“Death by a thousand stabs” until the lira stabilizes
Is it really the worst behind us? Whoever finds a way to trust the words recently issued by Riad Salameh, perhaps he is contemplating something good while he counts the last dollars or parallel liras – which differ according to the approved equation – in his pocket. The governor of the Central Bank of Lebanon settled the equation on his part when he decided to stay and confront. With the Lebanese economy adapting to a minimum of three exchange markets, the ruler is betting on the citizen’s thirst for a stable exchange rate that is perhaps three times the official current prevailing rate, and is also betting on the political class’s need for it (and its fear of it at the same time), and on its aspiration to an American presidential election that will open The Lebanese scene is changing in one direction or another, regardless of its outcome. After it was confirmed again that any integrated monetary economic program for Lebanon can only pass through Washington in order to ensure the corresponding settlements, all parties agree that there is no problem for the country’s poor and middle class to suffer more losses, awaiting the American signal. As she approaches, Riad Salameh affirms that the worst is over. But where did the country become after its politicians completely abandoned it a year ago?
The complex and complex crisis, which has worsened since last fall, will lead to a contraction of the economy by nearly a fifth this year, which means that productive activities that generate wages, profits and rents of more than ten billion dollars will evaporate completely. Thus, the recession directly affects vulnerable groups, and it is expected that the rate of poverty and extreme poverty will nearly double compared to the levels of 2012, reaching 45% and 22%, respectively.
In light of the local search for mechanisms to empower the citizen through projects such as the support card, and the efforts of parties and leaders to buy political and sectarian loyalties through aid baskets, international organizations approach this situation in a practical but flat manner. The World Bank’s program of emergency support for safety nets adopts the same approach, allocating $ 206 million in its first phase to be distributed across various systems. Its authors boast that the coverage will increase to include 112,000 very poor families, i.e. from 1.5% to 22%. They forget that the increase in the number of the poor is the main transforming factor and not the success rate in reaching them to help them. The bank also adopts a parallel exchange rate of 3,850 pounds against the dollar. Is it really practical for the poor?
This is what brings us to the root of the “acute crisis (which) is behind us,” according to Riad Salameh. As what continued to exacerbate the situation was a clear decision by the Central Bank and the political authority to liberalize the exchange rate and hit the purchasing power to impose a new equilibrium within a framework of hidden negotiations with the poor of this land. In principle, when the official exchange rate is left to the market mechanisms to determine its levels at clearing houses as a result of supply and demand, the price does not witness a full free fall, unless the parallel market that will ultimately determine this balance is in turn in a free fall.
This scenario applies to Lebanon. It is part of a group that also includes Argentina and Zimbabwe, which have recently recorded rapid deterioration in the exchange rate on the parallel market. However, the case of Lebanon is exceptional in that it reflects the policy of “death by a thousand stabs”, according to the expression used in a paper recently published by the International Monetary Fund, which is a cool and appropriate expression at the same time. Such an option means, in practice, that if the monetary, political and financial authorities did not adopt the direct adjustment of the exchange rate closely and quickly to reduce the cost, then the alternative is a gradual approach that will incur the economy in general and its more vulnerable groups, especially high costs that can only be contained by raising interest rates significantly. To curb expectations of a future decline in the exchange rate. However, this approach may never reach the desired balance and keep the country suspended between formal and parallel markets without a horizon, as is the case in Lebanon today.
And if the factors that constitute pressure on the exchange rate continue, it is expected that the price will weaken further until structural problems – political or economic – are addressed or direct financial and monetary results are achieved that will positively affect the current account operations and the country’s position abroad and hard currencies. The Lebanese dilemma is that the existing political system is no longer suitable for administration, let alone the market’s reassurance of the national currency. Perhaps the lira will have long strides ahead, and a thousand more stab wounds, before the final stability.
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The complex and complex crisis, which has worsened since last fall, will lead to a contraction of the economy by nearly a fifth this year, which means that productive activities that generate wages, profits and rents of more than ten billion dollars will evaporate completely. Thus, the recession directly affects vulnerable groups, and it is expected that the rate of poverty and extreme poverty will nearly double compared to the levels of 2012, reaching 45% and 22%, respectively.
In light of the local search for mechanisms to empower the citizen through projects such as the support card, and the efforts of parties and leaders to buy political and sectarian loyalties through aid baskets, international organizations approach this situation in a practical but flat manner. The World Bank’s program of emergency support for safety nets adopts the same approach, allocating $ 206 million in its first phase to be distributed across various systems. Its authors boast that the coverage will increase to include 112,000 very poor families, i.e. from 1.5% to 22%. They forget that the increase in the number of the poor is the main transforming factor and not the success rate in reaching them to help them. The bank also adopts a parallel exchange rate of 3,850 pounds against the dollar. Is it really practical for the poor?
This is what brings us to the root of the “acute crisis (which) is behind us,” according to Riad Salameh. As what continued to exacerbate the situation was a clear decision by the Central Bank and the political authority to liberalize the exchange rate and hit the purchasing power to impose a new equilibrium within a framework of hidden negotiations with the poor of this land. In principle, when the official exchange rate is left to the market mechanisms to determine its levels at clearing houses as a result of supply and demand, the price does not witness a full free fall, unless the parallel market that will ultimately determine this balance is in turn in a free fall.
This scenario applies to Lebanon. It is part of a group that also includes Argentina and Zimbabwe, which have recently recorded rapid deterioration in the exchange rate on the parallel market. However, the case of Lebanon is exceptional in that it reflects the policy of “death by a thousand stabs”, according to the expression used in a paper recently published by the International Monetary Fund, which is a cool and appropriate expression at the same time. Such an option means, in practice, that if the monetary, political and financial authorities did not adopt the direct adjustment of the exchange rate closely and quickly to reduce the cost, then the alternative is a gradual approach that will incur the economy in general and its more vulnerable groups, especially high costs that can only be contained by raising interest rates significantly. To curb expectations of a future decline in the exchange rate. However, this approach may never reach the desired balance and keep the country suspended between formal and parallel markets without a horizon, as is the case in Lebanon today.
And if the factors that constitute pressure on the exchange rate continue, it is expected that the price will weaken further until structural problems – political or economic – are addressed or direct financial and monetary results are achieved that will positively affect the current account operations and the country’s position abroad and hard currencies. The Lebanese dilemma is that the existing political system is no longer suitable for administration, let alone the market’s reassurance of the national currency. Perhaps the lira will have long strides ahead, and a thousand more stab wounds, before the final stability.
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