Exchange rate unification: New milestone, dangerous turn

On Jan. 26, Parliament passed the 2024 budget law, based on a revised version drafted by Najib Mikati’s caretaker cabinet. The text, which is due to be published in the Official Gazette on Thursday, scrapped every reference to the LL15,000 LBP and LL1,507.5 official rates to the dollar when calculating taxes and other administrative charges.

A week later, Banque du Liban (BDL) published Basic Circular no. 167, which requires banks to convert several categories of assets denominated in foreign currency at a rate to be set by a foreign exchange platform, like Bloomberg Platform or Sayrafa platform.

“Circular no. 167 is much more decisive than Circular no. 166, which was published at the same time and allows depositors affected by banking restrictions to withdraw $150 a month from their accounts,” said Nadim Daher, a certified public accountant and treasurer of the Lebanese Business Leaders Association (RDCL).

“This will solve all the visibility problems on the banks’ accounts and, indirectly, of all other companies. Auditors will no longer be obliged to issue unfavorable opinions on financial statements in audit reports because they are contrary to international accounting standards, and more specifically IAS 21,” he added.

Implicitly fixing the exchange rate

The International Monetary Fund (IMF), with whom Lebanon has been negotiating intermittently since 2020 to secure aid that would finance its recovery, thinks along these lines.

Speaking to L’Orient-Le Jour, IMF Resident Representative for Lebanon Frederico Lima said “BDL’s measures are welcome steps towards unifying the exchange rate at a level that reflects the reality on the ground.”

Albert Dagher, economist and author of several books on the Lebanese crisis, indicated that it is not just a matter of unifying the exchange rate, but also of implicitly fixing it at a rate that does not seem to have been chosen by chance.

“Somewhere along the line, Lebanon is going through a period quite similar to the one it went through in the 1990s, during the time of former Prime Minister Rafik Hariri, with measures aimed at stabilizing the rate rather than letting it float,” he said.

“Only in countries where the state has been completely destroyed is the exchange rate allowed to float. As soon as there is a functioning state, there is interest to have a stable exchange rate,” he said.

The delay in launching the Bloomberg Platform, although in principle linked to the security context caused by the Israel-Hamas war, also allows BDL to keep a firm grip on the market and the rate, as the main seller of Lebanese lira that the state can directly mass absorb through taxes calculated at the market rate.

CEO of Banque BEMO Riad Obegi believes that unifying the exchange rate is an “essential first step,” as the main role of the currency is to reduce uncertainty for economic players, but it is not enough to solve everything. Lebanon’s GDP fell from $55 billion to $20 billion in four years of crisis, whole sections of the economy have been destroyed and the cash economy is flourishing.

“Every year, $35 billion of potential wealth goes up in smoke,” he said. “What’s more, the state is no longer repaying its debts and is no longer really assuming its responsibilities. At the same time, it acquired almost $50 billion,” he said.

Obegi added that the heart of the current crisis is linked to monetary policy, which has led to the disappearance of liquidity through hoarding and to a virtual cessation of payments by banks.

In an interview with L’Orient-Le Jour in July 2022, former French Diplomat Pierre Duquesne, who has followed the Lebanese situation for a long time, said that the Lebanese banking sector was going through a solvency crisis rather than a liquidity crisis.

The first real norm

The gradual unification of the exchange rate and its stabilization — which were made possible by tightening the market — were initiated by the authorities in 2023, putting an end to years marked by multiple rates. Banking restrictions, the development of the cash economy and impunity that speculators enjoyed, aided by the authorities’ inertia, also created fertile ground for the collapse of the lira, which has lost 98 percent of its value in over four years.

The monetary situation finally began to stabilize in the spring, shortly after BDL adopted circular no. 165 on April 19, 2023. For the first time, this formally clarified the difference between the new deposits in lira and dollars (subject to no abnormal restrictions) and the old ones (which are part of the liabilities that Lebanon is supposed to address as part of its recovery).

Daher recalled that the parliament and the caretaker cabinet helped push forward the process of unifying the exchange rate without fully undertaking it.

