Broken currencies: Unveiling the downfall of Lebanon's purchasing power

Lebanon Economy
2023-04-18 | 10:28
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Broken currencies: Unveiling the downfall of Lebanon's purchasing power
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3min
Broken currencies: Unveiling the downfall of Lebanon's purchasing power

In the past, during the 1950s and 1970s, the purchasing power of citizens was high, and the cost of living for an individual was only half a lira a day. 
 
The exchange rate for the US dollar did not exceed 3 Lebanese Liras.
 
Today, demands are being raised to increase salaries and wages to address the collapsing purchasing power, as the exchange rate has reached 100,000 LBP. 
 
However, these demands seem challenging to meet. So, what is the context of the ongoing collapse?
 
In the 1990s, pegging the exchange rate at 1,500 LBP to the US dollar came at a cost: it required providing sufficient quantities of hard currency to the Central Bank of Lebanon to maintain the Lebanese Lira's stability and finance the expenses of the government and imports.
 
Successive governments, instead of working on bringing in dollars to the country, did the opposite and used their authority to finance waste and corruption in sectors and institutions.

Over the years, salaries of public sector employees, for example, have become about half of the state's Budget because the sector has expanded through arbitrary employment based on favoritism.
 
In late 2017, the burden increased even more with the pay scale, especially with its cost exceeding 1.4 billion dollars.
 
At that time, the state resorted to a tax basket to secure revenues. However, it could not inject any of it into the treasury due to tax evasion and non-collection.

Moreover, the policy of favoritism continued, and around 7,000 additional people were employed in violation of the law. 
 
The state's deficit doubled within a year... The Central Bank of Lebanon supported all of these funds at the rate of 1,500 dollars.
 
The same scenario is repeating itself in a much more difficult situation today. 

The sectors' unions are again demanding an increase in the minimum wage to at least $325, which would cost approximately $1.6 billion annually. 
 
However, this time there are no dollars available.

The government is again trying to secure revenues by raising fees, including customs duties in dollars, to cover the increases, even if they are much less than required.
 
But these revenues are in LBP, while salaries are paid in dollars through Sayrafa platform.
 
The Central Bank will have to withdraw dollars from the market, leading to further collapse of the Lebanese Lira and, consequently, the value of salaries. 

In summary, if serious reforms are not implemented and dollars do not flow into the country, we will continue to repeat the same scenario but in a worse situation.
 
 

Lebanon Economy

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Lebanon

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