Lebanese liquidity crisis

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The Lebanese liquidity crisis is an ongoing financial crisis affecting the Middle Eastern nation of Lebanon starting in August 2019. Lebanon's crisis was worsened by U.S. sanctions targeting Syria's government and Iran-backed Hezbollah.[1][2] The COVID-19 pandemic in Lebanon, which began in 2020, further exacerbated the effects of this crisis.

Some economists have described Lebanon's financial system as a nationally regulated Ponzi scheme, where new money is borrowed to pay existing creditors.[3]

Background[edit]

The Lebanese pound has been pegged to the U.S. dollar at a rate of 1,507.5 LBP per USD since 1997. In August 2019, due to various financial hardships, especially the growing probability that the Lebanese government will default on maturing debt obligations, the black market exchange rate started diverging from the official exchange rate. In the fall of 2019, the black market exchange rate reached 1,600 LBP per USD, and would later increase to 3,000 LBP per USD in April 2020.[4][5] The USD black market exchange rate continues to increase due to devaluation of the Lebanese pound caused by acute USD shortages within Lebanon.[6] This dollar shortage also caused 785 restaurants and cafes to close between September 2019 and February 2020 and resulted in 25,000 employees losing their jobs.[7][8] Consumer goods prices have increased by 58% since October resulting from the worst economic crisis in decades.[9] This economic crisis made Lebanon's gross domestic product fall to about 44 billion USD from about 55 billion USD the year before.[10]

Consequences[edit]

The fall of the exchange rate caused the 2019–2020 Lebanese protests, which ultimately resulted in the resignation of the prime minister and his cabinet. After the resignation occurred, the COVID-19 pandemic forced additional businesses to close their doors and to lay off their employees.[11]

Prime minister Hassan Diab stated that the country would default on its Eurobond debt and seek out restructuring agreements amid a spiraling financial crisis that has affected foreign currency reserves. Lebanon was due to pay a US$1.2 billion Eurobond on 9 March, with another 700 million USD expected to mature in April and a further 600 million USD in June. Due to the lack of foreign currencies, the prime minister said that the reserves had fallen to “a worrying and dangerous level which pushes the Lebanese government to suspend payment of the 9 March Eurobond maturity because of a need for these funds.”[12][13]

The head of research at Bank Audi stated that Lebanese banks owned 12.7 billion USD of the country's outstanding 30 billion USD Eurobonds as of January. The central bank held 5.7 billion USD and the remainder was owned by foreign creditors.[12]

The debt to GDP ratio sits now at 170%. The default is the first one in the history of the country. Foreign currency inflows have slowed and Lebanon's pound has dropped in value compared to the dollar and other currencies. The nation's commercial banks have imposed tough restrictions on dollar withdrawals and transfers to maintain reserves. Due to this Lebanon's sovereign debt became junk rated.[11][12]

The Lebanese pound was pegged at around 1,500 per US$1; since October 2019, it has dropped to a third of this value, reaching 4,500 per US$1 on black markets on 28 April 2020. Two weeks before that, the currency sat at around 3,000 to US$1. Official valuations are different from the ones on the black market. One bank allowed depositors to withdraw Lebanese pounds from their dollar account at 2,000 to US$1. This caused significant anger towards the banks. The prime minister has sharply criticized the governor of the central bank Riad Salameh over its performance.[11]

The shortage of U.S. dollars, which are used in everyday transactions in Lebanon, and the crash in the value of the pound have undercut the country's ability to pay for imports, including essentials such as wheat and oil. Banks have stopped giving short-term loans to businesses and no longer provide them with U.S. dollars for imports, forcing people to turn to the black markets. There is also significant inflation, which caused a massive loss of purchasing power and an increase in poverty. The price of foule or ful, a fava bean common in the region, was up 55% in March over a year earlier. Sugar has seen an increase of 67%, while wheat, tea, rice, and cigarettes have all gone up nearly 50% over the same period.[11]

This liquidity crisis also created a barrier to every single person who had accounts in Lebanese banks; as they are unable to access their deposits. Not only are they unable to access their deposits, but they are unable to withdraw any USD directly. They can withdraw them in the national currency.[14]

See also[edit]

References[edit]

  1. ^ "US sanctions squeezing Iran-backed Hezbollah in Lebanon". Associated Press. 4 October 2019.
  2. ^ "Caesar Act: Fresh sanctions on Syria could worsen Lebanon economy". Al Jazeera. 18 June 2020.
  3. ^ https://ca.reuters.com/article/us-lebanon-crisis-financial-explainer-idCAKBN26821L
  4. ^ "Lira Rate | USD to LBP in Black Market | Dollar to LBP". Lira Rate.
  5. ^ "Banque du Liban: Data Series".
  6. ^ "Lebanese petrol stations shudder to a halt amid nationwide strike". www.aljazeera.com.
  7. ^ "Lebanon: 785 Restaurants, Cafes Closed, 25,000 Employees Laid Off". Asharq AL-awsat.
  8. ^ "US dollar shortage and Lebanon's economic crisis". www.aljazeera.com.
  9. ^ "Lebanon: Currency Drops, Central Bank Sets New Exchange Rate at Transfer Firms". www.english.aawsat.com.
  10. ^ "Lebanon's GDP declines to $44 billion from $55 billion | Business , Local | THE DAILY STAR". www.dailystar.com.lb.
  11. ^ a b c d Dadouch, Sarah (28 April 2020). "Unrest escalates in Lebanon as currency collapses and prospect of hunger grows". The Washington Post.
  12. ^ a b c France-Presse, Agence (7 March 2020). "Lebanon to default on debt for first time amid financial crisis". The Guardian.
  13. ^ Domat, Chloe (3 March 2020). "Lebanon: Facing Down A Liquidity Crisis". Global Finance.
  14. ^ "Lebanon's Financial Crisis: Where Did the Money Go?". lcps-lebanon.org. Retrieved 4 October 2020.