The repercussions of the devaluation of the national currency from 1,500 lira to 15,000 continue to unfold. The justification provided by the Ministry of Finance, claiming that the new exchange rate would be coordinated with the central bank, is arguably worse than the sin itself. Attempts to assuage concerns by suggesting a gradual implementation, along with efforts to mitigate social effects, are akin to pouring "gasoline" on the "match" of inflation, and awaiting the spark of social upheaval to burn what remains of a floundering economy.
Should the exchange rate be adjusted according to the version presented by the Finance Minister and confirmed by caretaker Prime Minister Najib Mikati, a host of legal violations, monetary errors, and increased living costs will be the burdens of this devaluation. Legally, lawyer Antoine Marab underscores that "there is no official exchange rate for the national currency. Instead, there is a legal rate defined in Article 229 of the Monetary and Credit Law.” He argues that the invention of the 1,515 rate, maintained as an official rate for two decades, and the central bank's right to change it at will, is a common mistake solidified by the Governor in 1997 with the backing of the then-Prime Minister when he agreed to fix the exchange rate at 1,515 lira per dollar. Changing the exchange rate determined by the Monetary and Credit Law, which explicitly states that the legal rate for the U.S. dollar in Lebanon is tied to the free market rate, requires a law issued by Parliament.”
According to Article 229 of the Monetary and Credit Law, paragraph (1), "The Lebanese pound shall rely on the U.S. dollar, which is defined as 0.888681 grams of pure gold, with a real, transitional legal rate close to the free market price." Hence, neither the Ministry of Finance nor the central bank has the authority to alter the exchange rate in any manner; this power lies with the lawmakers in Parliament. The system has long deceived itself, and today it places the authority to change or rather fix the exchange rate at a lower level in the hands of the very officials responsible for this collapse, namely the Ministry of Finance and the central bank governor, Marab states. "This will exacerbate issues and complicate matters. As long as the same financial and monetary political clique holds economic files, nothing will change. On the contrary, the repercussions will be catastrophic across various levels."
Monetarily, considering the new rate as a “fundamental step towards unifying the exchange rate” was the second mistake made by the Finance Minister. The new rate will join the basket of existing rates, complicating the move to a single rate, especially since it does not eliminate the old rate of 1,515, which many banking transactions, including personal loans and budget preparations, will continue to be based on. Furthermore, the new rate, which is 38% of the prevailing rate in the parallel market, obligates continued intervention by the central bank to defend it with substantial sums reaching today’s value of 24,000 lira per dollar. This will lead to the continued depletion of mandatory reserves and all remaining foreign currencies at the central bank, especially the special drawing rights allocated by the IMF, totaling $1.139 billion.
From a practical standpoint, what concerns citizens amidst this "financial and legal maelstrom" is how the new exchange rate will affect their daily lives, particularly regarding payment of fees, taxes, bank loans, and increases in the prices of goods, services, and consumer products. Article 229 of the Monetary and Credit Law stipulates that taxes and fees collected on amounts cleared in foreign currencies must be based on the "transitional legal rate" and that implementing the new exchange rate should not lead to any increases in the taxes and fees collected on amounts cleared in foreign currencies. The Finance Minister must determine through decisions the means to ensure this principle. Foreign currencies collected by the state are accounted for at the transitional legal rate, and expenditures defined in Lebanese lira should now be converted at the free market rate.
Thus, all taxes and commercial transactions, whether with foreign parties or domestically, will be calculated based on the new exchange rate. According to Economic and Social Council member Adnan Ramal, this also applies to commercial loans denominated in dollars, which are collected based on Circular 568 with "lollar" checks or at an exchange rate of 8,000 lira. "These will become payable at a rate of 15,000 lira, while personal loans will remain based on the 1,500 lira rate until an undefined future date." Regarding taxes calculated in Lebanese lira, these will inherently rise when the exchange rate becomes 15,000 lira, including taxes on property registration, transfers, inheritance, rental values, municipal taxes, and vehicles... among others. This is because the valuations rely on their dollar value, which will increase in line with the rise in the official exchange rate.
A significant increase in the VAT
If the exchange rate adjustment occurs, it will also lead to an increase of 10 times in the VAT. "Calculating customs fees at 15,000 lira instead of 1,500 lira, along with adding transportation costs and port fees to invoices at the rate of 15,000 lira per dollar, will cause a substantial increase in the VAT," Ramal states. The final value subject to VAT on invoices will multiply all its components by 15,000 lira instead of 1,500 lira. Consequently, the VAT amount will become excessively significant. According to Ramal, "The reduction in average shipping costs, specifically for goods imported from China by half, slightly reduced the final cost on the invoice subject to VAT. Otherwise, the cost would have been much higher."
A real dilemma
The implications of changing the exchange rate from 1,500 lira to 15,000 lira will be substantial and burdensome on citizens and the productive sectors of trade and services. However, according to Ramal, "It is impossible to continue calculating transactions based on the old rate," because it undermines state revenues and leads to a significant imbalance between revenues and expenditures. It renders the state incapable of funding public services, whether in health or education. If it refrains from doing so, citizens will have to bear multiple burdens to secure alternatives from their own pockets." Thus, we have fallen into a real dilemma that is difficult to escape. Taxes will increase tenfold, while salaries have not risen at the same rate. Public sector wages have been decimated by a factor of three, while the private sector has adjusted employee salaries, albeit at rates that remain below inflation and increased taxes and fees."
At a time when budget figures in the years before the crisis estimated expenditures at around $16 billion and revenues at $11 billion, these figures have now plummeted to just over $1 billion in expenditures and $800 million in revenues. These figures, if they indicate anything, highlight the enormous drop in revenues that allows the state to spend on essential services and development operations," says Ramal, "and the significant deprivation citizens face due to the huge decline in expenditures."
