The Lebanese Between the Anvil of the Pound and the Hammer of the Dollar

Using the US dollar in domestic transactions is nothing new to the Lebanese; it began in the mid-1980s with the collapse in the value of the Lebanese pound, and again in the early 1990s, specifically in 1992. Despite the pegging of the average exchange rate of one dollar at 1,507.5 Lebanese pounds and the state of economic stability that this provided, circulation of the US dollar persisted in local markets, and goods and services were often priced in dollars alongside the price in Lebanese pounds, contrary to the law and with officials turning a blind eye.

This state of coexistence between the pound and the dollar could have continued unchanged had it not been for the protracted collapse of the Lebanese pound and its loss of more than 97% of its value. The closure of banks the day after the demonstrations of October 17, 2019, and the subsequent restrictions on transfers and withdrawals, exposed their inability to meet their obligations toward depositors, shaking confidence in the Lebanese banking sector and in the Lebanese pound as a unit of account and a store of value. Losses in the value of the pound followed on a daily basis, while prices began rising in the opposite direction and at rates exceeding the pace of the pound's depreciation, plunging the economy into an inflationary spiral whose chapters unfold day after day.

Dollarization often comes as part of efforts by states to curb high inflation, and the common situation in developing countries is that citizens begin using a strong foreign currency, such as the US dollar, to spread the inflation risks associated with a weak local currency. The continuous decline in the purchasing power of the national currency ultimately leads to the dollarization of the economy. Lebanon's situation today represents the clearest example of countries where persistent inflation, accompanied by the successive decline in the value of their national currency, drives their citizens to resort to the US dollar, paving the way for dollarization and its repercussions.

While the World Bank's conditions have shown no inclination toward pushing Lebanon into dollarization, the necessity and importance of implementing comprehensive reforms that put Lebanon and its economy on the right track are affirmed day after day. The danger of dollarization, however, lies in the state losing the foundations and tools for protecting citizens, most notably ending the role of the central bank as the regulator of monetary policies (despite their mistakes), raising serious fears about moving toward full dollarization in the absence of any rescue plan and any vision for the desired reform.

Proceeding with dollarization, if carried out, is irreversible, and among its repercussions is the termination of the national currency, which constitutes one of the symbols of national sovereignty and a source of state financing free from external constraints. By contrast, there is simply no single exchange rate regime that is best for all countries, as each country has its own financial and economic circumstances that determine the optimal exchange rate system. The local exchange rate regime, which relied on pegging the exchange rate, could have spared the pound this tragic end, had it not been for Israeli attacks on the one hand and domestic political bickering on the other.

It is worth noting that dollarization is not limited to pricing goods and services in US dollars, a practice applied in Lebanon both directly and indirectly, albeit without legal justification as previously mentioned. However, the caretaker government's move to officially sanction the dollarization of prices marks a prelude to dollarization in its broad sense, and entails consequences for the state in terms of converting government spending into dollars, collecting taxes in dollars, in addition to setting the course for the retirement of the pound.

While posting prices in US dollars gives an impression of price stability for those earning an income in dollars, the positive aspect of this, should it materialize, is preventing an increase of 15% and perhaps more on prices denominated in pounds in addition to profits, as a preemptive measure adopted by many merchants and commercial establishments to counter a potential rise in the exchange rate.

On the other hand, the goal of dollarizing prices is, beyond doubt, to preserve the capital of merchants and commercial establishments (or replenish inventory), a right that cannot be overlooked if we accept the importance of the continued operation of these businesses within the national economy. Meanwhile, the percentages added to prices in pounds as a hedge against a rising exchange rate constitute an additional drain on the purchasing power of the Lebanese consumer.

Achieving stability in prices in general and in the exchange rate in particular, however, requires steps going beyond mere dollarized prices, especially since 60% of workers in Lebanon are wage earners and 90% of them receive their wages in Lebanese pounds (according to the economist Kamal Hamdan), prompting the question of where these people will get dollars to meet their daily needs amid the continuous decline of the national currency.

In this context, the withdrawal of public sector employees' salaries in US dollars at the Sayrafa rate can be considered a form of dollarization, whereas excluding private sector salaries from it threatens social solidarity and confirms the inadequacy of this measure as a comprehensive solution to curb the negative effects of exchange rate fluctuations. That is because the main obstacle to dollarization is the state paying its expenditures in US dollars, and foremost among these expenditures that must be paid in dollars are salaries, which make up the largest share of its current spending.

The state's collection of fees and taxes in US dollars from taxpayers, the largest share of whom earn their incomes in the national currency, likewise constitutes an obstacle to dollarization. Notably, there are decisions by the Ministry of Finance regarding taxes on income in dollars that remain a subject of give-and-take between taxpayers and the ministry concerned, at a time when taxpayers, both institutions and individuals, seek to take advantage of the political authorities' inability to define a vision for a comprehensive solution to the financial and economic crisis in which Lebanon is floundering.

Now that the financial and economic crisis battering Lebanon, destabilizing it, and threatening its entity and future has come to this pass, the political authorities must arrive at a forward-looking vision capable of halting the collapse and laying the groundwork for a multifaceted relaunch, starting by defining the role that Lebanon can play among its Arab peers so as to formulate the plans capable of achieving these goals. Partial or truncated solutions prolong the crisis and increase the obstacles on the path to finding remedies, and what ultimately counts are results, not headlines and labels.

Translated from Arabic with AI. Read it in Arabic