Lebanon devalues official exchange rate by 90%

Lebanon has devalued its currency by 90 per cent as it seeks to address a deep economic crisis, in a move that still leaves the pound far above its parallel black market rate.

The Banque du Liban said on Wednesday that it was setting the Lebanese pound, pegged at a fixed rate of L£1,507 to the dollar since 1997, at a new rate of L£15,000. This is still well below the L£60,000 to the dollar where the parallel currency was trading at the time of the central bank announcement.

The devaluation could stoke fears of further price rises in a country where the annual inflation rate for 2022 topped 170 per cent, according to official figures. Analysts said it was a costly stop-gap in the absence of wider structural reforms to Lebanon’s troubled economy.

“Fundamentally these measures don’t meaningfully address the causes of the crisis, which are the large financial sector losses,” said Mike Azar, a Lebanese economist. “What’s been needed for the past three years is a broader economic recovery plan with a restructuring of the financial system, not another piecemeal measure.”

The BdL said the change was a step towards unifying Lebanon’s various exchange rates in an effort to meet the demands set out in a draft deal reached with the IMF last year.

But experts cautioned it was unclear how that would be the case: Lebanon has multiple exchange rates that govern depositors’ withdrawals from frozen bank accounts, customs duties, public sector salaries, fuel prices and telecommunications, among others.

Nasser Saidi, a former economy minister and ex-deputy central bank governor, called it a continuation of the “failed exchange rate pegging/fixing policy that has generated the biggest financial crisis in history”.

The Lebanese pound has slumped since the country went into financial meltdown in 2019, losing more than 97 per cent of its value against the dollar on the parallel market.

The finance ministry last September announced it would devalue the pound, but walked back the decision amid criticism that it did not have the necessary authority. Instead the ministry applied new rates to areas within its purview, including customs and tax collection rates.

Saidi said that the new L£15,000 rate was “75 per cent below the effective market rate of L£60,000 as well as below the so-called Sayrafa rate of L£38,000,” the latter referring to the central bank’s exchange platform. “This just adds to the multiple exchange rates that lead to severe market distortions.”

Although the government reached a draft IMF agreement in April, the deal was contingent upon implementing divisive economic and political reforms, which have yet to be agreed. This has fuelled speculation in Lebanon that the deal might not ever be finalised.

Unifying the exchange rates is one of the IMF’s key prerequisites to unlock a $3bn loan facility, widely seen as the only way for the country to begin recovering from the crisis and restore confidence in its financial system.

“But the measure doesn’t actually unify the exchange rate,” Azar said. “It just created another one and created uncertainty over when and how the banks will be able to cover their foreign currency losses, both contrary to the deal negotiated with the IMF.”

Lebanon’s problems, which the World Bank has called one of the world’s worst economic crises of the past 150 years, have left the majority of people locked out of their deposits and more than three-quarters of the population in poverty.

The collapse in the currency has meant most people have been unable to access their dollar savings or have been forced to make withdrawals in pounds at punishingly low rates, in the absence of formal capital control laws to stem financial losses that the government and World Bank put at more than $70bn.

Most transactions in Lebanon — from supermarket shopping to phone bills — are now done almost exclusively in cash at the fluctuating parallel market rate. Lebanese use mobile apps to track the fluctuations before making transactions in prices that can change hourly. The desperation has even pushed a handful of people to hold up banks at gunpoint, in order to access their own funds.