šÆ Why is Lebanon Devaluing Its Currency by 90%?!
From insane inflation to pressing poverty, Lebanonās witnessing it all at the same time. Hereās why the country which was once called the Switzerland of the Middle East is now struggling. ReadOn!
A few days back, we came across a super interesting headline:Ā
āLebanon is devaluing its currency by 90%!ā
Why would a country devalue its own currency?
We looked into it and boy were we in for a surprise!
Lebanon has been quietly undergoing what has been called one of the worst economic crises of the last 150 years!
Before you blame Covid or some other calamity, theyāre not the culprits here.Ā
This is a story of corruption and bad governance.
This is a case study of how mismanagement can kill an economy.
Sit tight and ReadOn.
ā ļø The Crisis in Lebanon
23-hour long power cuts, long lines for basics like bread and fuel, minimum wage down by 84%, inflation hitting a high of 171%.
A nightmare?Ā
The reality of Lebanon.Ā
This is exactly why it is devaluing its currency.
But how did it get here?
The story dates back to 1990. Lebanon had just come out of a massive civil war (lasting from 1975-1990).
The war had a lasting economic impact. It brought down the value of the Lebanese pound.
Now, as the pound lost its value, imports became super expensive.
To solve this problem,it pegged its currency to the dollar.
It announced that $1 would now be equal to 1,507 Lebanese pounds forever.
If Lebanese citizens brought $1 to the banks they would get 1,507 Lebanese pounds in return.
This solved one problem temporarily. But it gave rise to several other problems.
šŖ The Peg Problems
Now, Lebanon had to maintain this exchange rate. To do so, it needed a steady supply of dollars.
Initially, this wasnāt a problem.
Lebanon got a lot of money in remittances and got loans from other Gulf countries.
So, it had a lot of dollar reserves.
In fact, dollar became a commonly used currency in the swanky neighbourhoods of Lebanon, with posh stores accepting dollars.
Things were going well. Lebanon was the Switzerland of the Middle East. Untilā¦
2011: the beginning of the Syrian civil war.
This war brought in a lot of unrest in the Middle East.
A lot of Lebanese citizens employed in other Middle Eastern countries lost their jobs.
Remittances went down. With remittance dollars low in supply, how would Lebanon pay off existing debt?
Well, Lebanon found yet another way to boost dollar reserves. It increased interest rates to encourage people to deposit their dollars in the bank.
It used these dollars to pay off the debt. And since it was paying off its debt, other countries kept extending more loans.
To pay off these loans, Lebanon kept borrowing, essentially running a Ponzi scheme.
It was basically borrowing from A to pay B and then borrowing from C to pay A.
But jugaad can only work for so long.
Ultimately, youāve got to fix the problem or face the music.
Lebanon paid no heed to fixing the problem.
It did not reduce public expenditure of dollars to save reserves.
Plus, the government and those close to it siphoned off a lot of the borrowed money.
Result? No economic development, a lot of debt and no money to pay it off.
š Facing the Demon
In 2019, this reality came to light for the government and the people of Lebanon.
So, Lebanon tried to make some quick money by adding taxes on petrol, tobacco and *wait-for-it* WhatsApp calls.
Yes, you read that right!
Now, people were obviously not happy. So, they began protesting and the taxes were removed.
Back to square one: no more money to pay off debt.
Result? In 2020, the country defaulted on its debt.
Bad luck? Um, this was just the beginning of bad luck!!
Lebanon was soon hit by Covid. Amidst the pandemic, its capital saw a massive blast that killed hundreds and injured thousands.
Since then, the government of Lebanon has changed.
Its economic condition? Naah.
The country is still struggling, with 80% of its population now considered poor.
The Lebanese pound has depreciated by 97%!
However, for the most part, the government didnāt acknowledge this.
It maintained the official peg at $1 to 1,507 Lebanese pounds.
But because the pound had depreciated A LOT, several new exchange rates came up.
For instance, if Lebanese citizens wanted to take out deposits from the bank, they would have to pay 3,800 Lebanese pounds for one dollar (add to that limits to how much you can withdraw). This has also led to a lot of bank robberies and citizens burning down banks.
Several such rates have come up for food, petrol, and black market deals.
In the black market, one dollar now costs 80,000 Lebanese pounds!
These multiple interest rates have made things complicated in the country, leading to more economic instability.
The other Gulf countries that once supported it have been turning a blind eye to Lebanon. This is because of its connection with Hezbollah, a militant group that has connections with Iran.
The Gulf Countries and Iran do not get along (both powers want to reign supreme over the Middle East).
Only one support left: International Monetary Fund (IMF).
Now, it does not approve of multiple exchange rates.
But, it is the only one willing to bail out Lebanon with a $3 Bn loan.
So, Lebanon has no other choice but to listen to the IMF.
The IMF wants one exchange rate. So, Lebanon has now devalued its currency.
$1= 15,000 pounds now.
Experts claim that this will in no way actually help the country. Multiple rates will still exist, at least in the black market.
The move will just make it even more difficult for the country (which heavily depends on imports) to afford basic amenities.
So, Lebanonās situation looks dire.Ā
And itās all because the government focused on siphoning money for itself and quick fixes instead of developing resources that would actually boost help the economy.
Now, the IMFās loan could bring some relief to the people, especially those who have lost their jobs and still cannot access their savings.
But will $3 bn be enough to completely revamp the economy and help change its bad habits? Will $3 bn be enough for a country under a pile of losses mounting to about $73 bn?
Will Lebanon learn from its mistakes?
Let us know if you liked today's piece. If you did, please share this with your friends, and get them to subscribe :)
See you tomorrow, smarty! š¤
If you are coming here for the very first time: Join us on WhatsApp and never miss an update! š