Credit: AFP
In Lebanon, the simple act of grocery shopping is becoming an increasingly complex and nightmarish task for households. Prices are soaring every month — or even day to day — while the lira continues its painful nosedive.
Since September 2019, the national currency has lost 80 percent of its value against the US dollar and prices have more than doubled (a 120 percent increase year-on-year, according to the Central Administration of Statistics), with an average monthly increase of 7 percent.
Food products have been particularly hard-hit: since most are imported, and therefore purchased with dollars, their prices have increased nearly fourfold in the same period.
We have yet to see the worst. The dramatic drop in foreign currency reserves at Banque du Liban, Lebanon’s central bank, will slash the government’s ability to subsidize fuel, pharmaceuticals and basic food items. Once the government ends these subsidies, there is a strong risk that prices will skyrocket, raising the specter of hyperinflation in the country.
This atypical form of inflation is characterized by an excessive and uncontrolled general rise in prices by more than 50 percent per month, according to the definition adopted by American economist Phillip Cagan in his 1956 paper “The monetary dynamics of hyperinflation.”
Historical experience also shows that once this hyperinflationary spiral is launched, it becomes very difficult to stop, and will have disastrous and irreversible consequences on the economy as a whole and on individual households. Hyperinflation deteriorates the value of money to the point of rendering it worthless — so worthless, in fact, that countries suffering from this crisis were forced to change their currency altogether. From Weimar Germany in 1923 to Zimbabwe in 2009, Hungary in 1946 or Brazil in 1994, most of the countries that suffered from the spiral of hyperinflation were forced to change their currency.
Printing money
If this hyperinflationary threat now hangs over Lebanon, it is primarily due to the monetary policy that BDL has been applying until recently. Instead of a sound strategy, BDL deployed the counterpart of the time-wasting tactics applied for over a year by the country’s political and economic authorities to delay, as much as possible, the painful reforms required to stabilize Lebanon’s economy and demanded by our international partners to access relief. At a fundamental level, BDL refused to recognize the real losses of the financial system, preventing their equitable distribution.
This monetary policy has, in fact, mainly consisted of “spinning the printing press,” as BDL deliberately and irresponsibly increased the supply of cash lira in circulation. At the end of September, the circulation of lira banknotes and coins jumped 267 percent year-on-year to reach LL23.743 trillion, triggering the emergence of a “cash economy.”
More precisely, this explosion in the supply of cash lira in circulation was the result of Circular 151, issued by BDL in April, which allows customers who have a foreign currency account at a Lebanese bank to withdraw cash in lira at the current exchange rate (now set at LL3,900 to the dollar) via the electronic platform “Sayrafa House,” launched in June by the central bank. In practice, this circular allowed BDL to redeem “Lebanese dollars” or “lollars” by printing Lebanese lira.
This money printing is further accentuated by the repercussions of Lebanon’s choice to declare in March that it was defaulting on paying its foreign currency debt, a first in the country’s history.
No longer having access to the financial markets to continue to finance a public deficit reaching LL3.35 trillion over the first half of the year, and to pay the civil servants’ salaries (which now represent more than 40 percent of total expenses), the state is in constant need for new liquidity in lira, provided by BDL.
This explosion of lira supply, combined with the dollar liquidity crunch, helped depreciate the lira to unprecedented levels on the black market.
Stabilization
Admittedly, BDL seems to have finally become aware of the risk. It has recently adopted two measures aimed at drastically reducing lira liquidity in the market: first by requiring that importers of subsidized products provide cash lira to obtain dollars, then by limiting the withdrawal of cash lira via the banks’ own withdrawal limits from the central bank.
But aside from the fact that these decisions proved extremely controversial due to their social consequences and forced BDL to — temporarily? — reverse gears, these measures are in any case ineffective due to the extent of the loss of confidence in the financial system.
The first step to reinstate this confidence remains the formation of a competent and independent government capable of setting a stabilization plan and applying it to the letter.
Such a program may indeed fail if it consists of only half-measures. Argentina carried out five stabilization programs in vain between 1984 and 1989 before succeeding in 1990. Brazil only succeeded after six failed attempts in 12 years.
That is why Lebanon’s stabilization plan must distribute, once and for all, the losses accumulated by the state, the banking sector and BDL. Without a clear, fair and final distribution of losses, it will not be possible for the banking sector to attract new capital and regain its activity as the driving force of the private sector, nor to stabilize the lira.
It is only once this work is done that the international community will be able to agree to an additional injection of liquidity. This aid would allow a relative restoration of confidence, a stabilization of the financial situation and the launch of structural reforms that have been postponed many times.
In order for the adjustment to be sustainable, this new government will not be able to turn a blind eye to fiscal reform, which will require taking on incredibly unpopular projects such as reducing the size of the public sector — in particular by cutting “ghost” jobs, which are paid but require no work — reforming the electricity sector and tackling tax and customs evasion.
Given its dramatic consequences and its irreversible nature, there is therefore more urgency than ever to stop buying time and to remove the specter of hyperinflation. The current financial situation has underscored that money is not just a medium of exchange, a store of value and a unit of account; it is also, through its value, a reflection of the stability of a country's social and political institutions.
This article was originally published in French in L'Orient-Le Jour. Translation by Sahar Ghoussoub.
