Sayrafa's Mistakes and the Risks of "Bloomberg"

Banque du Liban's intervention in the foreign exchange or currency market prior to establishing the Sayrafa platform took place automatically, through buying or selling hard currencies to curb fluctuations in the exchange rate of the national currency. Currency markets are not confined to a specific location; rather, they are made up of banking and financial institutions, money changers and other clients, with banks acting as the channel of communication among them, and particularly with Banque du Liban. This became untenable with the loss of confidence in the banking sector, whose credit role shrank and whose activities were reduced to implementing Banque du Liban's circulars. Until it launched the Sayrafa platform, Banque du Liban still relied in its foreign exchange market interventions on traditional means (specifically with the public), without upgrading them through the use of digital platforms and their modern technologies, which allow dealers to track all data related to local and foreign exchange markets moment by moment. This was despite the major advances in communications technology over more than a quarter of a century, and its integration into the core of financial business along with the instantaneous information (real-time information) about the markets and the speed and ease of trading that it provided to dealers. Had the banks not faltered and lost their role as a trusted intermediary, and had Banque du Liban not needed an alternative channel of communication with the monetary and financial markets, it would not have launched the Sayrafa platform in June 2021. While the platform was supposed to meet the standards of immediacy (real time) and transparency, Banque du Liban's setting of the exchange rate and its inability to maintain it, together with its failure to make the platform a natural and automatic link between Banque du Liban and the monetary and financial markets, served as an indicator of the platform's failure to achieve its self-evident goal, namely exchange rate stability. The reasons for the failure of the Sayrafa platform were not technical or due to a lack of data, so much as they lay in the timing of its creation and the manner in which it was managed. Achieving exchange rate stability requires the central bank to intervene in the foreign exchange market in proportion to the volume of demand for foreign currency, whereas Banque du Liban launched the platform after having already depleted the bulk of its foreign currency reserves through import subsidies and transfers abroad by favored figures of influence. Instead of Sayrafa serving as a platform for trading foreign currencies through both buying and selling, it became a platform for selling those currencies at a rate set by Banque du Liban rather than by supply and demand, while buying them from the parallel market at its prevailing rate, which drained what remained of depositors' funds. Had the central bank not needed a justification to keep Sayrafa going, it would not have expanded its services to include public sector employees' salaries and retirees' pensions. In its spring 2023 report on Lebanon, the World Bank considered that the Sayrafa platform had become an inappropriate monetary tool for stabilizing an exchange rate experiencing wide fluctuations over short periods at the expense of Banque du Liban's financial position and at the expense of its reserves. It also considers that Sayrafa turned into an instrument in the hands of certain dealers to generate profits from the spread between Sayrafa rates and parallel market rates, estimating that they likely reaped profits that may have reached $2.5 billion as a result. The caretaker government's decision during its session held on September 7, 2023, to adopt the Bloomberg platform as an alternative to Sayrafa, at the request of the acting governor of Banque du Liban, comes as part of an attempt by the latter to adopt a platform possessing the transparency and credibility that the Sayrafa platform lacks. Under this arrangement, Banque du Liban's role through it is to be confined to monitoring the movement of the foreign exchange market and regulating its pace to limit sharp fluctuations in the exchange rate caused by speculation that may occur from time to time. Conversely, the secretary-general of the Association of Banks in Lebanon, Fadi Khalaf, points in this September's editorial of the Association of Banks in Lebanon's monthly bulletin to the possibility of adopting the Beirut Stock Exchange instead of the Bloomberg platform. Especially since the Beirut Stock Exchange operates on an international trading system and is capable of providing dollar trading easily, transparently and within a relatively short period. Moreover, the Beirut Stock Exchange, according to Fadi Khalaf, is linked to the largest number of banks, whose staff are well versed in the exchange's technologies and requirements, allowing the timeframe needed to begin using it to be shortened. Yet the difficulties and obstacles that may confront Banque du Liban's adoption of a new foreign exchange platform do not differ from those that faced the Sayrafa platform as regards foreign exchange dealers' compliance with executing their transactions through the new platform. This is particularly so given the inability of the state, with its judicial and security apparatuses, to