Lebanese authorities have arrested scores of money changers in an attempt to stabilise the plummeting exchange rate. This could reduce speculation, but will do little to boost the value of the local currency, analysts told The National.
After weeks of a simmering conflict, the arrest of the head of the money changers syndicate on Thursday signalled that the judiciary was now taking action against currency traders who have played a central role in daily life in Lebanon since banks started restricting access to US dollars last summer.
The arrests came after the detention of dozens of other money changers who were accused of manipulating the price of the dollar for financial gain or trading money illegally, according to local media. Additionally, the Telecoms Ministry blocked popular currency exchange apps on April 30.
These moves could reduce uncertainty about the price of the Lebanese pound, said Hicham Safieddine, assistant professor at King’s College in London and author of a book on Lebanon’s central bank (BDL).
“A well-planned regulation of exchange houses, including their temporary shutdown, might help reduce uncertainty about exchange rate prices and, as a result, mitigate sudden and sharp rises and falls in the exchange rate – and is therefore much welcome,” he said.
“There is nothing repressive either about interrogating or arresting exchangers if there is evidence that they engaged in speculation,” he added.
But this strategy has been criticised by some financial experts.
“You cannot stabilise or peg a currency by decree or intimidating or arresting people. Every country that tried this failed miserably, even police states,” said Dan Azzi, former chairman and chief executive of Standard Chartered Bank in Lebanon.
“The arrests are misguided and will not reduce pressure on the pound,” said Mohieddine Kronfol, chief investment officer of global sukuk and Mena fixed income at Franklin Templeton.
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Money changers have depicted themselves as victims of both local authorities and private speculators. When they went on an open-ended strike on April 23, they complained that they were held “hostage” between the public, whose appetite for the American currency increased as it started disappearing, and “impersonators” – illegal cash dealers who supposedly speculate on the Lebanese pound.
Since the strike began, the value of the local currency continued to plummet on the black market, where it is now reportedly sold at more than 4,000 Lebanese pounds to the dollar compared with the official peg of 1,507.5 pounds.
Observers said that the tense stand-off between money changers and the government may damage the economy by fuelling the black market. Repeated efforts by the BDL to force money changers to sell dollars at a rate lower than the market price were unsuccessful, although the syndicate said after its president’s arrest that it would try to respect the BDL’s decisions “despite the difficulty in adhering to pre-determined price in a … market that is controlled by supply and demand and a free economic system”.
It was unclear when the strike will end.
“If you shut down all exchange offices, there will always be a black market for the US dollar, and it will not be determined by a central bank circular,” said Wael Atallah, a Lebanese PhD candidate in economics at the University of Quebec in Montreal.
In what has been widely interpreted as a step towards floating the local currency, the central bank published circulars in past weeks that allowed financial institutions to implement different exchange rates depending on clients’ requirements.
Officially, the 23-year-old dollar peg is still in place, but the government hopes to move towards a flexible exchange rate once it has secured international funding to shore up its economy.
But the Lebanese pound will continue to lose value as long as the government does not receive foreign assistance and implement much-needed structural adjustments, said Mr Kronfol.
“Pressure on the [Lebanese] pound will be almost impossible to contain without a return of confidence in the government and financial assistance from abroad – particularly the IMF,” he said.
Lebanon officially requested an IMF bailout earlier this month, saying that the country needed between $10 billion and $15bn in international support.
Negotiations on the bailout, expected to begin in the coming days, were expected to be tough as the IMF was likely to demand unpopular fiscal and economic reforms.
The government is aware of this: in a much-touted recovery plan unveiled alongside its request for help, it promised a shake-up of the state’s organisation over the next five years, including recovering embezzled funds, restructuring the financial sector, and tax reform.
Experts said that the central bank does not have the capacity to inject large amounts of dollars into the economy, which could have helped stabilise the exchange rate as the country waits for international support.
The BDL’s governor, Riad Salameh, Prime Minister Hassan Diab, and international rating agencies have all published different figures regarding the amount of cash available to the central bank.
The bank does not make all its accounting figures public and has come under pressure from Mr Diab, who announced last April that he would order an independent audit of BDL’s finances.
Another option to slow down the pound’s freefall would be to reduce Lebanon’s inflated imports bill through tariffs on non-essential goods and services that bleed dollars out of the country, said Mr Azzi.
“You drive the cost up of big cars so that very few people buy them, and that’s less dollars coming out. You impose tariffs on domestic help coming from outside, because they all send dollars overseas, etcetera,” he said.
Subsidies on imported goods should also be removed, said Mr Azzi. “Let’s say fuel is bought in dollars at an exchange rate of 1,500, then effectively one third of the price is real, and the other two thirds are subsidised by the central bank’s reserves,” he said.
The government has been reluctant to remove subsidies as poverty rates soar because of the financial crisis. But Mr Azzi pointed out that fuel is more expensive in neighbouring Syria and Jordan, where income per capita is lower than in Lebanon. “So if they can handle higher fuel prices, with a lower per capita income, then so should we, and thus should not be a cause for social unrest,” he said.
Sami Nader, director of the Levant Institute for Strategic Affairs in Lebanon, estimated that Lebanon spends $25 million a day to cater to its population’s basic needs, including oil, gas, wheat and medical imports.
As it relies on imports for its local consumption, Lebanon has always run a high trade deficit but compensated for it with a large inflow of dollars from remittances, tourism and foreign direct investment.
But the budget deficit became negative after inflows started drying up in 2011, said Mr Nader. “A twin deficit – budget and current account deficit – is a recipe for failure,” he said. “Since day one, the BDL should have had a floating exchange rate and let the market correct itself.”
As Lebanon braces itself for difficult financial decisions, the freefall of the local currency has become a running joke.
Last weekend, a video on social media showed a small dog barking at a man showing him a Lebanese pound, but when the man held out American dollars, the dog happily embraced him.
The pre-recorded laughter indicated that the video was meant to be funny, but the message it conveyed was grim: even dogs do not want Lebanese pounds anymore.