Why Lebanon ran out of money and what it can do now

Why Lebanon ran out of money and what it can do now
An anti-government demonstrator carries a placard which reads "The bank is safe, the currency is dead" in front of Lebanon's central bank in the capital Beirut on March 16, 2021. (AFP/File Photo)
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Updated 19 March 2021

Why Lebanon ran out of money and what it can do now

Why Lebanon ran out of money and what it can do now
  • In a span of weeks the pound has lost about 20 percent of its value against the dollar on the black market
  • There is no painless way out of the economic downward spiral and the endless devaluation of the currency

LONDON: Over the past two weeks the Lebanese pound has lost more than 20 percent of its value against the dollar on the black market. Since October 2019 the exchange rate has plummeted by 90 percent, affecting everyone in the country.

These numbers are stark. On March 16 three money changers told the AFP news agency they were buying dollars for 14,800 to 14,900 Lebanese pounds.

The currency is pegged to the dollar and the official rate is set at 1,507.5 pounds to one dollar. However, dollars are generally unavailable at the official rate because of the economic crisis, which is why black-market rates apply.

In 2020, Lebanon was the fourth most-indebted country in the world behind Japan, Greece and Eritrea. In March last year, the country defaulted on its international debt for the first time in its history. Since then, there have been no economic reforms and no payment plans agreed.

The situation is exacerbated by the banking crisis and the effects of the pandemic. The nation’s banks face bankruptcy, having lent up to 70 percent of their assets to an insolvent state and central bank. The country has lost its creditworthiness and is resorting to printing more, increasingly worthless, money which is further fueling inflation.

The depreciation of the pound resulted in staggering inflation of 84 percent in 2020. To make matters worse, food inflation stood at 402 percent. Meanwhile Lebanon’s gross domestic product contracted by 25 percent last year.

The World Bank estimates that 50 percent of Lebanon’s population has slipped below the poverty line, which is mind-boggling in a country that 60 years ago was known as the “Switzerland of the Middle East.”




The World Bank estimates that 50 percent of Lebanon’s population has slipped below the poverty line. (Photo by Marwan Tahtah)

The economic situation is worse now than it was during the civil war in the 1970s and 1980s.

What we see in Lebanon is a classic vicious circle: the worse the economy gets, the more the currency depreciates and vice versa. The numbers reflect a defunct economy.

The situation was already bad before the devastating explosion on Aug. 4 last year that destroyed Beirut’s port and a large section of the city. Since then, the nation’s economy has slid even further down the precipice.

The country is literally running out of money. Foreign reserves have dwindled from about $30 billion a year ago to about $16 billion, of which only between $1 billion and $1.5 billion is available to subsidize food and fuel imports.

These reserves are important because the central bank essentially subsidizes wheat, medicine and fuel prices by providing importers with hard currency at the official exchange rate.




The Lebanese government has so far been largely inactive as it faces an unprecedented economic crisis, as resentment grows. (Photo by Omar El-Sayyed)

Given the dwindling foreign reserves, interim finance minister Ghazi Wazni announced on Tuesday that subsidies will be removed from several non-essential products, such as cashew nuts and branded coffee. Gasoline subsidies will be reduced from 90 percent to 85 percent.

All of these financial pressures are hitting people in Lebanon hard and the situation is not going to improve any time soon. The government expects inflation to reach 77 percent this year — and that estimate was made before the removal of the aforementioned subsidies.

The more the currency depreciates, the further out of control inflation will spiral. A $246 million loan from the World Bank to support the 786,000 poorest people in the country is but a drop in the ocean, as is the 1 million pounds a month the government wants to give to the poorest families.

The Lebanese government has so far been largely inactive as it faces an unprecedented economic crisis. Wazni has announced that he wants to impose a 1 percent tax on bank deposits above $1 million, and charge 10 to 30 percent on the interest banks earn from deposits with the central bank.

These proposals will go down like a lead balloon in the face of banks and depositors who have already faced de facto haircuts on their deposits of more than 60 percent.

