- 07
- Aug.
- 2024
If the current tensions escalate into war, Lebanon will face severe turmoil. In a scenario of widespread conflict, Lebanese citizens will need to fear uncontrollable inflation more than a further devaluation of the pound against the dollar.
The country would experience chaos and significant volatility in the prices of goods and services if the attritional war, which began in October 2023 in Gaza and southern Lebanon, evolves into a full-scale conflict affecting the entire nation.
Since the onset of the multidimensional crisis in October 2019, Lebanon's economy has been in survival mode.
Initial growth estimates ranged between 1 and 1.5%, but this has diminished, leading to a loss of at least half a percent in the last months of 2023. This decline continued in 2024, with the summer season — up to July — witnessing a drop in tourism revenues by about 20% compared to the previous year.
It is fundamentally mistaken to discuss growth in the context of a cash economy where the balance of payments is inherently skewed.
An Impotent Government
In a wartime economy, the government is expected to play a central role as the regulatory authority. However, the government led by Nagib Mikati is fundamentally incapable and structurally powerless to decide whether or not to go to war. Hezbollah, under the guise of "front unity," has usurped and even confiscated the Executive's decision-making authority. How, then, can the government claim to control excessive inflation and prevent speculation and shortages during a war it neither initiated nor decided?
Dollarization of Prices
Contrary to some officials' beliefs, dollarization has not protected against rising prices. According to Professor Maroun Khater, a finance and economics researcher, dollarization makes price manipulation more concealed and less perceptible to consumers. "Product (food, etc.) and service providers (generator owners, etc.) manipulate prices without consumers' knowledge by using decimal adjustments," he explains, adding that "consumers do not notice the extent of these manipulations as long as prices are displayed in dollars, making them seem insignificant."
In an interview with This is Beirut, Professor Khater criticizes the government's lack of strategic perspective, which is crucial for operating within public sector norms. "There is only a biased budget, and thus an absent balance of payments and account of errors and omissions," he states. According to him, one cannot talk about political economy while having porous borders.
A Dollar at 90,000 Lebanese Pounds
On the ground, merchants have already anticipated the impact of a widespread war, displaying exchange rates of 89,900 or 90,000 Lebanese pounds per dollar in their commercial spaces, while the official exchange rate at licensed exchange offices by the Central Bank of Lebanon is 88,000 pounds per dollar. Conversely, a surge in the dollar against the pound seems unlikely, given that the money supply in pounds has decreased from 80,000 billion to less than 60,000 billion.
If Israel imposes an airport embargo on Lebanon, the situation will change dramatically, and US dollars will become even more sought after.
Read more
Comments