Dollar exchange rate to reach 110,000 LBP: Economy expert

Lebanon Economy
2023-02-20 | 06:29
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Dollar exchange rate to reach 110,000 LBP: Economy expert
Dollar exchange rate to reach 110,000 LBP: Economy expert

Gharbis Iradian, the chief economist at the Institute of International Finance, accused the ruling political class of blocking the structural reforms needed to end the country's economic and financial crisis.

In an exclusive interview with "Nidaa al-Watan," he emphasized that the economic indicators are heading from bad to worse if a bailout program with the International Monetary Fund and the necessary reforms are not implemented because he believed that the corrupt class is still protecting its personal interests at the expense of the complete collapse of the country.
In the meantime, according to the Institute of International Finance, the real GDP will contract by -7 percent in 2023 to $14.8 billion, while inflation will be 183 percent higher. The lira will be worth 110 thousand LBP by the end of the year. 
The interview with Iradian's text is as follows:

1. Given the lack of urgent reforms and the failure to reach a deal with the International Monetary Fund, what are the estimates of the Institute of International Finance for the year 2022 and the expectations for the year 2023 of the main economic and financial indicators in Lebanon?

Lebanon's economic and financial situation is extremely dire, and it is getting worse every day. The economy of Lebanon will continue to deteriorate and collapse unless the implementation of a comprehensive economic program backed by the International Monetary Fund and the international community, and Lebanon will become a failed state.
Due to political gridlock and the lack of reforms, my estimates indicate that real GDP shrank by -6.5 percent in 2022. I anticipate a further contraction of -7 percent in 2023. The GDP in US dollar will drop further, to about $14.8 billion in 2023. (One-third of its level in 2019).
The inflation rate will increase and continue to be in the triple digits. By the end of this year, the black market exchange rate may surpass 110,000 Lebanese pounds to the US dollar. The rate of deduction (haircut) from dollar deposits increases with each decline in the currency's value because their use is severely constrained.
People who lack access to foreign currency or have no way to acquire it will see a steady decline in their standard of living. However, it is challenging to distinguish between self-deception and intentional deception because politicians consistently assert that depositors' money is sacred and will be protected.
Official reserves (excluding gold and Eurobonds) will continue to decrease, from $10.6 billion at the end of 2022 to about $6 billion at the end of 2023, as the current account deficit will still be huge. The Banque Du Liban (BDL) will need to use more reserve requirements for commercial banks.
There will be more poverty and more unemployment. Additionally, as the middle-class declines, more skilled workers will leave the country. We estimate that more than 200,000 people have left Lebanon by 2022, and an additional 200,000 may do so this year. The wealthy oligarchs and their allies in Parliament are unconcerned by such a development as long as their power and wealth are safeguarded, whether in Lebanon or foreign banks.
2. Is it possible to deal with the economic crisis without the help of the IMF and receiving funding from the International community?
Lebanon's economic and financial crisis cannot be resolved without the International Monetary Fund and financial assistance from the international community.
Even so, it would be a miracle if the corrupt political class in power today would agree to carry out the required reforms to open the door to a deal with the IMF and the release of financial aid from the international community.
There is no way to stop the Lebanese economy's and country's financial collapse without implementing a comprehensive economic plan backed by the IMF. The current political class represented in the House of Representatives continues to hinder the implementation of the required reforms, particularly the Finance and Budget Committee.
Most of the IMF's initial conditions were not followed. In contrast, others (such as the law governing banking secrecy and capital controls) were changed to accommodate particular interests.
Regrettably, the Finance and Budget Committee vetoed the economic strategy created in April 2020 by Hassan Diab's government in conjunction with the financial consulting firm Lazard.
The multiple exchange rates would have been unified within a few months and remained between 4,000 and 5,000 LBP/USD, and inflation would have dropped to single-digit levels if this economic plan had been implemented with the support of the International Monetary Fund and the international community. Most depositors would have received a sizable portion of their deposits, and the economy might have recovered significantly. It is deplorable that the same corrupt political class has thwarted the new economic strategy created by Saadeh al-Shami, the Deputy Prime Minister, in coordination with the International Monetary Fund.
The more time passes, the more complex the solution needed to resolve the crisis!
3- The volume of imports increased from $12 billion in 2021 to about $19 billion in 2022, according to data from customs. How do you account for this rise in imports in a nation with a GDP of only about $18 billion and an economic downturn?

This sharp rise in imports is primarily the result of three factors:
- The use of multiple, distorted exchange rates. With the help of corrupt lawmakers in Parliament, importers and traders took advantage of the low exchange rate (1,500 LBP/USD until the end of January 2023) to pay minimal customs duties.

- A significant increase in the cost of food and oil globally.

- Significant smuggling of goods into Syria because of inadequate border control.

According to our calculations, at least $3 billion of the $19 billion in total recorded imports were smuggled into Syria. Smuggling and multiple exchange rate distortions have reduced potential tax revenues for the government, reducing spending on social sectors and widening deficits. Since Lebanon's GDP is less than $18 billion, it cannot accommodate $19 billion in imports of goods. From about 40% of GDP on average between 2012 and 2020, imports rose to 70% of GDP in 2021 and 103% of GDP in 2022. An odd and unrealistic development!
The Institute of International Finance is a US organization with its main office in Washington.
The Taif Agreement's power-sharing provisions were incorrect and contradictory.

Some analysts and political parties blame constitutional flaws for the current economic crisis and political stalemate. What are your thoughts on it?

Yes, the Taef Accord's idea of power-sharing was flawed and riddled with contradictions. Little can be done to reform the economy without fundamental political restructuring and a reasonable agreement on how the government's powers should be applied.
Sectarianism was enshrined in the constitution's text with specific positions allotted to various sects, despite the Taif Accord's declaration that sectarian divisions should be gradually eliminated. The Taif Constitution produced circumstances that strengthened the political impasse. This issue was insignificant when Syria was in power from 2003 to 2005. At the time, the prime minister successfully gained support in the Council of Ministers and Parliament during the comparatively prosperous years 1994–2004 by providing financial incentives, or in other words, "buying obedience." If a president is chosen and a consensual political government is formed, the balance of power will still be unevenly distributed among the various political players.

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