The Lira has been pegged in a tight range of 1500-1515 for 22 years. Even during the bleakest times, online rates remained 1514.5 at the biggest banks. Recently, I noticed something different. Their rates suddenly went up to 1516-1520, not a huge difference, but still an uncharacteristic deviation. That’s not the big deal. In the black market, meaning contractors, shopkeepers, exchange houses (sarraf), phone companies, rates are ranging from 1535 to 1580, with an average of 1560 on Friday. Some so-called experts have attributed this to greed by the sarrafs, but this is either due to lack of knowledge of basic economics or an intentional misrepresentation.
So let’s talk about the mechanics.
People need dollars daily for a variety of reasons ... when you pay your mobile bill or dollar credit card, or a business paying office rent, or traveling on vacation, or importer of fuel supplying gas stations. These dollars are provided by a bank’s stash of inventory. When banks run out, they exchange excess Lira for dollars, which the central bank provides out of his reserves.
Banks recently started giving each client a personalized limit on conversions, based on a profile, derived from their past history or business requirements, which is way less than their actual needs. A person who earns a Lira salary and used to convert $100 a month to pay a mobile phone bill gets that as her limit.
On the other hand, a friend of mine, one of the biggest importers of salmon in the country, has been given a limit of $1000 per day, which is not enough to meet his import obligations, rents, and other supplies. People like him now have to go to the sarraf. Sarrafs, similarly to banks, obtain their dollars from the supplier of last resort, BDL. If BDL does not meet their current needs, they have to carry the risk of holding Lira for several days, until they get rid of their excess in drips and drabs, due to their daily quota set by BDL. For example, if a sarraf bought your Lira for 1550 today, and the Lira is 1580 tomorrow, the Sarraf would lose 30 Lira by the time he gets his quota from the BDL.
In short, anyone who needs dollars must ultimately go to the central bank, thus, if there’s a shortage of dollars, it is because the central bank is rationing it. This fact is indisputable.
The obvious question that comes to mind is this. If BDL has $34 billion in cash reserves, why is he hoarding it, instead of supplying it to the banks and the sarrafs, thereby nipping the black market in the bud?
I stated here that there are two possible explanations.
The first is that their published number overstates the available cash reserves. After a recent conversation with “a person in the know,” who assured me that the reported number is accurate, and because I’ve known this person for a over a decade and trust him, I will remove this as a possibility.
That leaves the second explanation. BDL is resigned, maybe even comfortable, with a parallel black market. In some ways, this already existed in the financial engineering transactions, which, after deleting the bells and whistles (swaps, varying interest, deposits on both sides of the balance sheet), basically amounted to exchanging dollars for Lira, for banks, at a rate different from the official rate. So in one interpretation of the FE transactions, a black market rate of around 2,250 (+/-) has existed for three years, for banks, while the rest of us continued with the illusion of an exchange rate of 1500.
So if the reserves are $34 billion, why would the BDL withhold dollars and allow this black market to develop? Clearly, they’re seeing what I’m seeing, which is hemorrhaging of dollars out of the country through the balance of payment deficit, which was around $11 billion over the last year. While these reserves give them around 1-2 years, they’ve wisely opted not to wait until the last minute to take extreme measures.
Thus, if the Lira depreciates in the black market, this makes many transactions more expensive, thereby discouraging and curtailing economic activity resulting in more imports or dollar leakage to the outside. For example, if the black market for Lira becomes say 1,600 to the dollar, and you’re traveling to Turkey, this makes your trip 7% more expensive, thereby reducing your incentive to travel. In some ways, this is equivalent to a 7% tax on imports.
To be honest, and I might be an outlier here, but this is not a bad idea. For one thing, it releases the “pressure valve” slightly and reduces the requirement to pay exuberant rates to attract overseas dollars.
President Aoun correctly stated that we need to make some painful decisions. Many Lebanese found that amusing, but it is actually the unvarnished truth. If more politicians tell their constituents the truth instead of the usual twaddle, maybe they’d be more willing to endure the pain needed to get us through the next stage. In that regard, President Aoun recently formed a committee to design an emergency plan to salvage the economy.
It is chaired by Minister Mansour Bteich (which met in Beiteddine on Wednesday), and constitutes some of the top economic experts, representing the different political parties. This is a huge step in the right direction, and I’ve heard that they’re doing some great work, quietly in the background, including “resuscitating the patient” (the tactical stuff) as well as examining how to implement the McKinsey Plan and CEDRE (the strategic stuff). On the other hand, the government tried to implement some tough measures in the 2019 budget, but backed out of most of them, due to lobbying and strikes by the effected constituents. This is because no Lebanese group wants to be the one to pay the price, which is the “equitable distribution of losses” generated by the excesses of the last eight years, or give up our defective economic model, as long as they’re still personally benefiting from it.
In the absence of painful and expeditious decisions by the government, the BDL measure seems like the only rational course of action. Minister Bteich is an extremely bright individual and you need to read his words carefully, each of which is selected precisely. He doesn’t just say the usual aphorisms like many politicians. My interpretation of his latest statements is that despite some apparent disagreements between him and BDL, on this issue they seem to be aligned. This is very positive because the executive branch and the central bank agreeing on a policy is crucial to save the country.
Ideally, you would want the regular peg (1507.5) to be applied to necessities like fuel, grain, and medicine, and the black market rate on luxuries like a Rolls Royce, travel, or hiring a foreign domestic worker.
The challenge for BDL and the Committee, though, is how do you separate crucial transactions from luxury ones?
Dan Azzi is a regular contributor to Annahar. He has recently been invited to be an Advanced Leadership Initiative Fellow at Harvard University, a program for senior executives to leverage their experience and apply it to a problem with social impact. Dan’s research focus at Harvard will be economic and political reform in a hypothetical small country riddled with corruption and negligence. Previously, he was the Chairman and CEO of Standard Chartered Bank Lebanon.