While already struggling with simultaneous crises affecting its banking sector and currency, Lebanon seems to get engulfed by the spread of Covid-19 within its borders.
On top of that, the country’s debt burden is currently equivalent to nearly 170% of its gross domestic product, and it has been among the largest in the world for a long time. Despite a series of previous crises, Lebanon has never before defaulted, but in recent months it has grappled with its worst economic turmoil since the 1975-1990 civil war.
Lebanon was hit by a severe liquidity crunch and months of anti-government protests, and was due to repay a $1.2bn Eurobond on 9 March, while another $700m matures in April and a further $600m in June. Its overall amount of Eurobonds is $30bn, out of which Lebanese banks owned $12.7bn, the central bank held $5.7bn and the remainder was owned by foreign creditors (figures indicated by Marwan Barakat, head of research at Bank Audi).
On February 20th, Prime Minister Hassan Diab met a delegation from the International Monetary Fund to discuss how to tackle the country’s spiraling economic crisis. The premier asked the Washington-based emergency lender for advice, but has yet to ask for funds. Also, the IMF stressed out that the purpose of its delegation was to assess the economic challenges and provide broad technical advice.
The ongoing financial crisis has resulted in a scarcity of medical supplies necessary to deal with the Covid-19 outbreak, as a consequence of the restricted ability of medical supply importers to import vital medical supplies, including masks, gloves, and other protective gear, as well as ventilators and spare parts. Also, the government has yet to reimburse public and private hospitals for bills, including from the National Social Security Fund and military health funds.
On March 24th, the Association of Banks in Lebanon (ABL) held a press conference to announce the intention to donate $6 million to hospitals battling coronavirus, specifically for the purchase of 120 respirators. Two days later, Salim Sfeir, the Chairman of ABL, and Prime Minister Hassan Diab had a meeting, during which a cheque for the announced amount was handed over to the head of the government. The ABL’s announcement sparked criticism, given the figure was in dollars, which means the effective contribution could be fractionally disbursed or even postponed.
Since October last year, the Lebanese have been subject to strict capital controls, which have restricted weekly withdrawals to as little as $100, due to a severe shortage of the American currency. Moreover, several banks cut access to dollars for depositors when Hassan Diab declared a coronavirus lockdown on 15 March. The nationwide coronavirus lockdown has left many Lebanese workers without jobs, and subject to police fines and legal action if they chose to try and work.
The shortage of American currency was a critical issue in Lebanon even before the spread of Covid-19. For instance, in November 2019 the Lebanese Syndicate of Gas Stations Owners started an open strike, due to the financial losses inflicted by the fact that the gas stations’ owners pay their suppliers with the U.S. currency while selling fuel to clients in Lebanese pounds.
On April 3rd, Lebanon‘s Central Bank said depositors with small dollar-denominated accounts would soon be able to withdraw – and withdraw in local currency – money that has been trapped in the Lebanese banking system for almost half a year. The cash will be disbursed at a market rate set daily on an online platform, expected to be ready in one week to 10 days.
The decision was made public in a circular released by Lebanon’s central bank. It will allow people with accounts containing $3,000 or less to withdraw their money in Lebanese pounds at the market rate, which is substantially higher than the official rate.
The decision’s parameters apply to roughly 60 percent of accounts in Lebanon, worth a total of around $1bn, covering an estimate of 1.7 million people.
Lebanon’s currency has been pegged to the dollar at 1,500 Lebanese pounds for 23 years, but began depreciating on parallel markets last summer due to unsustainable financial policies that cracked under an acute dollar shortage. The dollar shortage was the result of a decade-long economic slump and a slowdown in remittances from Lebanon’s large diaspora.
Suffering from this dollar liquidity issue, banks imposed increasingly harsh capital controls and allowed depositors to withdraw a few hundred dollars per month from dollar-denominated accounts, forcing many to withdraw cash in Lebanese pounds at the official rate, which was substantially less than the market rate and thereby caused them to incur significant losses.
The recent decision affects only a small fraction of the Lebanese banking system’s more than $150bn in total deposits, but analysts see it as the first step in permanently converting dollar deposits into the local currency, a process known colloquially as “liraficaition.”
Jad Chaaban, associate professor of economics at the American University of Beirut,
said that “what is portrayed as something beneficial is actually a forced conversion to Lebanese pounds at a market rate, and it’s not a clear rate”, adding that “in effect, it cleans up the balance sheets of banks because they can ‘get rid’ of 1.7 million small depositors. Instead of these people trying to come and withdraw $100 to $200 every two weeks, [the banks] give it to them one time and in Lebanese pounds.”
Also on April 3rd, the World Bank announced it has approved a loan of $40 million dollars to strengthen the Lebanese Health Ministry’s response against the coronavirus outbreak in the country.
Sources: Middle East Monitor, Al-Jazeera, The Guardian, Human Rights Watch, Reuters, Daily Star, XinhuaNet.
Photo source: Malaysia News.