Between Unifying the Exchange Rate and Liberalizing It

Ahead of the payment of public-sector salaries for military personnel, civil servants and retirees at the end of 2023, the acting governor of Banque du Liban adopted an exchange rate of 89,500 Lebanese pounds to the dollar, instead of the 85,500 rate he had continued to apply for the same purpose since assuming his duties at the beginning of last August. This points to a move toward ending the multiple exchange rates of the Lebanese pound against the US dollar, which has become an urgent matter, even though it faces the obstacle of Banque du Liban's diminished ability to intervene in the foreign exchange market to keep exchange-rate fluctuations within a specific margin, and requires a set of measures that allow for liberalizing the exchange rate rather than merely unifying it. Conversely, abolishing the Sayrafa rate and adopting the parallel-market rate to pay salaries inflicts direct harm on military personnel, public-sector employees and retirees, as they lose nearly 5% of their salaries as soon as Banque du Liban applies this rate to salary dollars. It is as if what has already befallen the salaries of public-sector employees in general, and members of the military and security agencies and retirees in particular, in terms of decline and eroded purchasing power, were not enough, given that their salaries today do not exceed 10 percent of what they were before the collapse of the national currency. Nor is this the first time Banque du Liban has adopted a fixed exchange rate for the pound against the US dollar; it previously adopted a rate averaging 1,507.5 in 1993 that lasted until the end of 2019, when the bank was able to intervene in the foreign exchange market to maintain that rate. During the crisis and up until its latest decision, the bank applied more than one rate for the pound against the dollar simultaneously, under circulars governing withdrawals and banking transactions. Fixing the exchange rate of the pound against the US dollar amounts to pegging the pound to the dollar, which prevents the exchange rate from reflecting either the strength or the weakness of the pound, especially since the pound is the mirror of the national economy. Monetary authorities often resort to fixing the exchange rate in order to secure a suitable environment for investment, in which the national currency is relatively stable and its fluctuations are confined within narrow margins. This is particularly so because fixing the exchange rate helps boost economic growth and curb inflation, encouraging foreign capital inflows to finance productive investments. Yet Lebanon's fiscal and monetary authorities failed to respect the aforementioned considerations with regard to encouraging investment, achieving growth and curbing inflation, as the use of the foreign inflows available to Lebanon since the early 1990s was confined to expanding government spending, with all the burdens that entailed. Fixing the exchange rate during the period mentioned above did not come without a price; rather, it cost Banque du Liban vast sums paid in interest to attract liquidity from domestic and international markets. The national economy also bore its share of the cost of fixing the exchange rate and pegging it to the US dollar, due to declining domestic and foreign investment in Lebanon and its rising cost, along with the resulting increase in the cost of national production and the erosion of its competitiveness in global markets. The ceilings reached by interest rates throughout that period prevented available liquidity from being channeled into investments and contributing to economic growth. Through the Sayrafa platform, Banque du Liban attempted to control the exchange rate, but its attempt ended in failure, especially after the platform's role became restricted to providing cash dollars to favored individuals and institutions. Whereas the exchange rate recorded on the Sayrafa platform was supposed to serve as the benchmark within whose margins trading would take place in the money market, those running the platform relied on the prevailing exchange rate in the parallel market, applying a certain margin to set the Sayrafa rate, which closed at 85,500 pounds before recently being discontinued. Unifying exchange rates is achieved by adopting a single exchange rate for all monetary, fiscal and banking operations; it would put an end to speculation against the pound and curb opportunities to make profits at its expense, help ease pressure on Banque du Liban's foreign-currency reserves, and pave the way for liberalizing the exchange rate, which is determined by market forces through supply and demand for foreign currencies. Notably, the issue of unifying exchange rates constitutes one of the prior reform conditions set by the International Monetary Fund, and a gateway to the agreement that would allow Lebanon to obtain a three-billion-dollar loan from the fund. Although unifying exchange rates hinges on a decision by the fiscal and monetary authorities (the fiscal authority through the exchange rate adopted in the general budget, and the monetary authority by rescinding the circulars, each of which contains a different exchange rate), the success of this unification requires the legislature to pass a package of interconnected reforms enacted and implemented simultaneously. Moreover, it is impossible to enact and implement any of these conditions in isolation from the others, and the primary goal must be to liberalize the exchange rate, not merely to unify it. The