BEIRUT — The central bank Thursday afternoon released basic circular 161 to elaborate on Tuesday’s night announcement that it will intervene in the currency markets by selling US dollars to the public through commercial banks.
In the original announcement, BDL said it will provide banks with cash US dollars instead of Lebanese lira at the Sayrafa rate for their remaining quota of this month’s liquidity. In turn, banks will sell these dollars to their clients at the Sayrafa rate.
BDL will approve the repayment of commercial foreign currency loans in cash lira at the rate of LL8,000 to the “lollar,” or “Lebanese dollar”; this is the same rate that was set for “lollar” withdrawals last Thursday.
Here’s what we know:
• The lira dropped as low as LL29,000 to the US dollar on the parallel market before pulling back to LL26,000 after the announcement. The next day it again lost value, selling for a time at slightly above LL28,000 before settling around LL27,500, where it is currently trading.
• The circular explains that the central bank will supply banks with US dollar banknotes at the daily announced Sayrafa rate — yesterday’s closing rate was LL22,300 — instead of Lebanese lira, and banks will in turn sell these dollars to their clients at the same Sayrafa rate. According to banking sources, the transactions will take place as follows: assuming the monthly withdrawal limit per account is the one set by the central bank in circular 601, at $3,000 lollars, clients can withdraw $3,000 at a rate of LL8,000 for a total monthly amount of LL24,000,0000. Under the new exceptional measure announced in circular 161, the clients will receive LL24,000,000 divided by the Sayrafa rate. In this example, using yesterday’s closing of Sayrafa of LL22,300, the LL24,000,000 will yield $1,076 in US dollar banknotes. If clients choose to, they can in turn sell the US dollar banknotes to money exchangers at the parallel market rate of LL27,500, realizing in the process an immediate profit of more than LL5,600,000 — a concept analysts call arbitrage. The process is an effective haircut of 64 percent, from 3,000 lollars to $1,076 US dollar banknotes.
• Analysts believe with this move the central bank is aimed at stopping the rapid depreciation of the lira and pushing the parallel rate to converge closer to the Sayrafa rate; enough selling by clients to capture these profits will lead to the strengthening of the lira until this profit opportunity disappears.
• Others argue that this measure may be enough to stabilize the lira in the short term but given its short duration — the circular states that this exceptional measure will be in place until Dec. 31 — only progress in the negotiations with the International Monetary Fund is likely to prove be an effective long-term measure to halt the sell off.
• The central bank will effectively be using whatever is left of its foreign currency reserves to intervene in the markets, a practice some analysts believe is futile given the worsening economic conditions and will only result in wasting US dollars. As Beirut-based financial adviser Mike Azar told Reuters, the BDL's latest move is designed "to stabilise the lira but an insolvent bank that is bleeding FX ... cannot stabilize the currency by market intervention. It has no credibility."
• The circular does not address the second measure relating to commercial loan repayments at the rate of LL8,000. This should be the subject of another circular to be issued by the central bank.