For almost a year, the Lebanese have been facing a crisis of rare intensity, marked by banking restrictions and an unprecedented devaluation of the pound against the dollar, and seem not yet close to see the end of their sufferings as bad news continues to pile up. The situation was made worse by the double explosion in the Port of Beirut on August 4. The latest crisis, revealed on Thursday to the press by an anonymous source but still not officially confirmed, concerns the possibility that the Banque du Liban (BDL) may no longer have enough foreign exchange re-serves available to maintain all its import subsidy schemes. Unable to stabilize the exchange rate as it had been doing since 1997, the BDL has put in place since last October several ar-rangements so that importers of products considered strategic can exchange their pounds for dollars either at the official rate (1,507.5 pounds to the dollar) or at an intermediate rate (3,900 pounds to the dollar, the rate imposed on licensed moneychangers), in order to pay their suppliers.

Its various circulars covered imports of fuel, wheat and medicines (No. 530); medical equip-ment and raw materials for the local pharmaceutical industry (No. 535); and certain basic food-stuffs and raw materials for agriculture and industry (Nos. 557 and 564).These measures are aimed at limiting inflation linked to the devaluation of the pound (6,800 to 7,000 pounds to the dollar on Friday on the black market), in a country that imports the bulk of its needs.

Liquid Reserves

In order to finance these mechanisms, the BDL has to draw on its foreign exchange reserves, which have been steadily declining in recent years. According to the latest update, the reserves reached $30 billion (-19.6% year-to-date) in mid-August, excluding $18 billion of gold (+28.9% due to rising prices). But according to the aforementioned anonymous source on Thursday, the BDL would have only 19.8 billion dollars of liquidity left, of which about 17.5 billion correspond to the obligatory reserves of banks – which in principle the BDL cannot spend. The source finally concluded that this would leave the BDL with only $2.3 billion in reserves, which is enough to subsidize fuel, wheat and medicine imports for only three months.

The fact that the BDL does not publish details of its liquid reserves and the seriousness of the financial crisis that the country is going through (nearly $70 billion in losses divided between the state, the BDL and the banks, according to the cabinet) are fueling speculation about the real amount of foreign currency available. The reserves have already reached an amount be-tween 17 and 18 billion dollars, which is at least two billion less than the amount reported on Thursday, Kamal Hamdan, an economist and director of the Consultation & Research Institute (CRI), told L'Orient-Le Jour. For his part, a banker, speaking on the condition of anonymity, re-ported having heard that the liquid reserves would only be sufficient to cover five to six weeks of subsidies. "Some people think it's not as bad, others fear that reserve requirements are al-ready in place," the banker said.

However, the minutes of Wednesday's meeting between the BDL and the board of directors of the Association of Banks of Lebanon (ABL) give little cause for optimism. According to this doc-ument, which L'Orient-Le Jour was able to review, the BDL governor, Riad Salamé, indicated that the International Monetary Fund (IMF) had refused, at a recent meeting in Washington, a request from Lebanon to immediately release $800 million, the amount corresponding to the country's quota within the organization. The IMF, from whom Lebanese leaders have been seeking financial assistance since May, again made the release of any assistance conditional on the launch of reforms to ensure the recovery of the country, which has been in partial debt de-fault since March. "The fact that this request was actually made speaks volumes about the se-verity of the situation," the banker added.

The decision taken by the BDL, in the aftermath of the double explosion at the port, to let mon-ey transfer companies again disburse the amounts sent to their clients in Lebanon in dollars, after having imposed for several months doing so in pounds, was going to deprive the BDL of a source of foreign currencies that it could re-inject into subsidies, said another economist, also speaking on the condition of anonymity. Until now, the BDL has been buying back the trans-ferred dollars directly from the sector at a rate of 3,800 pounds to the dollar.

Impact on Inflation

Whether it happens now or in three months, the suspension of subsidies will logically affect the purchasing power of increasingly poorer Lebanese households (more than 55% of the popula-tion in May, according to a recent UN report). Healthcare expenditure accounts for 9.8% of household consumption, compared with 12% for transport and 4.5% for wheat; that is, a total of 26.3%, according to Hamdan. A suspension of subsidies on these products may eventually con-tribute to a rise in inflation "of 180 to 200% year-on-year in a few months." According to CRI, the inflation rate in July reached 91% year-on-year.

"This is a big problem for households that see their purchasing power diminish, knowing that 80% of salaries in Lebanon are received in pounds" and not in foreign currencies, the economist said, noting that in addition to accelerating the impoverishment of the population, the removal of fuel subsidies, to name but one, will have repercussions on other categories of expenditure and products (heating, local production costs, etc.

Economist Jean Tawile put things into perspective in a less alarming way, by stating that subsi-dies, for all product categories combined, have until now benefited the margins of certain trad-ers and that the removal of subsidies should not therefore result in excessive price increases. "If they raise their prices too much, they won't sell much," given the decline in purchasing power. Like the president of the Syndicate Of Supermarket Owners, Nabil Fahed, who said he believed the subsidies benefit "the rich more than the poor," the economist considered the current sub-sidy mechanisms inefficient if the aim is indeed to help the poorest.

While Fahed called for the introduction of "consumption vouchers," such as those mentioned in May by the Economy and Trade Ministry, Tawile recommended the adoption of a system of "transactions or social benefits, financed by the state budget" as soon as the country finally be-gins the reform process that should clean up its finances and revive its economy.

The question of how long the BDL will be able to subsidize this or that product, whether strate-gic or not, remains secondary to the major reforms that must be launched to prevent the crisis from taking an even more dramatic turn. In a tweet, the CEO of FFA Private Bank, Jean Riachi, recalled that the most urgent reforms – as requested by the IMF and the international commu-nity – should focus on the restructuring of the financial sector and the audit of BDL's accounts, the reform of the electricity sector and finally the reform of border control and customs admin-istration (including land borders, ports and airports).

(This article was originally published in French in L'Orient-Le Jour on the 22nd of August)