Revolution, devaluation and the dollar business in Lebanon

Shops closed in protest at the devaluation of the pound
Manifestación frente a la entrada de la Universidad Americana de Beirut, en la calle Bliss de la capital libanesa, el 29 de diciembre de 2020, contra la decisión de varias universidades de adoptar un nuevo tipo de cambio del dólar para fijar el precio de las matrículas AFP/ ANWAR AMRO

AFP/ ANWAR AMRO  -   El país está sumido en una crisis económica que ha provocado un aumento del desempleo y una espiral de precios, mientras que la moneda se ha desplomado hasta un nuevo mínimo frente al dólar en el mercado negro.

A new wave of virulent demonstrations shakes Lebanon from north to south, days of mass protests take to the streets once again by an angry mob because of the never-ending impoverished situation in the country, and the dramatic collapse of the local currency, which started last week, reaching 11,000 LBP against the US dollar benchmark and continued throughout the week until it reached 11,000 LBP. The currency has continued to plummet throughout the week, reaching a new all-time high on the informal market of 13,250 LBP per USD in the last few days. It is worth remembering that the official rate was set last spring at 3,900 LBP. This leads to hyperinflation, uncontrolled prices and, even more dramatically, the inaccessibility of basic products for a large part of the population. This is the daily life of a comatose society mired in a deep economic crisis unprecedented in the history of a nation once known for its successful financial industry.

El país está sumido en una crisis económica que ha provocado un aumento del desempleo y una espiral de precios, mientras que la moneda se ha desplomado hasta un nuevo mínimo con respecto al dólar en el mercado negro AFP/ JOSEPH EID
AFP/ JOSEPH EID-The country is mired in an economic crisis that has led to rising unemployment and spiralling prices, while the currency has plummeted to a new low against the dollar on the black market.
How did it all start?

Several variables are involved in the economic collapse and the worsening of the Lebanese financial crisis. Among the external causes, the main one is the resentment of the regional economy affected by the devaluation of the price of crude oil in recent years, which has slowed down financial aid and investment from the countries of the region, together with the distrust of the international financial markets towards the unstable Lebanese political system, repeatedly accused by international organisations of being nepotistic, clientelistic and incapable of forming a stable executive to ensure the future of international investment, thus reducing the flow of the foreign currency needed to maintain the national banking system.

Among the internal causes, even more intricate than the external ones that interfere in the incessant devaluation of the local currency, the trigger that blew up the entire financial system at the beginning of 2019 was the bursting of the real estate bubble resulting from the Al-Iskan credits also known as Housing Loans promoted by Banque de L'habitat.

Una mujer libanesa junto a su nevera vacía en su apartamento en la ciudad portuaria de Trípoli, al norte de Beirut, el 17 de junio de 2020. -  AFP/ IBRAHIM CHALHOUB
AFP/ IBRAHIM CHALHOUB-A Lebanese woman stands next to her empty fridge in her flat in the port city of Tripoli, north of Beirut, 17 June 2020.

The devastating brick speculation caused by a type of "junk credit" which consisted on offering a mortgage product or financial benefit at very low interest rates aimed mainly at public administration employees for the acquisition of a real estate property under the guarantee of the state, a guarantee promoted at the expense of the indebtedness of the executive with large Lebanese private banks ended up collapsing at the end of 2018 because of the inability of the administration to meet the debt contracted.

Another important cause of the Lebanese financial collapse is the inadequate strategies of expansion of financial assets in the countries of the region at the hands of some of the major Lebanese banks, the failure of international expansion led to the intervention of the Lebanese central bank (BDL) in order to prevent the bankruptcy of these banks, which implied even more burden and indebtedness on public finances.

Banco Central del Líbano en Beirut PHOTO/REUTERS
PHOTO/REUTERS-Central Bank of Lebanon in Beirut

On the other hand, it is worth mentioning the toxic products offered for years by banks to expatriate savers, one of the most important sources of financial resources for the inflow of international currency into the national economy.

Lebanese banks traditionally offered high interest rates to the expatriate diaspora who were attracted to deposit their savings in national bank accounts and were also seduced by the banking secrecy granted to clients, which maintained for decades a circular system based on "easy" mortgage loans fed by the deposit of savings and remunerated with high interest rates to small investors, thus achieving a constant flow of USD to Lebanon and a certain stability of the Lebanese lira from the end of the 1990s at an exchange rate of LBP 1.500 against the dollar until the end of the 1990s. 500 LBP to the dollar until the official devaluation by the Central Bank in the spring of last year to 3,900 LBP to the dollar.

El gobernador del Banco Central del Líbano, Riad Salameh PHOTO/REUTERS
PHOTO/REUTERS-Governor of the Central Bank of Lebanon Riad Salameh

Bank resentment and signs of fatigue over the past two years due to a poisoned and hyper-indebted system have finally scared off savers in the diaspora by cutting off much-needed foreign currency from Lebanese banks' deposits. In reaction to the events and fearing financial insolvency and bankruptcy, the banks in 2020 eliminated access to US dollars for the population and imposed a strict control of monthly capital per person, a phenomenon that feeds back into USD speculation in the informal market as well as the constant increase in prices.