At the end of 2020, then Finance Minister Ghazi Wazni took the first step, issuing decision no. 1/893, which requires companies to take account of the rate on the parallel market when recording their transactions. Then, the 2022 budget was calculated based on an exchange rate of LL15,000 and included taxes to be paid in dollars.

The shift in the official rate from LL1507.5 to LL15,000 to the dollar was made on Feb.1, 2023, in the most indirect way possible, through a statement former BDL governor Riad Salameh gave to Reuters on Jan. 31, followed by a rate change on BDL’s website.

In April of the same year, the cabinet issued Decree no. 11,230, requiring to give up the LL15,000 rate when calculating VAT on products priced in dollars (in an economy that is already almost totally dollarized), to the advantage of a system that aligns it de facto with the market rate.

“Circular no. 167 is the first norm published since the start of the crisis which clearly indicates that there is now only one reference rate, that is published by the BDL and currently aligned with the market, i.e. LL 89,500 to the dollar. Before this text, the authorities had never clearly defined the exchange rate that companies had to apply when preparing their financial statements,” said Daher. “Acting Governor [of BDL] Wassim Mansouri wanted the cabinet or parliament to undertake it first, but he finally decided to do so,” he said.

Difficulties with a knock-off effect

Everyone agrees that unifying the rate is not an end in itself, starting with Mansouri who is urging the authorities to implement the other reforms needed as operational tools for the country’s recovery.

“They include the capital controls law, to protect banks from one of the direct consequences of having a unified exchange rate, which is that all foreign currency deposits they hold should be released in dollars or lira at the market rate, the banking restructuring law and the law regulating the distribution of the Lebanese financial system’s net losses, which exceed $70 billion,” said Daher.

The IMF also warned that the job is far from finished and that BDL cannot do everything on its own. “The measures taken by BDL also underline the need to restructure the banking sector to boost growth and maximize the amounts that can be returned to depositors,” said Lima, referring to some $90 billion in deposits still targeted by banking restrictions.

“We urge the cabinet and parliament to take additional measures in this regard, in particular by passing the laws needed to start the bank restructuring process,” he said.

Obegi is critical of the approach that the authorities seem to favor, namely to continue injecting foreign currency liquidity slowly (as is the case with Circular no. 166) — an approach he deemed “counter-productive.”

“Also, stating that BDL owes nothing to the banks when the latter have more than $80 billion on deposit with it, is tantamount to announcing that no bank is solvent. Admittedly, BDL does not have $80 billion in immediate liquidity [it has nearly $9 billion], but the Lebanese economy does not need more than $4 billion to be revived [which the BDL has]. The hope that new banks will replace the old ones while keeping BDL’s modus operandi unchanged is wishful thinking. Only well-connected investors will dare to venture into a system where crony capitalism reigns,” he said.

According to Dagher, with or without reforms, the major consequence of the current measures remains the significant increase in tax burden and costs of public services, caused by the passing of the budget and the abandonment of the LL15,000 exchange rate.

“All economic players will seek to adjust their prices, which will inevitably impoverish the majority of Lebanese. As controls are inadequate, many abuses are also to be feared,” he said.

The economist noted that this unification also entrenched the devaluation of all the state’s and BDL’s past commitments in lira.

Daher pointed to the fact that the parliament finally excluded from the 2024 budget law the provision allowing companies to adjust their assets (blocked bank accounts, receivables and payables, as well as stock and fixed assets) from the effect of the lira devaluation, without subjecting this adjustment in value to tax.

This measure would have enabled companies to adjust their balance sheets by revaluing them at the market rate (without any unjustified tax impact) to make them more readable in compliance with IAS 21.

An asset worth $1,000 was converted at the rate of LL15,000 in the declaration made to the tax authorities before the 2024 budget. After coming into force, it should be converted to LL89,500 to the dollar, and the difference between the two amounts will be taxed.

“This is a very bad blow dealt to companies that were counting on this measure to correct their financial statements from the effect of the devaluation,” said the accountant.

This article was originally published in L'Orient-Le Jour. Translated by Joelle El Khoury.