enforce compliance with trading hard currencies through the designated platform, and to prosecute violators among them and fine them in proportion to the scale of their offenses. That remains out of reach, and is indeed growing ever more remote. Nor will any new platform be immune to the difficulties that impeded Sayrafa's work, foremost among them perhaps its ability to supply sufficient foreign currency to meet dealers' demand. Among the obstacles as well is the evasion by dealers, merchants and others alike, of using the new platform in order to conceal the volume of their commercial operations and thereby avoid resulting fees and taxes. The primary obstacle, however, lies in the collapse of the banking sector and its abandonment of its credit and investment role, at a time when such a platform requires a trustworthy banking sector with adequate solvency. More important than the new platform itself is defining its intended objectives, above all the monetary policies that must be followed to achieve monetary and financial stability. Especially since Banque du Liban proved unable to halt the collapse of the national currency, and the policies it devised failed to stem the depreciation of the exchange rate (circulars, multiple exchange rates and others...). This makes liberalizing and unifying the exchange rate an achievable goal, if those in charge of the monetary authority wish to capitalize on the relative stability the exchange rate has seen of late. The most delicate challenge for any new platform lies in the exchange rate to be adopted at its launch, since adopting the Sayrafa platform's rate would leave the old status quo intact, whereas what is needed is a new approach that simultaneously unifies the exchange rate and secures its stability. All the more so because the current stability of the exchange rate stems, in addition to the abundance of dollars, from a truce by speculators against the Lebanese pound, who appear invested in the success of Dr. Mansouri at the head of the central bank's governorship, making conditions opportune for floating the pound and adopting a single rate determined by supply and demand mechanisms. The success of the new platform hinges on liberalizing the national currency's exchange rate, which would end the chaos currently prevailing in the currency market and free Banque du Liban from the burdens of intervening in the foreign exchange market unless the exchange rate crosses certain thresholds. Combining the liberalization of exchange rates with their stability is one of the conditions for stimulating economic activity, which has contracted to its lowest levels due to multiple rates and their sharp volatility. Notably, the risks that could arise from liberalizing the exchange rate do not relate to whether or not the economy is dollarized, since dollarization has curbed demand for money-changing services and consequently reduced opportunities for speculation against the national currency. At the same time, expatriates' remittances and their spending while in Lebanon provide sufficient quantities of hard currency to ensure balance in the monetary market. As for the dollarized salaries of public sector employees and retirees, as well as a large share of sector employees, they are a double-edged sword that eases pressure on the pound when paid out and heightens it when collected again. Liberalizing the exchange rate requires political stability on the one hand, and an economic vision charting the future contours of the state's fiscal and monetary orientations on the other. Especially since liberalizing the pound's exchange rate against foreign currencies carries economic repercussions that the caretaker government must meet with programs encouraging export-oriented production, whether industrial or agricultural, or other programs incentivizing domestic and foreign investment. A careful weighing is needed between the extent of the need to adopt a new platform that liberalizes the national currency and unifies the exchange rate, and the risks entailed in adopting an international exchange platform, regardless of its standards of transparency. It would have been possible to upgrade the Sayrafa platform and apply standards of good governance and transparency in its management instead of abandoning it, or to adopt the Beirut Stock Exchange to replace Sayrafa, with all that this implies for reviving the role of Beirut and its stock exchange in the financial and monetary market. Adopting an international platform like the Bloomberg platform, however, raises the issue of Banque du Liban's oversight of the platform's operations and the exchange rate fluctuations recorded on it on the one hand, and its capacity to intervene and curb those fluctuations should they occur, if it chooses to do so. If those in charge of the monetary authority want to rid themselves of the Sayrafa platform along with its mistakes and sins, the fear is that the price of discarding Sayrafa may prove heavier than retaining it after upgrading it. Now that Lebanese officials have abandoned the national currency, and the symbol of state sovereignty it represents, in pricing goods and services all the way to salaries and turned to dollarization, will they also surrender Lebanon's sovereignty over its monetary and financial markets and move to outsource them to foreign platforms?

Translated from Arabic with AI. Read it in Arabic