Lebanon Central Bank is “No Longer Able to Intervene” as Its Fiat Currency Crashes Double Digits

Lebanon

TL;DR: The Lebanese pound crashed relative to the US dollar this week in spectacular double-digit fashion, taking with it purchasing power and, for the moment, civil order. Protests across the country have broken out, including the burning down of financial institutions connected to the Lebanon central bank (Banque du Liban). 

Lebanon Central Bank is “No Longer Able to Intervene”

Lebanon Prime Minister Hassan Diab seems at pains to explain the confluence of events leading to massive devaluation. Former Banque du Liban vice-governor Nasser Saidi told the Financial Times, “This is a cash market, not your usual forex market. The central bank is no longer able to intervene.” The government is out of answers and full of excuses.

For 20 years, the artificially intrinsic math for average Lebanese was like a natural law, rain, or gravity: L£1,500 pegged to $1.00. By the end of last week, ratios of L£6,000 and even L£7,000 were commonplace, falling high double-digits in just days — nearing a consistent 70% drop.

Scenes of protest across the country this week included blockades, random fires, and chanting, all registering the street’s reaction to livelihoods and savings crushed. The Lebanese Republic hugs the Mediterranean Sea to its West, Syria to its North and East, as Jordan and Israel dominate, round out, its Southern neighborhood.

Legendary and Chronic Corruption

With more than 5 million people, split nearly evenly between Muslim and Christian sects, Lebanon is widely considered the most religiously diverse country in the Middle East. Relative social harmony aside, economic protests, however, have increased in recent months, forcing the ouster of a Prime Minister in October over legendary and chronic corruption, exacerbated by imposed lockdowns due to coronavirus. Experts predict the current staggering 48% poverty rate might reach 60% by year’s end.

The government’s pandemic response merely compounded the obvious, resulting in a foreign bond payment default of more than $1 billion. So far, global relief agencies, such as the International Monetary Fund (IMF), have not come to the rescue (Lebanon has sovereign debt of more than 170% of GDP). Domestic policy since December’s new administration meant austerity measures, including limiting the average person’s ability to withdraw cash and worse.

For now, exchange rates are described as chaotic for those holding Lebanese pounds. The country’s central bank has insisted upon pegs of closer to L£3,000, but it is anyone’s guess as to whether it can be rationally observed. So far, it has not. Traders have also implemented rolling strikes at various points, limiting choices even further.

Feeding Dollars Into the Market

Uncertain price discovery, central bank mismanagement, virus shutdowns, and its largest neighbor, Syria, expecting more imminent US sanctions, all combined to prove overwhelming. Foreign exchange markets, a historic refuge in such situations, are non-existent at the moment, having failed to recover from last year’s dollar liquidity crisis.

By the week’s end, President Michel Aoun (the office that appoints the Prime Minister) declared by Monday the government would commence to “feeding dollars into the market,” attempting to boost the L£. Banque du Liban Governor, Riad Salame, has a mandate to lift rates to L£4,000, according to reports. Salame has held his position for nearly three decades, and confidence in his abilities is beginning to diminish.

As for cryptocurrency, Al Jazeera profiled renewed interest at the beginning of this year in a rather comprehensive piece.  “With confidence in Lebanese banks at an all-time low over increasing restrictions on foreign currency movements, more Lebanese are turning to digital currencies like bitcoin as a way to shift their money in and out of the country,” they claimed. “Seven Lebanese bitcoin traders said in interviews with Al Jazeera that the volume of their trade had spiked since November, when capital controls were first introduced, with the value of transactions collectively reaching millions of dollars a month.”

Bitcoin Cash

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