Lebanon Devalues 90% Of Its Official Exchange Rate

On Wednesday, Lebanon weakened its official exchange rate by 90%, which is the first time it has done so in the last 25 years.

Despite devaluating it, the local currency was still below its market value. In 2019, there had been a financial meltdown that caused the pound to crash.

The devaluation

This came after decades of excessive spending, corruption and mismanagement at the hands of the ruling elite that allowed the crisis to grow, even though there is rising poverty.

Before the collapse, the currency had been pegged at a rate of 1,507.5 pounds against the US dollar, which had existed for decades.

After the devaluation, the central bank confirmed that 15,000 pounds per dollar were the new official exchange rate.

According to market participants, the value at which the pound was changing hands in the parallel market on Wednesday, where most of the trading occurs, was around 60,000 per dollar.

Lebanese officials stated that they had adopted the new official exchange rate because the crisis had seen an array of rates emerge in the market and their goal was to unify them.

The IMF

Lebanon is interested in clinching an aid package from the International Monetary Fund (IMF) worth $3 billion, which would assist it in recovering from the meltdown.

One of the several steps that the country needs to take in order to clinch the deal is unifying the different exchange rates.

Last year, the IMF asserted that progress had been very slow when it comes to implementing reforms, as most of them have yet to be carried out, even though the crisis has gotten very severe.

As a matter of fact, this has become the most destabilizing phase to be seen in Lebanon since the civil war in 1975-90.

The impact

The purpose of setting the new rate is to restrict withdrawals from US dollar accounts in local currency, as depositors have been unable to withdraw hard currency from these accounts since 2019.

The new rate will also be implemented on custom duties that are charged, which are dependent heavily on imports.

Riad Salameh, the governor of the central bank, also said on Tuesday that banks’ equity would also decline as a result of the new exchange rate.

The financial system in Lebanon has a gaping hole of $70 billion and since there have been no reforms to plug it, the burden has fallen on depositors.

These people have been unable to access their savings in hard currency, or have to withdraw pounds at a hefty loss.

Based on the market rate on Wednesday, withdrawals from hard currency accounts in the Lebanese pound will still suffer losses.

However, most experts said that this step was still not a major development because nothing has been accomplished in the last 3 and a half years, after the biggest banking collapse happened in modern history.

They said that authorities in the fiscal, monetary, and political domains had not taken any significant measures. It is still depositors who are facing the burden.