BEIRUT — An economic and financial crisis looms over Lebanon, the third-highest indebted country in the world in terms of debt-to-gross domestic product ratio, which stood at 151% in 2018.
“Given the large public debt … [Lebanon's] interest payments now exceed 9% of GDP,” the International Monetary Fund (IMF) said in a July report. The IMF also said, “Deposit growth in 2018 was the lowest since 2005 and the BdL [Bank of Lebanon] reserves have now decreased by around $6 billion since early 2018.”
The crisis comes with strict banking procedures. Lebanese banks imposed restrictions on deposits and capped withdrawals. They also suspended housing loans and froze transfers abroad. This led to a US dollar scarcity in the Lebanese market and increased its exchange price against the Lebanese pound. The dollar reached 2,400 Lebanese pounds at the money changers in late November, before settling between 1,980 Lebanese pounds and 2,000 Lebanese pounds in sales and purchases during the second week of December. The official rate, however, remained Dec. 20 at 1,507.5 Lebanese pounds on the Beirut Stock Exchange.
Remarkably, the exchange rate in Syria also gyrated, hitting 1,000 Syrian pounds against the US dollar, while its value set by the Syrian Central Bank remained at 434 Syrian pounds.
This has led many to wonder about the connection between the two monetary crises. Some Lebanese fear that large amounts of dollars are being smuggled from Lebanon to Syria. But the dollar scarcity in Lebanon has led to the same condition in Syria. Many Syrians hold bank accounts in Lebanon, which at one time was a much more stable market. Now, though, these accounts are being frozen or restricted.
US sanctions prohibit American financial institutions from doing business with Syrian banks.
Meanwhile, more than 1 million Syrian refugees are registered with the UN High Commissioner for Refugees in Lebanon. The Lebanese government estimates the actual number at 1.5 million Syrians. Add to this the Syrian merchants who deposit their money in Lebanese banks.
A Norwegian Refugee Council report quoting World Bank data showed 17% of remittances to Syria come from Lebanon, second only to Saudi Arabia, with 29% of total financial remittances.
Al-Monitor spoke to Union of Money Changers Vice President Elias Srour, who commented on the fluctuations in the exchange rate of the dollar against the Lebanese pound. “Banks started taking measures to limit the sale of the dollar before the outbreak of the Oct. 17 revolution.”
He believes that any crisis affecting the money market is political. “People will regain confidence in the banking system in Lebanon when a trustworthy government is formed," he said. "The economy, politics and security are three interconnected factors.”
Srour pointed out that the money-changing market in Lebanon includes 300 companies with a daily turnover of around $10 million, which is not a significant number compared with banking transactions.
“Money changers are mediators between the seller and the buyer, and the rate of demand for the dollar increased during November," he said. "When the crisis started, the Lebanese people deliberately withdrew their funds in dollars from banks and kept them at home. These amounts are estimated at $4 billion. Seeing the high exchange rate of the dollar, Lebanese people stopped paying in dollars and resorted to money changers to exchange their dollar amounts to the Lebanese pound to raise their purchasing power before heading to the market and pharmacies.”
Regarding the supposed smuggling of the dollar to Syria, Srour argued that the money changers did not witness an influx of Syrians exchanging their currencies against the dollar, as Lebanese merchants represent more than 80% of money changers' clients, while other citizens make up the remaining 20%. He indicated that the exchange rate of the dollar is between 1,980 Lebanese pounds and 2,000 Lebanese pounds for buying and selling transactions.
Of note, the BdL has been pegging the Lebanese pound to greenbacks through what has come to be known as “financial engineering.” But at a Nov. 11 press conference, BdL head Riad Salameh stated, “We went through challenges, including the Syrian war, that turned the balance of payments from a surplus-registering balance to a deficit balance, and economic growth declined from 5% to 2%.”
A study — drafted by Kinan Yaghi, vice CEO of the Damascus Securities Exchange, and published Nov. 20 by the Damascus Center for Research and Studies (Medad) — noted that the Syrian pound in early November reached the lowest level in its history, with the exchange rate hovering around 715 Syrian pounds against the dollar on the black market. News websites reported that rate jumped to 1,000 Syrian pounds the first week of December.
In his study, Yaghi asserted that Lebanon's economic crisis negatively affected the Syrian pound exchange rate. He explained that this was due to several BdL measures.
“The BdL banned money changers and traders from [transporting large amounts of] cash through Rafik Hariri International Airport and border crossings," he said. "It required money changers to obtain prior authorization to transfer money and to do so through licensed money exchange companies. Previously people could transfer large amounts of dollars in cash outside Lebanon by getting the permission of the Lebanese customs authorities only.”
He added, “The capping of amounts that depositors, including Syrians, are allowed to withdraw — deposits estimated at tens of billions of dollars — also affected the Syrian pound exchange rate.”
For his part, Nassib Ghobril, head economist at Byblos Bank, noted Lebanon’s financial crunch started in late 2017; economic growth for that year was 0.6%.
“At the time, the Lebanese government imposed new taxes on consumption, movable funds and official formalities," he told Al-Monitor.
“The rise in the import of oil derivatives in Lebanon during 2019 to 8.2 million tons during the first seven months — almost doubling from 4.8 million for the same period of 2018 — is among the crisis triggers. Diesel imports increased more than fourfold from 1.1 million tons to 4.7 million tons. Some of the diesel quantities were sold to Syria, which enlarged Lebanon’s oil import bill. Lebanon buys oil derivatives in dollars and sells them to Syria in the Syrian currency, or in exchange for commodities or industrial goods," he said.
The main reason for the current financial crisis, Ghobril believes, remains the lack of serious political will to implement reforms that would boost confidence, lead to the injection of capital and reduce the deficit: “The solution is forming a credible government that will take serious measures, cause a positive shock to the commercial markets and beef up the confidence of expatriates and consumers.”
He noted that the money-changing market represents 4% of the monetary mass of foreign currencies and he asserted that Syria's economy is different than Lebanon's. “The BdL is taking measures commensurate with the financial stability of Lebanon,” Ghobril affirmed.