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No one on the local scene seems to be willing to speculate on how long the exchange rate can remain stable on the parallel market. It is an obscure mystery, known only to an exclusive circle of insiders, sources revealed to This is Beirut. Uncertainty is thickening around the post-July 31 monetary and credit outlook, following the expiration of Central Bank Governor Riad Salameh’s term.
The future of the monetary policy and its implications on the dollar exchange rate and inflation after the departure of Salameh is shrouded in uncertainty. However, Salmeh’s departure remains unsure. Various scenarios are being considered, including his possible retention in a transitional role, a technical extension of his mandate or his engagement as a consultant or shadow advisor to the Banque du Liban (BDL).
According to sources consulted by This is Beirut, the notion of a complete absence of institutional leadership at the head of the central bank has been dismissed. However, the caretaker government led by Najib Mikati has limited powers and is unable to appoint a successor to Salameh.
BDL Central Board
Relations among members of BDL’s Central Board have been strained due to disagreements over the implementation of monetary policies in the absence of normal political and institutional functioning. In addition to the Central Bank Governor and his four deputies, the Central Board consists of the Director General of the Ministry of Finance and the Director General of the Ministry of the Economy.
Disagreement
The disagreements over the monetary and credit policies within BDL’s Central Board have escalated following the State Council’s decision to look into the appeal filed by the Association of Banks in Lebanon (ABL) against the government’s decision to reduce a significant portion of the BDL’s foreign currency obligations to commercial banks.
The State Council also asserted its authority to “scrutinize government actions aimed at evading the obligation to return depositors’ money.” The Council’s ruling has brought the actions of the State under scrutiny, although the judiciary has yet to rule on the annulment appeal.
Dollar Injection
From an academic standpoint, the relatively stable exchange rate of the Lebanese pound against the dollar since March 21 can be attributed to the increasing availability of dollars in the market. One contributing factor to this stability is the central bank’s daily injection of approximately $1,500,000 through its foreign exchange platform, Sayrafa. Additionally, the central bank disburses $800 million annually as part of Circular 158, allowing eligible depositors to withdraw $400 in cash and an additional $400 in Lebanese pounds at the rate of 15,000 pounds per dollar.
In a televised interview, the Central Bank Governor stressed that the BDL has the capacity to absorb, in a single operation, large sums on the market, estimated at 75 trillion pounds. These have significantly diminished over time.
Unveiled Source of Dollars
The dollars injected into the market by the BDL originate from a variety of sources, including the central bank’s foreign currency reserves, and previous purchases on the local market, either made directly or through exchanges and transfers.
According to sources who requested anonymity, the BDL is said to have acquired greenbacks through undisclosed financial arrangements known only within the bank’s inner circle. The sources were unable to ascertain the exact amount generated from these arrangements. The central bank also holds a 99% stake in the national airline, MEA, which potentially serves as a significant source of foreign currency.
Furthermore, private businesses, having significantly reduced their debt by repaying loans to banks at the rate of 1,505.7 pounds per dollar, have unlocked their coffers by paying salaries in fresh dollars with the aim of revitalizing consumption dynamics. This measure has contributed to alleviating pressure on the demand for dollars in the parallel market.
Monetary Policy Shift
In this vein, the question arises as to whether the monetary policy adopted to address the crisis that emerged in the fourth quarter of 2019 will remain unchanged after July 31. Uncertainty is the name of the game. One proposal gaining traction among members of the BDL Central Council is the potential elimination of Sayrafa, the BDL’s currency exchange platform, in favor of allowing the dollar exchange rate to float freely, a measure that has been advocated by the International Monetary Fund (IMF).
The proposed move would have an immediate impact on the foreign exchange market, causing the Lebanese pound to, once again, face erosion against the dollar. Consequently, attaining equilibrium relies on the interplay between supply and demand in an unfettered market.
However, one inherent risk of a floating currency system in a country like Lebanon lies in the absence of a stable political landscape capable of regulating the country’s economy. This fosters an environment of persistent speculation and heightens the associated risks. Nevertheless, every cloud has a silver lining: a floating exchange rate regime does not require BDL to accumulate substantial foreign currency reserves. The BDL would only need to intervene in the event of significant fluctuations between the national currency and the dollar.
