Is the Lebanese lira dead? For experts interviewed by The National, the answer is yes.
“The damage caused by the currency crisis is irreparable,” said financial expert Mike Azar.
The lira, which was pegged at the rate of 1,500 to the dollar for 22 years, has now lost 98 per cent of its value since the start of Lebanon's economic meltdown.
It has become a virtually meaningless piece of paper that does not perform any of a currency’s functions.
The loss of confidence in the national currency is reflected by the craving for dollars on the market.
This is called “dollar addiction”, which is now pushing the economy towards rampant dollarisation, with a disastrous “socio-economic cost”, Siham Rizkallah, professor of economics at Saint Joseph University, told the National.
“It is creating a Lebanon for USD holders that we see in restaurants, shopping malls, big hospitals and touristic venues versus workers whose incomes are in lira who have become excluded from the socio-economic tissue,” she said.
“Lebanon needs a new exchange rate regime to put an end to the current chaos."
But what are the options?
Some call for a “hard peg”, including dollarisation, where the lira would be completely replaced by the greenback, or a “currency board”, with the introduction of a new national currency guaranteed by FX reserves.
In these fixed-exchange regimes, the central bank cannot turn to monetary creation to finance the fiscal deficit — the very reason that led to the destruction of the Lebanese lira’s value.
Experts agree that giving up on a national currency and monetary sovereignty is never ideal, but it may be inevitable, four years into what the World Bank labelled "a deliberate crisis”.
Bye bye Lira
Economists distinguished different types of dollarisation.
Lebanon has already been experiencing a high level of dollarisation — hovering around 70 per cent of the deposits since the late 1980s, said Ms Rizkallah, which shows a low level of confidence in the lira, even pre-crisis.
After 1993, the country gradually institutionalised a partial dollarisation, which spread unfettered in the economy since the 2019 collapse.
The introduction of a full dollarisation will lead to the abandonment of the national currency, with all the monetary base converted into US dollars at a fixed exchange rate.
“The size of the economy will be adjusted in function of the available reserves,” said Ms Siham.
This will also mean that the budget would be in dollars.
“Lebanon’s public finances lost a lot these past years by taxing in liras profits made in USD,” said Ms Rizkallah.
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“The use of a stable currency will bring back the confidence of the economic agents, attracts capital and investment,” she said.
In this scenario, the central bank's role will shrink considerably as it loses its monetary sovereignty.
“This primarily refers to a central bank’s role in managing the level of interest rates or the value of the currency based on local economic conditions. With dollarisation, countries no longer have control over monetary policy,” said Mr Azar.
“But has Lebanon ever really exercised monetary sovereignty in the first place?”
For French economist Jean-Francois Ponsot, dollarisation is advisable if the central bank's monetary policies were harmful to the currency.
He said that in Ecuador, a case he researched, where oligarchic groups used the central bank for their own interests, the full dollarisation adopted in 2000 was a way to end the “incestuous relationship” between the central bank, lenders and the oligarchs.
But, experts agree, dollarisation needs to be accompanied by a reform plan.
“It needs a complete restructuring of the banking system," Mr Ponsot said. "Their balance sheets will be converted into foreign currencies at the chosen conversion rate."
Lebanese banks have more foreign currency liabilities — which they list in Lebanese lira at a discounted rate, rather than as foreign currency assets. Therefore the dollarisation of their balance sheets will force some to recognise bankruptcy. “In Ecuador, 20 banks had to close,” Mr Ponsot said.
Authorities will have also to deal with the issue of loss allocation, and decide which mechanisms will be mobilised to bail out depositors, whose savings have been locked since 2019.
In Ecuador, the entire dollarisation process took nine months, he said.
Don’t print if you can’t cover it
The currency board is another form of hard pegs, which requires the national currency to be 100 per cent covered by the equivalent in foreign exchange reserves.
In this scenario, a new Lebanese currency will be created and pegged at a fixed exchange rate.
Economist Nikolay Nenovsky, one of the architects of the currency board introduced in 1997 in Bulgaria, pressed strongly for a Lebanese version during a webinar organised by Lefmi, a network of researchers.
He warned against the strong financial and political dependence to the US that comes with dollarisation, in a time where the greenback's future itself is uncertain. He also stressed that dollarisation means greater exposition to US sanctions.
But “the problem with the currency board is that the central bank still has some room for manoeuvre, so it can fall back into accounting tricks”, said Mr Ponsot.
But hard pegs are not all roses.
As the central bank no longer has the possibility to print money to finance government deficits, hard pegs constrained countries to strict budgetary rigour. For the system to work, Lebanon, a country that imports 80 per cent of its goods, would also have to find a stable inflow of dollars.
“There is no miracle solution with a monetary regime,” Mr Ponsot said.
Above all it requires political will.
But in Lebanon, there seems to be very little incentive for the ruling elite to change the current system, as the local currency is deliberately used today only as "a vehicle to pass on the financial losses to the general public through inflation”, Mr Azar said.
On one side, “banks and the central bank are slowly liquidating their US dollar debts, comprised primarily of people’s bank deposits, by converting them into Lebanese pounds in an attempt to restore solvency”, he said.
“Similarly, public sector employees, who have seen the value of their income collapse due to the currency devaluation, are given intermittent payments by the government, also funded by printing local currency.”
This excessive money printing further contributes to debasing the lira and causes it to lose value.
“The government has not undertaken any real reforms to achieve sustainability in the public finances or financial system,” Mr Azar said.