Directives and arrests: Lebanon attempts to stem currency rout

The downward spiral of Lebanon’s currency started accelerating dramatically late last week.

Lebanon currency protest
Lebanese soldiers confront a demonstrator during a protest against the collapsing Lebanese pound currency and the price hikes, in Zouk, north of Beirut, Lebanon [File: Mohamed Azakir/Reuters]

Beirut, Lebanon – Lebanese authorities have started using forceful measures to try and bring the country’s rapidly sliding national currency under control, as angry citizens block roads and attack banks in protest over rapidly eroding livelihoods.

“My salary is now worth $100,” a protester shouted during an attempt to block a road in Beirut on Monday as Lebanon witnessed its largest number of demonstrations since a nationwide COVID-19 lockdown was imposed in mid-March.

The Lebanese pound, also known as the Lebanese lira, has depreciated by more than 50 percent on parallel markets since last summer, when decades of unsustainable fiscal policies, mismanagement and corruption finally came to bear.

An acute dollar shortage has sent the Lebanese pound tumbling from 1,500 to $1 – the official exchange rate peg since the late 90s – to about 3,000 to one $1 on parallel markets by mid-April – a drop that effectively slices the value of wages and savings by half, throwing millions of financial lives into uncertainty.

But last week, the currency’s slide started accelerating dramatically, with parallel market rates opening at around 3,400 Lebanese pounds to $1 on Friday – only to close nearly 12 percent lower, at 3,800 to $1.

Some reports said the Lebanese currency plunged as low as 4,000 to $1 on Friday, or more than 17 percent in a single day.

The downward spiral prompted Lebanon’s central bank over the weekend to come to the currency’s rescue for the third time since the economy tipped into full-blown crisis last summer, by amending Lebanese law to set a limit for the exchange rate at 3,200 Lebanese pounds to $1.

But similar measures have utterly failed to stem speculative attacks on the currency before. On Monday morning, with some exchange dealers ignoring the new regulations, the government turned to heavy-handed tactics, announcing by noon that over a dozen dealers had been arrested for violating the new directive.

The syndicate of currency exchange shops called the arrests a “flagrant violation of the principle of a liberal, free market,” and said all exchange shops will remain closed until the dealers are released and every shop can resume business. 

“If trust [in the currency] is gone, you can’t decrease the [exchange] rate by issuing a circular [policy directive],” Omar Tamo, a Lebanese foreign exchange expert, told Al Jazeera.”The only solution is long-term, related to government reforms.”

That loss of trust was evident on black market exchanges on Monday, said Tamo, noting that people were buying dollars for upwards of 4,000 Lebanese pounds to one greenback via chat rooms and through currency exchange dealers with whom they have personal connections.

‘Suspicious ambiguity’

Lebanon’s Prime Minister Hassan Diab is blaming Central Bank Governor Riad Salameh for the currency’s sudden, sharp moves to the downside in recent days.

Informal capital controls have been in place on bank deposit withdrawals in both local and foreign currencies for six months, with banks recently entirely phasing out the latter.

Then last week, the central bank issued a policy change allowing all depositors with foreign currency accounts to withdraw cash in Lebanese pounds, at a market value to be set by commercial banks.

Experts warned that allowing dollar deposit withdrawals in Lebanese pounds at a rate less favourable than the official one – but likely more punitive than the parallel or black market rates – would likely trigger an inflationary spiral as Lebanese pounds flood the market, while dollars remain scarce.

That scenario started to take hold on Friday as the Lebanese pound began to plummet.

In a speech on Friday, Diab blasted Salameh for “suspicious ambiguity” in his decisions, saying there were “gaps in performance, strategies, frankness, clarity, [and] monetary policy.” He also suggested that Salameh may be intentionally attempting to depreciate the Lebanese pound and called on the central bank chief to be honest with the Lebanese people about the country’s finances.

Meanwhile, President Michel Aoun asked ministers during a Friday cabinet session whether Salameh should be forced to resign. No agreement was reached.

Salameh is set to respond to criticisms of his handling of the currency crisis in a prerecorded video scheduled to be released on Wednesday.

‘Riad Salameh is corona’

The central bank’s management of Lebanon’s currency crisis has further complicated everyday life for many Lebanese who are navigating no less than five exchange rates today.

As the currency devalues, it has provided fresh fodder to anti-establishment protests – which disappeared during a nationwide COVID-19 lockdown – only to reappear in violation of stay-at-home orders.

About 20 locations across Lebanon witnessed road closures between Sunday and Monday, with large piles of burning tyres spewing black smoke into the sky.

Molotov cocktails were thrown at three banks in three separate cities over the weekend, while a fourth bank was hit by an explosive device. Attacks on banks continued into Monday.

There have been no reports of any arrests made yet in connection with the incidents.

But protesters insist that it is not just private bankers or Salameh who are at fault.

“Yes, Salameh is responsible, but he is the one who was implementing all your corrupt policies,” a young man with a surgical mask on his face told a local news reporter at the side of a main highway that demonstrators were attempting to block on Monday. “Yes, we want Salameh out, but it’s also time for the corrupt politicians [to be held accountable].”

Salameh – whose name means “health” in Arabic – was synonymous with the once-storied stability of the Lebanese pound, and has now become the poster child of its demise. For years, he had promised that the currency was stable and would remain so.

When a reporter had asked him in December how far the local currency would slide, he answered, “No one knows.”

At a protest on Thursday, protesters chanted: “Corona, corona, we don’t care about corona. Corona, corona, Riad Salameh is corona.”

Source: Al Jazeera