A currency peg that has defended the Lebanese Lira for years may falter and make way for a crisis
Lebanon on Brink of Economic Ruin, Finance Minister Warns
SOURCE: THE NATIONAL
The Lebanese economy has been sluggish for the past seven years, but Lebanon’s finance minister is now warning of a potential crash in the value of the country’s currency, as haggling between politicians continues to delay the formation of a national-unity government.
The Lebanese Lira has been pegged to the US Dollar since 1998, a policy that economists say has stabilised financial markets and defended against a currency crash.
But the eight-month delay in the formation of a national unity cabinet has raised the spectre of alarm over the possibility of a destabilising currency crisis on par with that of Turkey.
“The repercussions and consequences of the economic crisis today are at their highest. The crisis started to turn into a financial one,” Lebanese Caretaker Finance Minister Ali Hassan Khalil said late on Saturday in a statement carried by the state-run National News Agency.
“We hope it will not become a monetary crisis,” he said.
The government’s dollar-denominated bonds have hit record lows and bank deposits are growing at their slowest pace since the end of the civil war. Consequently, banks in the country are striving to preserve the currency peg by offering the highest interest rates in a decade in an attempt to bring dollars into the country.
Reflecting this precarious financial standing, both Moody’s and Fitch international ratings agencies have changed Lebanon’s outlook to a negative, making government bonds less attractive and increasing speculation about the vulnerability of the Lebanese Lira.
Lebanon’s Central Bank maintains that the currency is not at risk of a devaluation because the level of foreign currency reserves it holds acts as a technical buffer.
The current political crisis in Lebanon may not be as dire as in 2005 when Lebanon’s then-prime minister Rafik Hariri was assassinated or, in 2006, when the country entered a month-long war with Israel. But political wrangling over cabinet formation has stalled necessary fiscal reforms that could unlock $11 billion in pledged loans by international donors during a Paris conference in April.
The country, which was urged by the International Monetary Fund this year to carry out “urgent” measures to put public finances back on a sustainable footing, is in dire need of the funds.
The inflation rate has increased from 1.5 per cent in 2017, to 7 per cent in 2018, leaving Lebanese consumers with a shortage of money and less purchasing power.
Meanwhile, economic growth has slowed from 8 per cent in 2010 to 0.6 per cent in 2017, as measured by the country’s Central Administration of Statistics. The IMF projects a GDP growth of just 1 per cent for 2018.
Added to this, political wrangling has undermined confidence in the country’s main sectors. For instance, confidence in Lebanese real estate slumped in 2018, leading to a decline in investment.
Concern over a potential currency crisis has also dimmed confidence in Lebanon’s banking sector.
The political and economic crisis has aggravated public discontent. Hundreds of demonstrators last week took to the streets of the capital Beirut, where they called for the “overthrow” of the government, over what they described as poor governance.
The economic cost of political deadlock has also sparked criticism from Lebanon’s Maronite Patriarch Beshara Al Rai, who said in his Christmas address that politicians “do not care about the great financial losses suffered by the Lebanese state and people”.
Lebanese officials this month indicated a government deal is close after Lebanese President Michel Aoun agreed to cede a seat in government to one of Hezbollah’s Sunni allies, satisfying a key demand by the Lebanese group.
However, Hezbollah’s Sunni allies raised last-minute objections as to whom would represent them in government, after a candidate selected by the president refused to exclusively represent the group.
This has started a new page of consultations over which of the remaining five MPs would represent the Sunni alliance in government.
Lebanon has been without a government since parliamentary elections were held in May.