On Wednesday, Lebanon depreciated its official exchange rate for the first time in 25 years, lowering it by 90% while maintaining a significant undervaluation of the local currency.
The pound has plummeted since a financial collapse in 2019 that was caused by years of corruption, wasteful spending, and poor management by Lebanon’s ruling elite, which allowed the situation to fester amid skyrocketing poverty.
The change from the previous rate of 1,507 to 15,000 is still much below the amount the pound was trading at on Tuesday on the black market, which was roughly 57,000 per dollar.
Market participants reported that on Wednesday, the pound was trading at almost 60,000 to the dollar on the parallel market, where the majority of transactions take place.
According to Salameh, the modification will affect banks, which will result in a decline in the equity of the organizations at the center of the nation’s 2019 financial collapse.
The wider economy, which is more dollarized and where the majority of deals are conducted using the parallel market rate, is anticipated to be less affected by the change.
Since the pound started to deviate from the 1,507 rate in 2019, it has lost approximately 97% of its value.
According to Salameh, the country’s commercial banks “would notice a fall in the portion of their equity that is in pounds once translated into dollars at 15,000 instead of 1,500,” according to Reuters.
There are still a number of rates, including the official rate, the parallel market rate, and the Sayrafa exchange platform rate of the central bank, which is presently 38,000 pounds to one US dollar.
The IMF has advocated for a quick unification of rates and stated that the Lebanese government should deal with the estimated $70 billion in financial sector losses up front. These losses are largely believed to be the result of years of wasteful expenditure, corruption, and poor management.
However, a more long-term strategy has been suggested in draft government proposals. According to one expert, Mike Azar, the IMF’s belief that the losses must be dealt with swiftly conflicts with the five-year time frame given to recreate losses.
Banks would be given five years “to rebuild the losses owing to the devaluation,” he stated, in order to lessen the effects of this change.
In line with a draft deal Lebanon negotiated with the International Monetary Fund last year that set out conditions to unlock a $3 billion bailout, Salameh said the adjustment to 15,000 was a step toward harmonizing different exchange rates.
Without a thorough structure for bank restructuring, he claimed, institutions would either have to seek capital from shareholders to pay their losses or transfer losses to depositors by enabling local currency withdrawals from dollar accounts.
The central bank is giving them a five-year runway to do it because they can’t do it right away, according to Azar, a former Johns Hopkins University economics professor.
Many believe that the IMF agreement is the only option for Lebanon to start rebuilding its financial system’s trust and recovering from the crisis.
The inability of regular Lebanese to freely access their dollar savings is one of the most crippling parts of the crisis, and the shift in the exchange rate is not anticipated to ease it.
Although Lebanon has never technically implemented capital controls, banks have started doing so as of 2019 and have severely restricted withdrawals in dollars and Lebanese pounds.