What we see in Lebanon is a classic vicious circle: the worse the economy gets, the more the currency depreciates and vice versa. The numbers reflect a defunct economy.

Cornelia Meyer

The government’s plan to devalue the currency and work toward a flexible exchange rate, while laudable, can only work in conjunction with a full program of economic reforms, which will have to be supported by the International Monetary Fund (IMF) for the sake of credibility.

The situation grew so dire a week ago that President Michel Aoun tried to crack down on the ever-declining black market exchange rate by ordering security forces to intervene when the exchange rate exceeded 10,000 pounds.

He justified his order by highlighting the “dangerous repercussions” the deteriorating exchange rate is having “on social security.”

His speech could not halt the slide of the currency, and neither could his security forces. Hassan Diab, the country’s caretaker prime minister, also warned this month that Lebanon could slide deeper into chaos amid the exchange rate’s continuing nose dive.

Angry protesters blocked highways and streets, outraged by political inaction and corruption in the face of untold economic suffering.




Turning the crisis around will not be an easy task, especially given the Lebanese people have already endured enormous economic hardship. (Photo by Omar El-Sayyed)

A comprehensive plan for economic reforms and a bailout from the IMF are vital if confidence in the Lebanese economy is to be restored. The reforms required by the IMF will come at a price, and politicians will need to be willing to explain that to the general population.

This will not be an easy task, especially given the Lebanese people have already endured enormous economic hardship, which means opposition to further suffering is inevitable.

Whichever way we look at Lebanon’s economic woes, they cannot be divorced from the nation’s politics. The country needs a government that can be a counterparty with which international institutions and bilateral lenders can negotiate.

The political arena in Lebanon is complex, with sectarian and geopolitical undertones that have their origins in the civil war and the geopolitical complexities of the regional neighborhood, including the influence of Iran and Hezbollah.

The caretaker government, which is headed by a prime minister who has wanted to resign for a long time and does not have a mandate to negotiate with the IMF, will be incapable of convincing the population to accept what will doubtlessly be the draconian measures required as part and parcel of any agreement with the lender.




A picture shows the value in Lebanese pounds of a $100 bill on the black market exchange rate (1,500,000 LP) in Beirut on March 16, 2021. (AFP/File Photo)

The US, France and the UK have made it clear that they are prepared to support a competent, reform-minded Lebanese government, but are not willing to fund defunct political classes who seem unwilling to form a government.

In other words, the IMF needs a partner with whom it can negotiate a comprehensive program of reforms in exchange for a bailout package.

The IMF will also demand, as a precondition for any engagement, a comprehensive audit of the Banque du Liban, Lebanon’s central bank, which will be an uncomfortable prospect for some in the political class.

There is no way out of the nation’s economic downward spiral, and the endless and uncontrolled devaluation of its currency, without an agenda that includes wide-ranging economic and tax reforms.

As long as those in power in Lebanon remain reluctant to show a will to implement such reforms, the IMF’s hands are tied and Western allies such as the US, France and the UK will not help.

 

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* Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources

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China’s central bank rules all crypto transactions are illegal

China’s central bank rules all crypto transactions are illegal
Updated 24 September 2021

China’s central bank rules all crypto transactions are illegal

China’s central bank rules all crypto transactions are illegal
  • The global values of cryptocurrencies including Bitcoin have massively fluctuated over the past year partly due to Chinese regulations
  • Bitcoin, the world’s largest digital currency, and other cryptos cannot be traced by a country’s central bank, making them difficult to regulate

