Firas Saleem wrote for mtv
Economists have defined inflation as an increase in the volume of money in the market, which results in a loss of the real value of the local currency, and is matched by an increase in the price of goods and services. This is what happened in Lebanon in the 1980s and this year, as the country suffers from “pent-up” inflation for the increased injection of paper money into the market and “imported” inflation resulting from the impact of the high prices of imported goods.
One of the reasons for the collapse of the lira at the end of the eighties was the focus on printing it to “smuggle” the dollar from the market, as large quantities of it were pumped into the market and the currency collapsed. In addition to speculation on the currency on the black market, what the BDL is currently doing by printing a local currency and pumping it into the market is very similar to what it did in the eighties. And the great fear that pumping the currency into the market is matched at the other end by a national currency that is stored in homes that is also subject to collapse in the market at any time its owners decide to do so, which will lose control of the monetary mass of the national currency in a way that does not fit the size of the real economy and the value of the GDP, which, by the way, diminishes. Dramatically, for big reasons, the last and most cruel was the tragedy of the Beirut bombing on August 4.
The inflation rate of any country is in line with the rate of growth of its monetary mass in the local currency. At the present time, a large part of the monetary supply in Lebanon is outside the banking system, where the main monetary challenge lies in returning it to prevent black market speculation. It would have been more useful for the resigned government to set its sights on how to find appropriate economic solutions that prevent the exchange of the national currency in dollars and paralyze speculative operations in the parallel market, instead of focusing on writing off debts of some of them due in 2043.
In light of this great deterioration in the exchange rate of the Lebanese pound against the dollar, the biggest winner from this matter is the Lebanese banks, as their debt to the state rises dramatically in value, at a time when the banking sector uses 43% of its total deposits to finance the state’s net public debt According to Lebanese studies.
The Central Bank’s foreign currency reserves reached the limits of $ 600 million only in 1984, which was the period of the first vacancy of the Governor of Banque du Liban, that is, during the transitional period from Mr. Michel Bechara El-Khoury to Dr. Edmond Naim. Despite the small size of the reserve, the exchange rate of the lira did not exceed a barrier at that time to 6.8 pounds per dollar, while it jumped to the limits of 840 in 1990 until it was fixed (albeit artificially and at exorbitant cutting price costs) at the level of 1507 since 1993. This increase is largely a result of the monetary block’s escape from the Lebanese pound currency into the Lebanese market.
Here, it must be pointed out that the solution to writing off three zeros from the pound would return large percentages of the money operating in the black market and bring it to the official market and recover some of the money outside the banks, which would prevent the existence of cash blocks in the pound outside this market. At the height of the financial crisis that plagues Lebanon, I find it surprising that none of the financial and monetary policy makers in Lebanon put forward such a proposal, which could contribute to solving the country’s financial crisis.
The economic conditions have become favorable for Lebanon to join the convoy of countries in the world that took such a step, which West Germany began shortly after the end of World War II, to protect its national currency and transmit signals of confidence in its national economy in the world. This deletion will be followed by the process of issuing new banknotes of the Lira, Five Lira, 25 Lira, 50 and Hundred Lira denominations. This may be an innovative solution to attract the large monetary mass circulating on the black market and stored with people at home. This will lead to the gradual withdrawal of current currencies from circulation that may last up to 3 years. In addition, the existence of an effective and influential black market in this way in Lebanon and rates of inflation rising dramatically and in light of the devaluation of the currency compared to foreign currencies and the failure of the state to pay its obligations, it is imperative that we follow this path that goes beyond the logic of formal treatment for its indemnity to restore the control of the Central Bank of the monetary mass. Of course, after deleting the three zeros, citizens will be asked to exchange their old currency for new currencies through headquarters distributed throughout the Lebanese state.
In a related context, Lebanon should develop electronic payment systems in it to enhance the role of local banks in controlling retail sales and purchases, as when trading begins between people at the level of individuals with electronic cards, there will be no need for the traditional paper exchange.
IMF Managing Director Christine Lagarde said at the 2018 Singapore Fintech Conference that e-money service providers see them as less risky than banks, because they do not lend money, but rather deposit clients ’money in custody accounts and make payments simply within the framework of Their networks.
Lagarde asks if central banks should issue a new digital form of money? A state-guaranteed token, or perhaps an account kept directly at the central bank, made available to individuals and companies to make retail payments. Several central banks around the world have begun to seriously consider the application of digital currency, including Canada, China, Sweden and Uruguay. Perhaps if Lebanon begins to implement this, the banking sector will be activated through retail transactions between individuals. We will start seeing retail stores in all regions hang signs on the fronts of their stores by not accepting cash payments, which will enhance banking transactions that keep cash blocks within the banking framework between individuals and small and medium enterprises and prevent Monetary mass inflated.
It is noteworthy that the cash withdrawals of depositors from Lebanese banks in November 2019 reached the limits of 165 billion pounds per day, which required the Central Bank to print tons of national currency for the fifty and one hundred thousand denominations to face the problem of withdrawals. Two of the masters in the economic and monetary field do not differ that the printing of currency by the central bank is a very dangerous matter if each printed monetary unit is not covered with a balance of foreign exchange reserves or a balance of gold, as the injection of currency into the market must be proportional to the size of Economy and domestic production to maintain the real value of this currency.
The most dangerous thing is that one of the motives for printing currency is securing the salaries of public sector employees, which amount to about 1,200 billion pounds per month, thanks to the approval of the salary and ranks series. It must be noted here that the injection of the Lebanese currency into the Lebanese market has significantly increased inflation due to the direct organic relationship between the two indicators. The matter began with the approval of the salary and ranks series in 2018 and passed the circulars of the Central Bank of Lebanon to compensate the owners of small accounts in addition to allowing the owners of deposits in dollars to withdraw the value of their deposits in cash in pounds, not the last of which today is the idea of giving compensation to the Social Security Fund at an exchange rate of 3900 pounds. This is right for the employee, but it fatal for the national economy and the local currency, similar to approving the ranks of the ranks that the employee has not gained until today except for the high consumer prices and thus the erosion of his salary The solution is for the retiree to receive his compensation according to the exchange rate of 3900 pounds, provided that a large part of it is frozen in a designated account in the Central Bank to prevent the increase in the supply of the monetary mass in Lebanese pounds, especially since more than 500 thousand people are waiting to receive the end of service compensation from the guarantee!
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