Until the so-called Oct. 17, 2019 Revolution, the dollar was what may be termed a paranational currency within the framework of a dual circulation of currencies. In the internal exchanges, the dollar was the reference currency. The dollar deposits in the Lebanese banks exceeded 65 percent, more than 90 percent of loans in the private sector were in dollars, the important transactions were in dollars, a substantial part of future engagements (pensions, insurances, etc.) was in dollars.
Thus, Lebanese banks were creating offshore dollars (Lebanese dollar) to the extent that the deposits hence created had exceeded the assets in dollar held by these Lebanese banks in American banks as well as the dollar reserves of the Lebanese Central Bank. This mechanism of monetary creation is very similar to the one that exists on the euro-dollar market nowadays (offshore dollars).
Nevertheless, the actual and potential state’s indebtedness was mainly in Lebanese pound. The salaries of the public sector were in Lebanese pound, the pensions, in Lebanese pound, the state’s debts toward hospitals, subsidized schools, etc. in Lebanese pound. That dual circulation was smooth. The Lebanese pound was firmly pegged to the dollar and its parity remained stable for more than 20 years. The Lebanese took great pride in that although the maintenance of such parity required holding foreign reserves equivalent to one times GDP, which are sterile with respect to the national economy. Throughout this whole period, Lebanon thought in dollars and dreamt in Lebanese pound.
The causes of this monetary schizophrenia are historical and structural at once. During the Lebanese Civil War, over almost 15 years, the dollar had appreciated 10.000 percent, the inflation followed, and the Lebanese’s savings in Lebanese pound disappeared. That lingering memory has driven the Lebanese to rely, in their economic calculations, upon the main international currency. Furthermore, the national economy – if not Lebanon itself – is strongly global and integrated. The imports in Lebanon represent more than one third of the GDP. Lebanon was the platform for a certain number of regional even international enterprises. Lebanese are everywhere and they maintain ties, to a greater or lesser extent, with Lebanon, in which they often have their family or retain assets, and for which they hold affection.
This “strangeness” has led to a spontaneous and strictly Lebanese innovation. In fact, the Lebanese dollar has been subject to an effective national monetary policy. The monetary authorities have operated the internal interest rates in dollars, the money supply in dollars. They have had, and have used over this locally treated international currency, all the instruments of a classical monetary policy: required reserves, key interest rates, and open market operations. There has been a real interbank money market as well as a compensation mechanism. They have also been able to benefit from a slightly limited seigniorage. By means of the dollar-required reserves, the Central Bank has been able to access funding at low cost. The seigniorage was obviously applied only to the scriptural money and not to the fiduciary money.
Since October 2019, this strange construction has collapsed. It had already been wavering since the outbreak of the civil war in Syria in 2011: the interest rates, in both the Lebanese dollar and the Lebanese pound, had soared, the deposits in Lebanese banks were fleeing seeking less stormy skies and in three years, they had decreased by the equivalent of 40 percent of the GDP.
In October 2019, an informal capital control was established because the Lebanese banks, short of international liquidity, were no longer able to secure their clients’ transfers abroad. In addition, the Central Bank, unable to simultaneously support a mismanaged state, a deficit in the balance of payments, an assaulted banking sector and an economy much afflicted by the regional upheavals, has given priority to supporting the state.
The main national economic pillars collapsed. The Lebanese pound has lost 500 percent of its value over 6 months, the Lebanese dollar, 200 percent thereof, more than 50 percent of the international transfers are now made through exchangers, “bankerization” which was one of the strongest in the region is in sharp decline, the clients are using less checks and payment cards and more and more bank notes, the banks’ credits have decreased by 40 percent, unemployment has reached more than 50 percent of the active population, whereas the notoriously inefficient public sector employs today almost half of the persons who are still active. To make matters even worse: the exchange rates have multiplied: the official, the subsidized, the gray-black, the black, the double black. All these exchange rates fluctuate erratically and not always in unison. The misery has taken hold and the famine looms.
In this context of widespread collapse, what should be the first step toward recovery? Some people believe it is about restoring the state’s finances, others to force the profiteers, prevaricators and corrupted to give back ill-gotten gains; some, fewer though, to render the state more efficient and the nation more moral. While we don’t deny the importance of all the aforementioned, we think that first and foremost, it is necessary to restore a certain monetary stability, without which, the economic agents are unable to establish long-term relationships, transactions become extremely costly, and the recovery illusory.
The Central Bank should resume its role as a borrower and lender of last resort as well as a market-maker for the currency. It is difficult to imagine that the economy would subsist with a multitude of exchange rates, exchange transactions being largely made with changers, some of which on the verge of illegality. The banks should recover their function as the main channel of liquidity.
To this end, the Central Bank should marshal its means: the foreign reserves ($20 billion), the gold reserves ($15 billion), and to earmark a third thereof to buttress a crawling peg between the Lebanese dollar and the international dollar (for instance 30 percent to begin with) and another between the Lebanese pound and the Lebanese dollar (for example LL4000 for a Lebanese dollar). The Central Bank should also implement a stimulus policy which, due to not being able to rely on the already very low interest rates, should be made by easing prudential regulatory ratios and the obligatory reserves.
Such measures should progressively lead to a reappreciation of the Lebanese dollar to attain at the end of three years an exchange rate of 1 Lebanese dollar for 90 US cents. By clearly displaying the intentions, by reliably realizing the Lebanese dollar appreciation program, the Central Bank would rectify the anticipations which would become positive and thus would enable it to restore its foreign reserves as things return to normal.
In the end, it may not be necessary to keep two national currencies. Switching to Lebanese dollar as the new national currency might be an applicable and effective solution.
Riad Obegi is CEO of BEMO Bank and Jean-Francois Goux is a French economist.
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