Currencies of Lebanon, Iran and Syria are in freefall with inflation surging, IIF says

Sanctions, geopolitics and Covid-19 have diminished the strength of the three currencies and weakened the economies of Beirut, Tehran and Damascus

A currency trader counts rial banknotes in Iran. The currency's value against the dollar has plummeted as a result of more stringent US sanctions. Bloomberg

The currencies of Lebanon, Iran and Syria have hit record lows, with spreads between official and black-market rates widening and inflation increasing due to decades of mismanagement, corruption and sanctions, the Institute of International Finance said.

Lebanon faces its worst financial crisis since independence in 1943, and its economy has deteriorated after talks with the International Monetary Fund stalled, the institute said in a report this week.

The country asked the fund for a $10 billion (Dh36.7bn) rescue package in May.

“Two months of negotiations between the authorities and the IMF to secure financial support have made no significant progress due to the reluctance of vested interest groups in the government and parliament to implement the urgent fiscal and structural reforms,” the IIF, which is in Washington, said.

The Lebanese pound, pegged to the US dollar since 1998 at 1,507, has lost ground on the black market and traded at about 8,600 to the greenback in the first 11 days of this month.

The IIF said the spread between official and parallel market rates had widened to more than 400 per cent, with inflation expected to increase to 180 per cent by year-end after hitting 56 per cent in May.

The country’s recession will deepen this year because of a lack of reforms, the institute said. According to an IMF forecast, Lebanon’s economy will shrink by 12 per cent this year.

The depreciation in the value of the Lebanese pound is “due to the loss in confidence among currency traders in the ability of the current political establishment to implement a comprehensive economic programme”, the IIF said.

A “significant portion” of the country’s imports are being smuggled into neighbouring Syria while the central bank’s declining foreign currency reserves “are effectively subsidising the Syrian economy”, the IIF said.

“Maintaining implicit subsidies on fuel in the face of rapidly increasing inflation and [a] depreciation of the parallel rate will lead to a much wider fiscal deficit than anticipated in [Lebanon’s] 2020 budget.”

Lebanon’s economic deterioration and financial crisis have contributed to a rapid depreciation of the Syrian pound, which has lost 150 per cent of its value against the greenback on the black market, while inflation is expected to hit 160 per cent by year-end, the IIF said.

Syria, which has been under US and EU sanctions since a civil war broke out in 2011, has traditionally relied on the foreign currency remittances of more than 300,000 Syrian workers in Lebanon who send about $2.5bn – more than 7 per cent of gross domestic product – annually, the IIF said.

Protesters face water cannon from riot police during a demonstration organised by supporters of Hezbollah, Lebanese communist party, and other Lebanese national parties at the US embassy against US interference in Lebanon's affairs, in Awkar area north-east Beirut, Lebanon. EPA

Protesters backed by Hezbollah, the Lebanese communist party and others during a demonstration against the United States' interference in Lebanon's affairs, near the US embassy in Awkar area, Beirut, Lebanon. EPA

Protesters try to remove barbed wire during a demonstration by supporters of Hezbollah, Lebanese communist party, and other Lebanese national parties during a demonstration at the US embassy against US interference in Lebanon's affairs, in Awkar area north-east Beirut, Lebanon. EPA

Protesters carry a picture of Hezbollah commander Imad Moughnyeh during a demonstration by supporters of Hezbollah, Lebanese communist party, and other Lebanese national parties at the US embassy against US interference in Lebanon's affairs, in Awkar area northeast Beirut, Lebanon. EPA

Lebanese army soldiers in riot gear arrive to the scene where supporters of Hezbollah and communist groups protest against US interference in Lebanon's affairs, near the American embassy, in Aukar north-east of Beirut, Lebanon. AP Photo

A Hezbollah supporter holds a placard during a protest against US interference in Lebanon's affairs, near the American embassy, in Aukar north-east of Beirut, Lebanon. AP Photo

Protesters pull barbed-wire fence off a street during an anti-US demonstration near the American embassy in Awkar, north-east Beirut. AFP

Protesters during an anti-US demonstration near the American embassy in Awkar, north-east of Lebanon's capital Beirut. AFP

A protester chants slogans as he is flanked by Lebanese police during an anti-US demonstration outside the American embassy in Awkar, north-east of the capital Beirut. AFP

Hezbollah supporters and communist groups throw stones at riot police during a protest against US interference in Lebanon's affairs, near the American embassy in Aukar, north-east of Beirut, Lebanon. AP Photo

As a result of Lebanon’s capital controls and liquidity crunch, Syria’s access to US dollars has been limited while US sanctions that were tightened in June have exacerbated the situation.

The IIF also said Iran’s economy would shrink for a third consecutive year because of the Covid-19 pandemic and more stringent sanctions imposed after President Donald Trump unilaterally withdrew the US from the nuclear deal in 2018.

Iran’s GDP is set to fall by 6 per cent this year while inflation is projected to remain high at 34.2 per cent, after last year’s 41 per cent, according to the IMF.

The dire situation prompted Tehran to ask for a loan of $5bn from the fund this year.

The US sanctions have been targeted at Iran’s oil industry, its primary source of foreign exchange, and have limited its access to the international financial system.

As a result, oil exports have fallen from 2.8 million barrels per day to less than 400,000 bpd.

The US curbs have also weakened confidence in the rial, which has lost more than 400 per cent of its value against the dollar on the black market, the IIF said.

“Iran’s attempts at exchange rate reunification in 1994, 2002, 2012 and April 2018 have failed, as US sanctions and lack of deep economic reforms ... caused the spread between the official and parallel rates to widen,” the IIF said.

The currency depreciated to 215,000 rials against the dollar on the black market this month, from 64,000 rials in June 2018.