The stability of the pound amid the storm

As tensions escalate in occupied Palestine in the wake of the heroic Operation Al-Aqsa Flood carried out on the seventh of this October by the Palestinian resistance in the occupied territories, as the atrocity of the massacres committed by the Israeli enemy against civilians grows, and as the winds of escalation scorch Lebanon's southern border, the exchange rate of the Lebanese pound against the US dollar has remained stable for the third consecutive month despite all of the above, transcending the presidential vacuum and the inability of the caretaker government to take measures to prevent the continuation of the financial and economic collapse. It goes without saying that the reasons for the rise in the exchange rate of the pound against the US dollar are confined to the financial and economic crisis battering Lebanon, especially since speculation against the pound played a major role in accelerating the collapse in the value of the national currency. Meanwhile, the transfer abroad of foreign currency deposits by officials and well-connected insiders served as the coup de grâce for the national currency, while a large portion of Banque du Liban's reserves was squandered on indiscriminate subsidies for the import of consumer goods, rather than being used to maintain the stability of the exchange rate and curb speculation. The pound's exchange rate had begun to decline gradually at the end of last March after reaching its highest level, surpassing the threshold of 140,000 Lebanese pounds in the second third of that month, before stabilizing at around 90,000 pounds since the end of last July. At the time, many "experts" were predicting that the exchange rate would rise to dramatic levels as soon as the summer season ended, tourists returned to their countries, and expatriates went back to their jobs abroad, even though military developments were considered unlikely. Yet the stability of the exchange rate persisted, defying the expectations mentioned above, even during the period preceding the failure to appoint a new governor for Banque du Liban to succeed former governor Riad Salameh, with all the polemics and bickering it witnessed, and despite the deputy governors threatening to resign should the government fail to appoint a permanent governor for the bank. Indeed, the uncertainty that characterized the period prior to the naming of Dr. Wassim Mansouri as acting governor of Banque du Liban was enough to shake the fragile stability of the exchange rate. And while it was feared that paying the salaries of public sector employees, members of the military and security agencies, and retirees in US dollars would cause a decline in the exchange rate, Banque du Liban managed to overcome this threat and continue paying salaries in dollars at the end of last August and the end of last September, maintaining at the same time both the stability of the exchange rate and its reserves, according to a press interview given by the acting governor of Banque du Liban on the sidelines of the International Monetary Fund meetings held in the Moroccan city of Marrakesh (from October 9 to 15). On the contrary, state revenues in foreign currencies actually contributed to increasing them. Perhaps the stability witnessed in the exchange rate of the national currency amid current political, economic, and even security conditions is the best proof that the game of speculating against the national currency has exhausted its tools and pretexts, especially after Banque du Liban reduced the money supply in Lebanese pounds. Notably, reducing the size of the money supply in Lebanese pounds was initiated by former Banque du Liban governor Riad Salameh, though he squandered the effectiveness of this reduction by reinjecting part of this supply to collect dollars from the parallel market in order to meet demand on the Sayrafa platform. While the Sayrafa platform had been counted on to curb speculation against the national currency and stabilize the exchange rate of the Lebanese pound, it turned into a platform enabling speculation against the pound and profit-making through the price margin between Sayrafa and the parallel market. That margin was covered by Banque du Liban, causing a drain on its foreign currency reserves that would not have stopped without halting operations on the Sayrafa platform. Here too, halting Sayrafa's operations did not prevent the exchange rate from remaining stable within the same margins, owing to the balance achieved between supply and demand for the dollar in the money market. At the same time, the increase in fees and taxes boosted the revenues of the Lebanese state, which came to cover a large share of the state's current expenditures and curbed its need for financing from Banque du Liban. In the interview mentioned above, the acting governor of Banque du Liban confirmed the rise in state revenues. He noted that cooperation between the central bank and the government yielded revenues of around 20 trillion pounds in August, rising to around 25 trillion in September, with positive results expected