Lebanon To Devalue Currency By 90% On Feb. 1, Central Bank Chief Says

According to central bank chief Riad Salameh, Lebanon will adopt a new official exchange rate of 15,000 pounds per US dollar on February 1, which will devalue the currency by 90%.

Lebanon To Devalue Currency By 90% On Feb. 1, Central Bank Chief Says 1

Central bank governor Riad Salameh announced that Lebanon will adopt a new official exchange rate of 15,000 pounds per U.S. dollar on February 1.

The change from the previous rate of 1,507 to 15,000 is still much below the amount the pound was trading at on Tuesday on the black market, which was roughly 57,000 per dollar.

According to Salameh, the modification will affect banks, which will result in a decline in the equity of the organizations at the center of the nation’s 2019 financial meltdown.

The wider economy, which is more dollarized and where the majority of deals are conducted using the parallel market rate, is anticipated to be less affected by the change.

Since the pound started to deviate from the 1,507 rates in 2019, it has lost approximately 97% of its value.

According to Salameh, the country’s commercial banks “will see the part of their equity that is in pound decrease once translated into dollars at 15,000 instead of 1,500,” according to Reuters.

Banks would be given five years “to reconstitute the losses due to the devaluation” he stated, in order to lessen the effects of this change.

In line with a draught deal Lebanon negotiated with the International Monetary Fund last year that set out conditions to unlock a $3 billion bailout, Salameh said the adjustment to 15,000 was a step toward harmonizing various exchange rates.

There are still a number of rates, including the official rate, the parallel market rate, and the Sayrafa exchange platform rate of the central bank, which is presently 38,000 pounds to one US dollar.

‘FIVE-YEAR RUNWAY’

The IMF has advocated for a quick unification of rates and stated that the Lebanese government should deal with the estimated $70 billion in financial sector losses up front. These losses are largely believed to be the result of years of excessive expenditure, corruption, and poor management.

However, a more long-term strategy has been suggested in proposed government proposals. The five-year time frame to reconstitute losses, according to one expert, Mike Azar, is at odds with the IMF’s belief that the losses must be swiftly addressed.

Without a thorough structure for bank restructuring, he claimed, institutions would either have to seek capital from shareholders to pay their losses or transfer losses to depositors by enabling local currency withdrawals from dollar accounts.

“They can’t do that immediately, so the central bank is giving them a five-year runway to do it,” said Azar, a former economics professor at Johns Hopkins University.

Many believe that the IMF deal is the only option for Lebanon to start rebuilding its financial system’s trust and recovering from the crisis.

The inability of ordinary Lebanese to freely access their dollar savings is one of the most crippling parts of the crisis, and the shift in the exchange rate is not anticipated to ease it.

Although Lebanon has never technically implemented capital controls, banks have started doing so as of 2019 and have severely restricted withdrawals in dollars and Lebanese pounds.

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