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Is dollarization best option for Lebanon’s collapsing economy?

In light of the continued collapse of the Lebanese currency, some are suggesting that the dollarization of the economy may be the best option to revive the country’s financial system.
A welcoming billboard is seen along the airport road in Beirut on June 22, 2022.

BEIRUT — After his car broke down on his way from Beirut to his hometown in the Bekaa in eastern Lebanon, Ramzi Kassem, a father of three and a public sector employee, had to pay $1,500 to replace his car engine.

“I pay $100 on a monthly basis in private generator fees. At the pharmacy, the price of medicines is set according to the daily exchange rate of the dollar, just like commodity prices at the supermarket. Everything is priced in dollars,” Kassem told Al-Monitor.

Hanan Mustafa, a young Lebanese woman in her 30s, paid $12 for a laboratory test she took in a hospital in Sidon in southern Lebanon.

“I had the option to pay in Lebanese pounds at the black market exchange rate (it stood at 33,000 Lebanese pounds to the dollar on that day), so it came to the same thing. I paid in dollars,” she told Al-Monitor.

Lama, a 26-year-old woman who hails from the south and works in Beirut (she did not want to reveal her full name), told Al-Monitor that she pays $170 in rent for a room in Beirut, and the landlord only accepts payment in cash.

“I can afford the rental because my salary is in dollars although I only earn $700. Salaries have dropped amid the current collapse of the local currency. Companies argue that $700 is worth about 21 million Lebanese pounds as we speak. While this figure might sound huge, it does not buy anything,” she added.

Goods and services such as household items, auto parts, clothes, health insurance, hospitals, rents and subscriptions are either sold in dollars or at the daily market exchange rate.

There is no official decision forcing people to price their items in dollars. However, one cannot deny the fact that the national currency has collapsed against the dollar.

Lebanon’s economy is chaotically and gradually becoming dollar-based, as the dollar has dominated the pricing, payment, trading and even people’s savings due to the collapse of the Lebanese pound since the economic crisis broke out in October 2019, leaving the country on the brink of total financial collapse.

A dollar-based economy is an economy in which the country officially adopts the dollar instead of its local currency. Some observers and economists believe this would be a solution to the current monetary crisis in Lebanon and a way to secure monetary stability. However, others are against such an economy on the grounds that clinging to the national currency would reflect the independence and sovereignty of Lebanon.

Patrick Mardini, president of the Lebanese Institute for Market Studies (LIMS), told Al-Monitor that dollarizing the economy would help the Lebanese people weather the current crisis and limit poverty.

“When institutions get paid for their goods and services in dollars, they guarantee a dollar margin that covers their employees’ wages and salaries. This also helps them manage to pay taxes and fees to the Lebanese state in dollars, which allows the state to dollarize the salaries it pays to public sector employees,” he added.

Contracts with employees in the public and private sectors would consequently be converted into dollars, Mardini added, which would alleviate the imbalance between the incomes and expenses of institutions in the two mentioned sectors.

According to Mardini, the Central Bank of Lebanon would buy, in this case, the Lebanese pound in circulation and the money in bank accounts and subsequently destroy it. This operation would cost between $3 billion to $4 billion and would put an end to the monetary crisis and the collapse of the national currency, he explained.

Many countries in the world have adopted a different currency than their local ones, such as France, Italy and Germany. The only difference is that these countries did not suffer from a severe economic and monetary crisis like Lebanon.

Minister of Tourism Walid Nassar issued a decision on June 2, allowing tourist establishments to set their prices in dollars until the end of September 2022.

According to Mardini, the decision proved to be successful, as “tourism revenues this year are estimated at about $4 billion, which is better compared to the previous two years.”

“I believe that one of the most important reasons behind the success of the tourism sector this year is the decision to dollarize prices, which should be extended to the winter season and all sectors such as industry and agriculture,” Mardini went on to say.

Economist Jean Tawile agrees. He told Al-Monitor, “The adoption of the dollar in the commercial, tourism and medical sectors, among others, and the Lebanese pound in other sectors such as the public sector would have dramatic repercussions in Lebanon, as it deepens the divide between the rich and the poor.”

“Currency is based on confidence. In Lebanon, people have lost confidence in the national currency, which is currently being printed out to secure public sector salaries,” Tawile said.

“How many dollars are left in the Central Bank? More than 80% of our economy is dollarized, so dollarizing the remaining percentage would be the best option,” he added.

“I was one of the people who clung to the local currency, but three years into the economic and monetary crisis, and after spending about $25 billion from the Central Bank reserves, and the political authority’s refusal to carry out any economic reforms, comprehensive dollarization seems to be the only option to stabilize the currency. Dollarization will force political parties to come up with a joint political decision in this regard,” he added.

However, Jad Tohme, a lawyer and coordinator of the Legal Committee at the Popular Observatory for Combating Corruption, does not believe in the option of comprehensive dollarization in Lebanon.

He told Al-Monitor that “the essence of the crisis lies in the bad monetary and financial engineering policies that caused inflation and led to the collapse of the national currency, knowing that the Central Council of the Central Bank is to blame for this because it handled the implementation of the Code of Money and Credit,” which covers the regulation of money. 

He added, “The national currency was supposed to be protected instead of letting it collapse.”

Tohme pointed out that it was not wise for Lebanon to default on the payment of its Eurobond debts in March 2020. While such dues were worth $1.3 billion, the Central Bank reserves stood back then at about $37 billion. The default destabilized the financial situation of the country and led the economic crisis to degenerate to the worse, he explained.

Tohme further said, “To get out of the current crisis, the laws in force, namely the Code of Money and Credit, should be implemented under a clear monetary policy. Also, the Central Bank and the public prosecutors should control the black market, while the official exchange rate should be unified. In addition, a transparent financial policy and a new financial engineering policy should be introduced to take into account people’s interests in restoring their deposits. These are the key headlines that an integrated reform plan should be based on.”

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