issue of liberalizing the exchange rate has become a mandatory pathway to monetary reform, whether an agreement with the International Monetary Fund is reached or not. Pursuing reforms in general, and fiscal and monetary reforms in particular, has become urgent and indispensable for economic recovery and for getting the wheel of growth turning once again. This is especially true given that fixing the exchange rate and pegging it to the US dollar over 27 years constituted one of the main causes of the financial and economic crisis in which Lebanon is mired, and any attempt to address this crisis must tackle liberalizing the exchange rate. There are fears that liberalizing or floating the exchange rate could trigger sharp fluctuations in the value of the national currency, causing the dollar to jump to unprecedented record levels whose consequences the Lebanese cannot bear. In particular, volatility in the pound's exchange rate would translate into instability in prices, which, although mostly dollarized, still include many prices, as well as fees and taxes, denominated in the national currency. Above all, intervention by Banque du Liban in the foreign exchange market to prevent wide swings in the pound's exchange rate has become a thing of the past, as it is impossible for it to intervene the way it formerly did after the former governor squandered Banque du Liban's foreign-currency reserves and failed to attract new deposits. Banque du Liban's adoption of the average parallel-market dollar rate to pay salaries is, in practical terms, the beginning of liberalizing the exchange rate. It also frees Banque du Liban from the losses it had been incurring as a result of the gap between the exchange rate of the pound against the US dollar in the parallel market and the Sayrafa rate, and aligns as well with what the acting governor of Banque du Liban, Dr. Wassim Mansouri, had announced regarding not financing the government under any guise. As for fears that liberalizing the exchange rate will cause the US dollar to rise against the Lebanese pound, they are belied by the stability of the parallel-market rate so far, which appears poised to continue. The monetary policies adopted by the new leadership of Banque du Liban have proven sound in halting state financing from the remaining reserves at a time when its monthly revenues have reached nearly 20 trillion Lebanese pounds. These policies coincided with a thriving tourist season marked by the injection of large sums of cash dollars by tourists and expatriates, and liberalizing the dollar exchange rate today coincides with the Christmas and New Year holidays, which witnessed notable prosperity despite the escalating military confrontation with the Israeli enemy in southern Lebanon. Meanwhile, the warnings issued by some experts about the perils of liberalizing the exchange rate run counter to the realities unfolding in the foreign exchange market, where exchange-rate stability has persisted despite the absence of domestic political consensus and despite escalating military and security threats. The adaptation of the Lebanese to the financial and economic crisis, or "normalization" with the crisis, to use the term coined by the World Bank, is nothing new and is the secret behind their resilience in the face of collapsing purchasing power and lost savings. Neither did they benefit from the subsidies that squandered nearly 18 billion US dollars in reserves, nor was the creation of the Sayrafa platform meant to supply them with cash dollars. Here it must be reaffirmed that continued evasion of fiscal and economic reforms is impermissible; such reforms must not be undertaken merely to please the International Monetary Fund, but rather must proceed in parallel with and in support of Banque du Liban's policies. It is illogical for the monetary policies enacted by Banque du Liban to stand in for the state's fiscal and economic policies, which must be determined by the relevant ministries, after Lebanon and the Lebanese reaped the disappointments of those policies in a financial and economic crisis whose repercussions we are still dragging behind us to this day. Although the dimensions and repercussions of the Lebanese crisis are eminently financial and economic, the true nature of the crisis lies in the political system based on power-sharing among political factions, which treat power as fiefdoms for exercising their influence and securing the means of its perpetuation. The classification of ministries into sovereign portfolios and less important ones, and their distribution on a sectarian basis, turned them into spoils for those holding political decision-making power, leaving no place in them for the public interest. Rectifying the relationship of these factions with state ministries and institutions is a prerequisite for the success of the desired remedies, such that everyone who assumes responsibility in the Lebanese state, from the top of the pyramid to the bottom of the base, is subject to questioning and accountability away from sectarian and political protections. Addressing the crisis also requires adopting good governance that places competence ahead of all other considerations, elevating the standard of the public interest above any other criterion, and respecting the laws and regulations in force and abiding by their requirements. Otherwise, monetary policies and attempts to unify and liberalize the exchange rate will be of limited effectiveness, indeed little more than a cry in the wilderness.

Translated from Arabic with AI. Read it in Arabic