BEIJING: China’s central bank on Friday said all financial transactions involving cryptocurrencies are illegal, sounding the death knell for the digital trade in China after a crackdown on the volatile currencies.
The global values of cryptocurrencies including Bitcoin have massively fluctuated over the past year partly due to Chinese regulations, which have sought to prevent speculation and money laundering.
“Virtual currency-related business activities are illegal financial activities,” the People’s Bank of China (PBOC) said in an online statement Friday, adding that offenders would be “investigated for criminal liability in accordance with the law.”
The notice bans all related financial activities involving cryptocurrencies, such as trading crypto, selling tokens, transactions involving virtual currency derivatives and “illegal fundraising.”
Bitcoin, which had already been falling before the announcement, sank by as much as 8.9 percent to $41,019 in European afternoon trading before recovering slightly later in the day.
The central bank said that in recent years trading of Bitcoin and other virtual currencies had become “widespread, disrupting economic and financial order, giving rise to money laundering, illegal fund-raising, fraud, pyramid schemes and other illegal and criminal activities.”
This was “seriously endangering the safety of people’s assets,” the PBOC said.
While crypto creation and trading have been illegal in China since 2019, further crackdowns this year by Beijing warned banks to halt related transactions and closed much of the country’s vast network of bitcoin miners.
Friday’s statement by the central bank sent the strongest yet signal that China is closed to crypto.
Bitcoin, the world’s largest digital currency, and other cryptos cannot be traced by a country’s central bank, making them difficult to regulate.
Analysts say China fears the proliferation of illicit investments and fundraising from cryptocurrency in the world’s second-biggest economy, which also has strict rules around the outflow of capital.
The crypto crackdown also opens the gates for China to introduce its own digital currency, already in the pipeline, allowing the central government to monitor transactions.
In June, Chinese officials said more than 1,000 people had been arrested for using the profits from crime to buy cryptocurrencies.
Several key Chinese provinces have banned the operation of cryptocurrency mines since the start of this year, with one region accounting for eight percent of the computing power needed to run the global blockchain — a set of online ledgers to record bitcoin transactions.
Bitcoin values tumbled in May on the back of a warning by Beijing to investors against speculative trading in cryptocurrencies.
“China’s ban on all cryptocurrency trading activity will have some short-term impact on currency valuation, but long-term implications are likely to be muted,” said Ganesh Viswanath Natraj, Assistant Professor of Finance at Warwick Business School.
“This ban will result in the migration of crypto investment opportunities to other hubs in Asia, such as Singapore’s launch of the DBS digital currency exchange earlier this month,” he added.


Saudi Arabia insurance reforms will enhance sector — CAIS CEO

Saudi Arabia insurance reforms will enhance sector — CAIS CEO
Updated 24 September 2021

Saudi Arabia insurance reforms will enhance sector — CAIS CEO

Saudi Arabia insurance reforms will enhance sector — CAIS CEO
  • Adoption of IFRS 17 standards will increase investment in the sector

RIYADH: Saudi Arabia may be the first country in the world to witness a merger between three insurance companies following regulatory reforms, according to Sulaiman Binmayouf, CEO at United Co. for Actuarial Services CAIS.

Many of Saudi Arabia’s 29 insurance companies need capital infusions or mergers to meet the requirements of regulators, after they ordered to triple capital to SR300 million from SR100 million, Binmayouf said.

The Kingdom’s insurance companies are only profitable with high premiums, some of which they have to freeze as reserves, meaning they can’t invest the money, he said.

However, he expects the adoption of IFRS 17 standards by the insurance sector in the Kingdom will help solve the problem.

IFRS 17 is an International Financial Reporting Standard that was issued by the International Accounting Standards Board in May 2017.

The financial statements of insurance companies on the Capital Market Authority (CMA) website are not sufficient for taking an investment decision, said Binmayouf.

The standard will provide a more accurate supervision and disclosure process in the development of financial statements, giving investors a clearer idea of whether they want to invest in the company or not, he said.

“Investors should look at the status of insurance companies in terms of the board of directors and committees, and review the strategic plan and financial statements to make the investment decision,” he said.

That will lead to more capital flowing into the insurance sector, while supporting its stability, he said. IFRS 17 will be implemented in stages, as decided by the central bank.


