Lebanese central bank's injection of U.S. currency to stabilize Lebanese pound inefficient

Source: Xinhua | 2020-06-18

Lebanese Central Bank's decision to inject U.S. dollars into the licensed exchange market to meet the needs of citizens and importers and stabilize Lebanese pound was not met favorably by local experts.

Vice President of the Syndicate of Money Changers in Lebanon Mahmoud Halawi announced last week that the central bank will inject dollars on a daily basis.

Halawi said that money changers will be disciplined in selling the dollar at a price of 3,940 Lebanese pounds compared with 5,000 pounds per dollar in the black market.

The new mechanism allows people to exchange their Lebanese pounds at licensed money exchange shops by submitting documents proving their needs for U.S. currency.

Citizens are only allowed to purchase 200 dollars per month.

Meanwhile, Lebanese Central Bank Governor Riad Salameh said that the central bank has started injecting around 4 million dollars daily since Monday in an attempt to stabilize the price of the U.S. dollar to the Lebanese pound.

However, local economists and experts do not seem upbeat about the central bank's move while urging officials to take measures that would restore confidence in Lebanon and contribute to strengthening the local currency.

"What we are asking the central bank to do is use depositors' money to supply the market with dollars and protect the value of the currency," Adel Afiouni, former information technology minister, told Xinhua.

"The reserves that the central bank currently owns have to be used wisely to supply the country with basic imports and products rather than to supply it with dollars that can only support the value of the pound for a few weeks or months at maximum," Afiouni added.

Lebanon has witnessed in the past few months a shortage in dollars amid an economic slowdown, the drop in cash injections from Lebanese abroad, and money transfers by big depositors to foreign countries.

Currently, the Lebanese central bank's foreign reserves, valued at about 20 billion dollars, can barely cover the country's needs for wheat, oil and medical products.

Patrick Mardini, president of Lebanese Institute for Market Studies, told Xinhua that exchange shops can only satisfy part of the Lebanese population's need for U.S. currency while the rest of the population will have to go to the black market, which will lead to a further weakening of the Lebanese pound.

"If the cabinet attempts to suppress the black market, we will witness a famine scenario in the country over a lack of products in the market," Mardini explained.

Experts believe that long-term reform measures need to be taken to stop the deterioration of the Lebanese pound.

Afiouni recommends the adoption of confidence measures such as encouraging consumption of local products, reducing the import of non-essential goods and focus on local production.

"We will need less dollars in this case," he said.

Afiouni also suggests controlling the circulation of dollars outside the borders.

On the supply side, Lebanon needs to attract more dollars into the country through more exports, tourism and remittances, he said.

"Since investments in the country are not possible for the moment amid a lack of confidence, we should seek foreign aid from international institutions to help us address the imbalance progressively," Afiouni added.

Mardini believes that the central bank must stop printing Lebanese pounds which attributed to weakening the pound and causing hyperinflation.

"The government is printing Lebanese pounds to finance its expenditures but in normal scenarios, the cabinet must use its tax revenues to finance its expenses," he said.

For Mardini, the long-term solution would be creating a currency board within the central bank.

The currency board will create disciplines in the financial system by being responsible for issuing the Lebanese pound and trading the pound at an absolutely fixed exchange rate with the dollar since the board would have dollar reserves that are 100 percent capable of backing the local currency.