to be recorded this October. Even the decline in Banque du Liban's liquid external foreign currency assets, according to the bank's statement issued last September 18, which was due to a drop in the euro's exchange rate against the dollar, along with a slight increase in external liabilities resulting from the inflow of certain sums from abroad, in addition to what is required by complying with the implementation of the mechanisms of Circular 158, left no negative repercussions on the exchange rate in light of the decision by the acting governor of Banque du Liban not to touch reserves and to refrain from financing the state, whether in pounds or in dollars. As for those who argue that the stability of the exchange rate is bound to end with the close of the tourist season and a decline in the supply of cash dollars and remittances, ignoring the fact that the supply of dollars in the local market is not confined to the tourist season, this oversimplifies the mechanisms of dollar supply and demand in the Lebanese market. A close look at the volume of sums traded shows that they are not limited to the summer season, but are distributed throughout the year, especially considering that expatriate remittances flowing into Lebanon, according to World Bank estimates, reached $6.4 billion in 2022, placing it third regionally, behind only Egypt ($28.3 billion) and Morocco ($11.2 billion). What falls under the heading of remittances is not limited to actual transfers, but includes the cash sums carried by expatriates and tourists arriving in Lebanon at different times of the year. While transfers take place throughout the year in largely equal amounts, the sums carried by arrivals to Lebanon are distributed across the seasons of the year, from the summer season to the Christmas and New Year holidays and the winter ski season, in addition to the Eid al-Fitr and Eid al-Adha seasons and other holidays that likewise witness the arrival of expatriates bringing whatever cash sums in foreign currencies they can. Conversely, some argue that escalating tensions on Lebanon's southern border and the possibility of wider confrontations with the Israeli enemy will drive the Lebanese to flee their national currency for foreign currencies, which would inevitably leave its mark in one way or another on the exchange rate. Yet this wave of flight already took place as the financial and economic crisis intensified from the end of 2019, and was entrenched and made more pervasive by the dollarization of consumer goods prices, which spilled over into services that in turn came to be priced in dollars. Rather, the feared pressure on the exchange rate lies in a rush to buy and stockpile goods, translating into growing demand for foreign currencies and consequently a rise in the exchange rate, given that most consumer goods are imported. Growing demand for goods also leads to higher prices for them, not merely a higher exchange rate, bearing in mind that even dollar-denominated prices were raised when the exchange rate declined, whereas today both the prices of goods and the exchange rate continue in relative stability. Based on the above, it can be said that the prospects for the stability of the Lebanese pound's exchange rate against the US dollar remain strong if Banque du Liban persists in preserving its foreign currency reserves and avoids getting drawn once again into financing the public budget deficit out of what remains of depositors' funds. It is worth noting that Banque du Liban's recent intervention to maintain the stability of the exchange rate, albeit on a limited scale, indicates that sustaining stability does not rest solely on refraining from squandering reserves, but requires a set of complementary measures and steps, most notably reviewing all circulars issued by Banque du Liban's governorship from the onset of the crisis to the present day. Nevertheless, this stability of the exchange rate remains fragile amid the ongoing presidential vacancy and deepening divisions among the political parties holding the fate of the country and its people in their hands, indifferent to the requirements of the national interest and to confronting the dangers lurking for the nation and its citizens. What makes the stability of the exchange rate even more fragile is that it is not underpinned by an economic plan with defined priorities and objectives, while no less consequential are the erosion of the state's role, the ineffectiveness of its institutions, and the deterioration of its services. The gravest threat to the stability of the exchange rate, however, lies in the possibility that escalating confrontations in southern Lebanon with the Israeli enemy could lead to a regional war converging with Operation Al-Aqsa Flood, and in the disruption that this could cause to all attempts to preserve the stability of the pound's exchange rate against the US dollar, indeed wiping out whatever pillars of the national economy remain. Is there anyone to spare Lebanon the imminent danger threatening it, its currency, and its economy?

Translated from Arabic with AI. Read it in Arabic