Fed policy tightening not all bad for Gulf economies — Jefferies

Fed policy tightening not all bad for Gulf economies — Jefferies
Updated 24 September 2021

Fed policy tightening not all bad for Gulf economies — Jefferies

Fed policy tightening not all bad for Gulf economies — Jefferies
  • A likely strengthening of the dollar, to which Gulf currencies are pegged, may push down inflation, because it makes imports less expensive

RIYADH: The impending end of super-loose monetary policy from the Federal Reserve will have both positive and negative effects on the economies of the Arabian Gulf, according to Alia Moubayed, a managing director at investment bank Jefferies International.

A likely strengthening of the dollar, to which Gulf currencies are pegged, may push down inflation, because it makes imports less expensive, Moubayed said in an interview with Asharq.

Higher interest rates on dollar-denominated assets tend to lead to outflows from emerging markets, but Moubayed said that the Gulf markets have recently witnessed an influx of foreign capital, especially into stocks, and so should not be affected as badly as many of their EM peers.

Higher interest rates will increase the financing burden on governments with large budget and trade deficits, such as Bahrain, Moubayed said.

However, countries such as Qatar, Saudi Arabia and the UAE will “benefit from shrinking deficits due to the rise in oil prices and the increase in revenues in national currencies,” she said.

The Federal Reserve announced yesterday that it will likely start reducing its asset purchase program soon, and said policy makers are increasingly minded to start raising interest rates in 2022 instead of 2023 as previously envisioned.

If progress toward employment and inflation targets continues, the slowdown in asset purchases may start in November and end in mid-2022, the Fed said.


APICORP sukuk program given expected AA rating by Fitch

APICORP sukuk program given expected AA rating by Fitch
Updated 24 September 2021

APICORP sukuk program given expected AA rating by Fitch

APICORP sukuk program given expected AA rating by Fitch
  • A default in APICORP's sukuk program would be considered a default in the parent, Fitch said

RIYADH: APICORP, the multilateral development bank set up by Arab oil producers, has received a rating of AA(EXP) by Fitch for its sukuk program.

APICORP Sukuk Ltd. (ASL) is incorporated in the Cayman Islands with the sole purpose of issuing Islamic debt. The final rating is contingent on Fitch receiving documents that support information already provided.

ASL is expected to receive the same AA rating as APICORP as a default in the sukuk program would be considered a default in the parent, Fitch said. APICORP’s rating is based on Fitch’s solvency and liquidity assessment and a “medium risk” business environment.

APICORP was established in 1975 by the 10 members of the Organization of Arab Petroleum Exporting Countries (OAPEC) with the aim of developing the Arab world’s energy sector through equity investment, debt financing, financial advisory and energy research services.


UAE allocates $17.6bn to Emirati housing program in Dubai

UAE allocates $17.6bn to Emirati housing program in Dubai
Updated 24 September 2021

UAE allocates $17.6bn to Emirati housing program in Dubai

UAE allocates $17.6bn to Emirati housing program in Dubai
  • Land plots allocated to Emirati housing projects in Dubai increased to 1.7 billion square feet.

RIYADH: Dubai Ruler Sheikh Mohammed bin Rashid Al Maktoum has approved the allocation of 65 billion dirhams ($17.6 billion) to a housing program for Emirati citizens in Dubai, to be spent over the next two decades, according to a statement from the Dubai Media Office.

Sheikh Mohammed, who is also prime minister of the UAE, issued directives to quadruple the number of Emiratis benefiting from the housing program from next year, and to increase the land plots allocated to Emirati housing projects in Dubai to 1.7 billion square feet.

“We are working to develop a comprehensive plan for ensuring our citizens have access to high quality housing over the next 20 years,” said Sheikh Maktoum bin Mohammed bin Rashid Al Maktoum, deputy ruler of Dubai. “Dubai’s urban development plans are subject to constant review and our housing policy will continue to evolve according to the requirements of our citizens.”

The Dubai 2040 Urban Master Plan sets out a comprehensive future map for sustainable urban development in the city, and focuses on enhancing people’s happiness and quality of life in line with the UAE’s vision for the next 50 years.