A Return to Promoting a Fall in the Value of the Pound
Recent forecasts by Standard & Poor's Global of a sharp decline in the value of the Lebanese pound over the next three years have raised questions about the motives behind these negative projections on the one hand, and how closely they reflect reality on the other. This is especially true given that these forecasts bring back to the minds of the Lebanese the scenes that accompanied the collapse in the value of the Lebanese pound since 2020, along with the analyses and perhaps the "wishes" of some during that period for the pound to collapse to unprecedented levels. Yet developments witnessed in the Lebanese economy and the measures adopted by Banque du Liban since the beginning of summer 2023 have helped halt this collapse, even if only in terms of the nominal value of the pound.
The international agency's forecasts are divided into three stages. In the first stage, it expects the exchange rate of the Lebanese pound against the US dollar to reach 115,000 in 2025, and 136,000 in the second stage by 2026, while in the third and final stage in 2027 the pound is projected to record the equivalent of 152,000. Notably, the exchange rate of the pound against the US dollar had reached 140,000 pounds at the end of March 2023, before stabilising at its current rate.
In its forecasts, the international agency relies on the numerous challenges facing the Lebanese economy, most notably rising security risks in Lebanon due to the ongoing clashes between Hezbollah and the Israeli enemy, as well as prolonged political paralysis under the caretaker government. These forecasts are also based on a lack of investor confidence, economic instability, monetary policy's lack of the required flexibility, and the high dollarisation of the economy.
In its report issued last May, the International Monetary Fund considered economic reforms in Lebanon insufficient to help resolve the economic crisis in which the country is mired, alongside the worsening Syrian refugee crisis. Meanwhile, S&P Global took the view that weak governance and low institutional effectiveness were among the reasons for its persistence. Indeed, the failure to achieve tangible progress on the required reforms across multiple levels, much like the delay in debt restructuring in the foreseeable future, exacerbates and prolongs the crisis.
However important the reasons cited by both the International Monetary Fund and S&P Global may be, the scarcity, not to say the absence, of official financial data calls into question how connected their forecasts are to Lebanon's actual financial and monetary reality. Indeed, it makes these forecasts closer to speculation or wishful thinking on the part of their authors, and they can only be placed within the context of ongoing pressure on the Lebanese economy by besieging its monetary tools after undermining its banking system.
On the other hand, pegging the exchange rate of the Lebanese pound against the US dollar at 89,500 pounds does not mean that the real exchange rate remains at the same level as when it was adopted at the end of July last year. In particular, the fallout from the Russian-Ukrainian war has driven up food commodity prices, just as the war on Gaza has led to higher shipping rates that have raised the cost of all goods. This reflects negatively on the value of the pound, or its purchasing power, even if the nominal exchange rate remains unchanged.
While the dollarisation of the national economy has contributed to the stability of the nominal exchange rate by preventing speculation against the pound, this has not prevented a decline in its purchasing power due to rising prices and their inflationary repercussions. Even so, the decline affecting the value of the Lebanese pound, just as it affects other national currencies, remains within the bounds of global inflation rates despite the financial and economic crisis in which Lebanon is mired.
Framing the scenarios projected by the agency S&P Global regarding the decline in the value of the Lebanese pound over the next three years as a new collapse, with all the economic and social repercussions that entails, cannot be considered objective analysis. This is particularly so given that these forecasts coincide with threats by the Israeli enemy to wage a full-scale, devastating war against Lebanon, even though the exchange rate has remained stable amid the ongoing clashes in the south for more than ten months.
Although financial and economic reforms remain out of reach given the caretaker government's refusal to adopt an economic recovery plan with clear features and directions, the size of the national economy has been growing steadily following the contraction it suffered in the wake of the financial and economic crisis and the COVID-19 pandemic. Moreover, Banque du Liban's reserves are increasing steadily, albeit at modest rates, which helps stabilise the value of the pound and its purchasing power, rather than the reverse.
In the face of these emerging analyses and forecasts regarding the future of the national currency and its purchasing power, it is imperative to unify and liberalise the exchange rate of the Lebanese pound. Five years into the crisis, the time has come for the fiscal and monetary authorities to unify the exchange rate, after nearly a third of the value of deposits has been deducted and the remainder continues to be withheld jointly and severally with the banks. The same applies to the necessity of liberalising the exchange rate so that it reflects the actual value of the national currency, especially since pegging the exchange rate against the US dollar has deepened the financial and monetary crisis, compounding its severity and its economic repercussions.
Translated from Arabic with AI. Read it in Arabic