The short history of the Lebanese pound: Is it time to divorce with the dollar?

[Butifldrm]

 

 

The short history of the Lebanese pound: Is it time to divorce with the dollar?

Dan Azzi

  

 

 Articles

Dan Azzi *

The Lira was born in 1939. It was raised under the patronage of our affectionate mother France. When she reached adulthood, her value was then linked to French francs. After France was defeated in World War II, the lira abandoned her lover the franc and tied it to the handsome British pound.After the return of France to the list of superpowers, the lira returned to her first lover, and linked her life to the franc again, until 1949 when she was liberated from the franc, like the independence of Lebanon from the French mandate, and pounded the franc and France, and said " au revoir " Floating, their value is determined by the supply and demand market.

Meanwhile, a new leader has entered the global economic and geopolitical neighborhood, the US Dollar. A new story has been going on so far.

Between 1964 and 1981, the exchange rate of the lira moved within a narrow margin between 3.22 lira and 3.92 lira per US dollar. Then in March 1981, the lira jumped out of this range, and for the first time the dollar bought 4 lira. In June 1982, when clouds of black Israeli invasions surfaced, the US dollar was buying 5 liras. In June 1984, "Lira got a face" and the dollar was buying 6 liras. And here the doors of hell opened wide and the pound collapsed, until one US dollar bought 2382 lira in August 1992.

In 1993, a new governor came to the Banque du Liban and the exchange rate was set at $ 1507.5 per dollar from December 1997 until this morning. It is clear that our ruler has faced a tremendous challenge: to compensate, through a series of monetary maneuvers, for the absence of a serious economic plan by the concerned, not to mention the country's less idealistic administration, and the leakage and leakage of our "unique" sectarian and clan system.

It is clear that our monetary policy is based on one principle that governs economic policy, which is to stabilize the exchange rate of the lira against the US dollar, a policy that has been going on for more than two decades.But if this policy fulfilled the role of economic policy and replaced it, all countries would have seized the price of their currency in dollars with a fixed value does not change.

There is no doubt that in the 1990s, the policy of linking the pound was necessary to restore confidence in the local currency. Now, is this policy one of the core tasks of the central bank? Before we answer that, we must answer the most important question: What is the typical task of typical central banks?

According to the macro - economic theories " Macroeconomics common", the basic tasks of central banks, or rather its priorities, come as follows:

1. Price Stability Any limit and control of the price level, which is usually known to keep annual inflation below 2%.

2. Full Employment Any reduction of the unemployment rate to a minimum, but without breaking the first rule above.

 

What is the situation in Lebanon?

In fact, Lebanon's inflation rate exceeded 5%, a high rate compared with the cost of living in the United States, which we link our currency to, with an inflation rate of about 2%. Worse still, the unemployment rate is around 25%, which is over 37% for young people, according to World Bank reports.To understand how catastrophic these figures are, we must remember the Great Depression of 1929, when the US stock market lost 90 percent of its value, and people jumped from New York skyscrapers to get rid of their lives. The 20%!

Of course, when a currency is linked to another currency, the country loses the ability to control several important things, including its monetary and economic independence. If you stop running, for example, to run the toilet, you have to stop and wait outside, so the winner will never win.

 

What are the implications of the peg to the dollar?

Lebanon was positively affected by many years of fixing the exchange rate and pegging it to the dollar. This allowed residents to pay higher salaries, which raised their purchasing power and living standards to a much higher level than if the value of the pound was linked to the productivity of the Lebanese economy. But in return, we lost the ability to design an independent monetary policy and suitable for our own situation. From here, when US central bank governor Jerome Powell decides to raise interest rates in the US, as now happens, we have to raise interest in Lebanon.Which is bad, especially at this stage in which Lebanon is experiencing a severe economic recession. Raising the deposit interest rate to 15%, as it is today, eliminates incentives for the investor to establish a company, an institution or a restaurant, to develop a property, to buy a plot of land or to do other activities. Instead, he would prefer to double his money within 5 years For deposit at a rate of 15%).

In the face of this reality, what is the typical price of a currency? How does the market determine the exchange rate of a currency that is not linked to another foreign currency? Let's take a simple example to illustrate the idea.In two countries such as South Korea and Japan, two factories and two car exporters and the value of their currencies under the market, if many consumers decide to buy Korean cars instead of Japanese cars, the Korean Won will rise at the expense of the Japanese yen. However, this will improve the competitiveness of Japanese goods whose prices have fallen, so, in normal conditions, the market will adjust itself, according to some economic theories. But in Lebanon, since we do not sell cars and we do not have important products for export abroad, most of what we consume is imported from abroad, it is imperative to maintain the exchange rate of the pound to attract US dollars from abroad to fund our addiction to necessary and luxury foreign goods, Clothing, and even ******, which is our favorite national hobby.

Previously, we were getting dollars from three main sources: foreign direct investment, tourism and remittances of expatriate Lebanese. Today, foreign direct investment has dried up completely, and this has been going on for several years. Tourism is entering about $ 4 billion a year in Lebanon. These figures are exaggerated by the fact that many tourists are Lebanese expatriates with dual nationalities who enter their foreign passports because of the difficulty of renewing their Lebanese passports, as well as their high cost. Now, the volume of Lebanese tourism has gone up, absorbing almost a dollar equivalent to the amount of dollars generated by incoming tourism to Lebanon. This is because our local currency is overvalued, which raises prices locally and makes traveling to neighboring countries less expensive than spending money in Lebanon.

 

A huge shortage of dollars

This has resulted in a huge shortage of access to dollars, and thus the traditional sources of attracting dollars can not maintain the same lifestyle, that is no longer enough to finance the Lebanese economy, and that is why the term "financial engineering", a cash operations during The last three years have risen recently.

Most Lebanese do not know much about what these cash operations are, but since their name is "engineering," the Lebanese concept must be a positive and innovative event because every Lebanese since childhood is told to become an engineer (or marry an engineer) . What are these "Einsteinian" ideologies that generate huge sums of money? Several forms of financial engineering have been implemented, but it reminds me of the Kama Sutra book, since, no matter how many situations, it leads to one result. Hence, financial institutions can be summed up as a process of paying high interest rates on dollar deposits by paying imaginary dividends in Lebanese pounds (which are printed) to attract and attract the dollar, which in turn is quickly consumed to fund imports.

Is still linking the exchange rate of the pound today produces the same benefit and allows residents to obtain a high standard of living? In fact, the real estate bubble, high inflation and high prices have hurt the purchasing power of the majority of residents, so that their income is no longer sufficient to finance their consumption, a sign of rising household and individual indebtedness. It has also affected investment and productive economy, as evidenced by the fact that several industrial establishments closed due to high costs and loss of competitiveness, as well as many tourist establishments and restaurants, which increased the unemployment rate, which contributed to the deterioration of purchasing power more and more, and this negative spiral is exacerbated.

Therefore, it is time to think about alternative and serious economic and financial policies, and then reconsider this "Maronite marriage" between the lira and the dollar. The most important question is whether we have a choice in this regard, especially that the price of defending this "marriage", with the same conditions, could lead to a 25% increase in interest rates next year, up to 40% in subsequent years, Of harmful and dangerous repercussions?

A new partner is better for us, it could be, for example, a basket of foreign currencies that reflects the trade balances of the countries with which we exchange goods. This hadeeth is a continuation.

* Retired banker, former chairman of Standard Chartered Bank

For the Lebanese "news"

Views 60   Date Added 11/09/2018

http://economy-news.net/content.php?id=13611

[bostonangler]

"Ditch the dollar"... Seems everyone is thinking about a new direction.... Let's hope not...

 

B/A