‘A morphine shot’: Lebanon exchange shops reopen after crackdown

Beirut, Lebanon – Currency exchange shops across Lebanon opened for the first time in over a month on Wednesday after traders reached a deal with authorities to try and rein in the rapidly depreciating Lebanese pound. But analysts are extremely sceptical it will work.

Lebanon’s currency has lost some 60 percent of its value on parallel exchanges since the economy started buckling last year and unrest swept the nation as thousands demanded political change and more competent financial stewardship.

In April, after the pound lost some 20 percent of its value in the span of a few days, Lebanon’s central bank ordered all parallel market foreign exchange shops to not exceed a rate of 3,200 Lebanese pounds to $1.

Dozens of traders refused to comply with the order that they felt placed an unrealistic value on the pound.  The government responded by arresting more than 50 dealers on charges of manipulating exchange rates, and threw dozens in jail. Those arrested included the head and deputy head of the currency exchange traders’ syndicate.

But the government’s strong-arming backfired spectacularly by driving the currency trade onto the black market, where the prevailing rate is 4,000 Lebanese pounds to $1.

The interim head of the currency exchange traders’ syndicate, Mahmoud Halawi, did not respond to Al Jazeera’s request for comment. 

‘A morphine shot’

After the crackdown failed to arrest the pound’s slide, exchange dealers met with top-level officials including Prime Minister Hassan Diab late last month and agreed to gradually lower the parallel market rate from the prevailing black market rate.

Exchange shops began trading on Wednesday, offering a rate of 3,950 to $1 to customers seeking to purchase United States dollars and 4,000 pounds to $1 to customers seeking to sell greenbacks.

But analysts say these measures will be a stopgap at best, because the root cause of the currency crisis – an acute shortage of dollars – remains.

“There is a low supply of dollars and an excess demand for dollars, and the situation is further exacerbated by economic and financial instability. These factors provide a breeding ground for speculation,” Mohamad Faour, a postdoctoral research fellow in finance at University College Dublin, told Al Jazeera.

In addition to the new measures by exchange shops, Lebanon’s cabinet said last month that the central bank would intervene in currency markets to attempt to stabilise the parallel market rate.

But Faour says that the critical level of the central bank’s foreign reserves – currently being used primarily to support imports of necessities like wheat, fuel and medicine – would sorely limit the impact of an intervention.

“Any change will be a morphine shot which is most likely short term,” he said.

The central bank is also set to launch an online platform along with private banks and exchange shops that will display daily exchange rates for foreign currencies against the pound – exchange rates that traders will be obliged to follow.

But Faour says the online platform “won’t make much of a difference” so long as US dollars are scarce in Lebanon. 

The government is seeking to alleviate the dollar crunch by securing fresh funds from international entities including $10bn from the International Monetary Fund – with which it is currently in bailout negotiations – and roughly the same amount from a number of international donors and organisations, including the World Bank.

But the release of those funds would almost surely be contingent on Lebanon implementing wide-ranging structural reforms that previous governments have lacked the political will to mount.

Lebanon’s crisis has been decades in the making. The ruling class racked up over $90bn in debt, much of which was mismanaged or lost to corruption instead of financing infrastructure development or other projects that could make the economy more productive.

Diab’s government in March decided to default on a $1.2bn Eurobond payment and is now seeking to restructure both local and foreign-held debt, as well as private banks and the central bank under a government rescue plan.