The exchange rate of the Lebanese pound against the dollar has developed resistance to all "ineffective antibiotics" that have been "injected" into the veins of monetary policy. Misguided measures taken to control the collapse of the national currency have led to surges that no traditional remedy in the arsenal of the "Central Bank" can address. The occasional calmness and improvement of the pound, along with the excessive injection of dollars, have only prepared the ground for a widespread "virus" of exchange rate collapse.
Despite the Central Bank exhausting around $2.3 billion in the first half of this year to support the national currency, the average exchange rate has not dipped below 29,000 pounds. The exchange rate peaked at around 20,600 pounds in February, then rose to 37,000 pounds on May 27. It only returned to around 29,000 with the Central Bank injecting $196 million in one day into the Sayrafa platform. After the elections, when the Central Bank ceased significant dollar interventions on the platform, the exchange rate deteriorated further, surpassing 31,000 pounds and indicating further declines.
**IIF Predictions on Future Exchange Rate**
Controlling the exchange rate under these conditions requires enormous amounts of dollars that are impossible to secure regardless of how many financial engineering measures are applied. Sources of hard currency are extremely limited, and aside from the significant weight of the remaining mandatory deposits that cannot be touched (theoretically), there are no currency exchange operations accounting for approximately 10% of money transfers via remittance companies, nor tourist money, nor profits from Middle East Airlines and Casino Lebanon that would suffice for intervention. Consequently, "the exchange rate in the black market will continue to decline to more than 40,000 Lebanese pounds by the end of 2022, and will reach 110,000 pounds by the end of 2026," according to the pessimistic scenario from the Institute of International Finance (IIF), which is one of two scenarios presented in the report titled "Lebanon: Escalating Challenges."
In the pessimistic scenario, which assumes that parliament will continue to obstruct critical reforms and delay the approval of laws concerning previous measures, there will be no agreement with the International Monetary Fund, nor will there be financial support from the international community. In the absence of financial assistance from the IMF, the World Bank, and other official sources, the official reserves available will drop to below one billion dollars by 2026, meaning the Central Bank will have to utilize most of the mandatory requirements owed to commercial banks.
**The Problem with the Cash Economy**
"Any discussion regarding the reality and future of the exchange rate of the pound against the dollar, without complete clarity regarding the balance of payments, is mere theorizing," according to Paul Abi Nassar, a member of the Board of Directors of the Industrialists Association. "Local and international estimates mostly lack accurate information due to the expansion of the cash economy. It becomes almost impossible to calculate the volume of supply and demand for dollars and the proportion of the latter actually used in the economic cycle compared to what is stored."
**The Central Bank's Reluctance to Intervene**
Given this ambiguity, it is certain that the dollar's non-decline and its stability at around 29,500 pounds over the last three months are due to the Central Bank’s reluctance to inject dollars into Sayrafa at a sufficient ratio. "The Central Bank left during this period the task of supplying dollars to tourists and expatriates who began flowing into Lebanon since the beginning of June," according to Abi Nassar. "This reduction in the Central Bank’s intervention prevented the dollar from declining as expected before the start of the summer and tourism season." Particularly, the dollar's supply might have ranged between $1.5 billion and $2 billion, assuming that the number of tourists and expatriates ranged between 1 and 1.5 million, with an expenditure average of between $1,000 and $1,500 per individual.
**Fate of the Exchange Rate**
Based on the above, it is clear that the fate of the exchange rate of the pound against the dollar is tied in the coming days to two main factors: first, the Central Bank's ability, after the departure of tourists and expatriates, to continue intervening on the Sayrafa platform with sufficient quantities to meet demand, and the cost of this intervention. The second and most crucial factor is the ability to stabilize monetary operations and precisely determine the balance of payments size.
To achieve the second condition, a "set of essential steps must be taken to restore confidence in the banking system and significantly restrict monetary operations," in Abi Nassar's view, including:
- Restructuring the banking sector.
- Determining all cash flows entering and exiting the country.
- Opening the Sayrafa platform to all traders, making it the sole platform for currency transactions with absolute transparency, thereby automatically determining the fair exchange rate, clarifying the actual trading volume, and defining the scale of monetary operations.
Without serious and effective measures, the exchange rate will remain susceptible to significant fluctuations, and nothing will prevent the pound from continuing to fall against the dollar. This will exacerbate the crisis in the coming days, aggravate suffering, and accelerate the collapse solely for the advantage of speculators and certain beneficiaries. If we exclude the factors of trust and speculation, the pressure on the pound today is economically unjustified. The trade balance deficit estimated today at around $9 billion can be easily covered by export revenues exceeding $3 billion, remittances estimated at $6.7 billion, and other unrecorded transfers," according to Abi Nassar. In principle, the trade balance represents the primary and large demand for dollars. This means that the enormous demand for dollars resulting from the rampant printing of pounds is either being smuggled abroad or stored in homes. There is no hope for achieving stability in the exchange rate except with the cessation of these phenomena and the return of stored funds to the economic cycle or commercial banks. Ultimately, this requires fundamental reforms.
Just as all roads lead to Rome, the conditions for reducing the exchange rate lead to the necessity of achieving fundamental reforms. Without these reforms, the pound will remain hostage to patchwork monetary measures, which would deepen the crisis and increase the collapse of the purchasing power of the national currency.