The quasi-bankruptcy of the state and the insolvency of private banks make it impossible for the Lebanese central bank, Banque du Liban (BDL), to officially import US dollars, the raw material for any financial operation in the country, from foreign trade to the basic domestic economy. In the absence of USD in the official market, coupled with the low productivity of a nation lacking in industry and a competitive productive fabric, importing practically all the goods consumed, from machinery, fuel, medicines to basic foodstuffs, and with such a devalued currency, this has a negative impact on the exponential increase in prices, the loss of value of transactions in the local currency and therefore, as a social effect, the impact of the unstoppable increase in poverty.

If the 85% devaluation of the national currency in less than a year was not enough, the stratospheric unemployment rate, which in recent months has risen to more than 40% of the total population, must be added to the banks' squeeze on savers' assets by blocking access to their savings. The insidiousness of this trap is particularly acute in accounts held in US dollars by small savers. In the absence of circulation of this currency on the official market, savers are trapped in a spiral of constant losses of their values, being forced to buy Lebanese lira with their savings in dollars at the exchange rate of 3,900 LBP established by the central bank (BDL) but facing prices of products on the market ranging from 8,000 LBP as it was in recent months to the collapse of 13,250 LBP in the last few days per dollar. In other words, one buys lira at one exchange rate and is confronted with product prices more than three times the officially stipulated value, thus losing a great deal of the currency's value in the transaction and seriously decreasing the purchasing power of the citizens.

Un voluntario de la ONG libanesa Beit al-Braka (casa de las bendiciones) organiza las existencias de alimentos que se distribuirán a los necesitados, en la sede de la organización en la capital, Beirut, el 23 de febrero de 2021 AFP/ JOSEPH EID
AFP/ JOSEPH EID-A volunteer from the Lebanese NGO Beit al-Braka (House of Blessings) arranges food stocks to be distributed to the needy, at the organisation's headquarters in the capital Beirut on 23 February 2021.
The USD business

Who benefits from this situation?

Undoubtedly, as the proverb goes, it is good fishing in troubled waters.Each and every calamitous situation always benefits from the misfortune of others. In this case, those who benefit from the dollar crisis are the exchange bureaus who influence the fluctuation in the black market of the USD against the national currency.

Companies, individuals and each and every consumer urgently need the availability of USD for subsistence, the shortage of domestic production pushes this small country to import most of the raw materials and food for the sustenance of the nation.
All companies, from the largest to the smallest, be they supermarket chains, pharmaceutical companies and importers of all kinds, need the USD to purchase their products on the international market.
As the central bank has no US dollars to inject into the market, consumers are forced to turn to alternative money changers to buy US dollars.

The regular inflow of this currency is done through accounts called "Fresh Money", a particular type of account with origin abroad and destination Lebanon that enables the transfer from abroad of USD. This type of account is in some cases the only means of support for many families who, thanks to a relative abroad who sends remittances, help the family economy, but on the other hand, unfortunately, given the unbridled need for consumption, the situation is taken advantage of by others to do business in the exchange houses, triggering speculation on the black market and uncontrolled price increases.

Un hombre cuenta libras libanesas en una tienda de cambio, en Beirut, Líbano AP/HUSSEIN MALLA
AP/HUSSEIN MALLA-A man counts Lebanese pounds in a money exchange shop in Beirut, Lebanon.

Exhausted and desperate citizens go to the bureaux de change to buy US dollars as a safe asset to meet family expenses that cannot be covered with devalued salaries. In the transaction, the money changer, without control or fixed rules established by the authorities, imposes the exchange rate arbitrarily according to the daily flow of USD to Lebanon, reaching commissions of 70% to obtain cash.

The origin of these bureaux de change is of a different nature: they are generally companies registered and authorised by the Lebanese Ministry of Finance and the central bank (BDL) to operate as money changers, but there are many others that are not so official and are in the hands of private investors.

The extent to which society has taken on the economic burden is such that there is a free mobile application that determines the current exchange rate by the hour, so that the necessary purchases can be programmed in advance according to the forecast increase in the price of products.

El presidente del Líbano, Michel Aoun PHOTO/DALATI&NOHRA
PHOTO/DALATI&NOHRA-The President of Lebanon, Michel Aoun

This dual economy, the one established by the formal one, nominally at 3,900 LBP but non-existent in practice, and the informal one that has devoured the Lebanese market, is slowly consuming Lebanon, only accelerating the country's financial collapse.

As expected, the need for US dollars whets the appetite of irregular financial actors. The authorities, aware of the urgency of the situation, sometimes provide little information on the origin of many accounts, which collaterally encourages the entry of investors of dubious provenance, opportunists for money laundering, mafias and, as always in this nation eroded by sectarianism, irregular actors and armed groups with political connections.

The drift

Far from the end of the tunnel, the gloom of uncertainty is growing over Lebanon as the nation's political deadlock prevents the formation of a lasting and stable executive. The authorities' inaction in undertaking the various structural reforms demanded by the IMF for the financial rescue has forced changes in the banking structure, imposing among other conditions the transfer of all deposits in USD accounts to Lebanese lira, a measure that is not only unpopular but also unprecedented, and which has to be voted on in parliament, for which no political group wants to take responsibility. The reforms demanded by the IMF and international investors would not only restructure the foundations of the Lebanese economy but also dynamite the clientelistic pyramid system endemic to national politics, as well as endangering the partnership between the current government partners between former General Michael Aoun's party and the pro-Iranian Party of God.