Beirut, Lebanon – Lebanon’s financial prosecutor has ordered the arrest of the head of monetary operations at the central bank amid a widening probe into manipulation of the country’s volatile currency.
The arrest of Mazen Hamdan late on Thursday marked the first such move against an official at the increasingly embattled institution since Lebanon’s currency crisis began last summer.
The Lebanese pound, long set at 1,500 to $1, is now trading for roughly 4,200 to the greenback on the black market amid an acute dollar shortage linked to dried-up remittances, corruption and unsustainable fiscal policies.
Its demise is just one part of a full-blown financial crisis that has pushed the small, economically crippled nation to seek $20bn in foreign aid, of which $10bn is supposed to come from an International Monetary Fund (IMF) programme.
The crisis has seen tens of thousands of people lose jobs and poverty soar to almost 50 percent, according to finance ministry data. Last month, Social Affairs Minister Ramzi Moucharafieh said some 70-75 percent of the population required aid after the economic crisis was exacerbated by the coronavirus pandemic, while the IMF forecast the economy would shrink by 12 percent this year – one of the worst recessions in the world.
The country’s currency had been on a steady downwards trajectory against the US dollar since August. That slide turned into a freefall in late April, with a roughly 12 percent drop in a single day, leading to nationwide street protests and riots.
Prime Minister Hassan Diab’s government blamed the central bank for failing to inject dollars into the market to stabilise the currency. Diab also alleged the central bank governor, Riad Salameh, may be aiming to intentionally hurt the currency, noting “suspicious ambiguity” in decisions.
Salameh denied these charges as part of a “campaign” against him and said he has worked to keep the currency stable for decades through successive political crises and conflict.
The central bank subsequently ordered all currency exchange dealers to trade dollars at a rate of 3,200 – its third attempt to implement an exchange rate cap since the crisis began. At the same time, security forces launched a crackdown against any traders who went above this rate, leading all exchange dealers to go on a strike now heading into its fourth week.
Unrelenting, financial prosecutor Ali Ibrahim has ordered the arrest of several dozen exchange dealers in recent weeks, including the head of the currency exchange dealers’ syndicate, Mahmoud Mrad.
On Thursday, he also ordered the arrest of Hamdan, who remains in custody.
“While there have been some instances of currency manipulation, which is not unexpected when the currency peg falls apart after 22 years, the lira [Lebanese pound] is dropping primarily because there isn’t sufficient dollars being pumped by the central bank or coming from overseas to lift it,” Dan Azzi, an economic analyst and former CEO of Standard Charterer Bank Lebanon, told Al Jazeera.
“It will keep dropping until an equilibrium point is reached, when dollar remittances are equal to dollars flowing out to buy imports.”
In a statement, the central bank said it was cooperating with investigations and had lifted secrecy on its transactions with currency exchange dealers. In the period between April 8 and May 5, the central bank said it had sold $12.7m to currency exchange dealers and had bought $11.3m.
These amounts, the statement said, could not account for the “magnitude” of currency depreciation during that period, in which the rate dropped from 2,900 Lebanese pounds to $1 to more than 4,000.
“It is self-evident, after looking at the amounts mentioned, that, contrary to what was rumoured, there was no manipulation in the money exchange market as a result of the Central Bank’s operations,” the statement said.
Some analysts view the attempts to control the currency via a crackdown on exchange dealers or the central bank as futile.
“Accusing money changers for the vertiginous depreciation of Lebanese Pound is politically expedient but is economic nonsense,” Nasser Saidi, a former economy minister and central bank vice-governor, said in a Twitter post.
“Depreciation results [from the central bank] financing budget deficit by printing money, unsustainable fiscal and debt policies, deep recession and nothing to anchor Lebanese Pound expectations.”