The US dollar exchange rate had risen on Sunday in the black market to touch the limits of 44,300 Lebanese pounds, compared to a level that did not exceed 40,000 pounds against the dollar in the same period last month. The dollar's value increased by nearly 11% within one month.
This article was originally published in, and translated from, Lebanese online news outlet Al Modon.
Developments contrary to previous expectations
The market recorded all these adverse developments at the beginning of the holiday season directly, which is currently witnessing the beginning of the influx of expatriate dollars into Lebanon, which was not supposed to support the value of the lira in the black market, not the other way around.
All indications showed that December would witness a promising tourist season after more than 90% of the seats of incoming aircraft were reserved during this month, a month and a half before their arrival.
The black market also recorded all these adverse developments, while Banque du Liban (BDL) had promised in a statement - in the last week of October - to suspend dollar purchases through its platform and only to sell it starting last October 25.
Again, this development was supposed to be an improvement in the lira's value in the black market since then, given the effect of pumping and offering dollars by BDL through the platform.
In short, the course of the deterioration of the lira's exchange rate contradicted many expectations, suggesting that the market would witness a temporary calm due to these factors in particular.
However, a careful reading of BDL's budgets revealed that what happened was a natural result of some of the bank's recent measures, some of which reflected the promise to stop buying dollars from the market.
Back to buying dollars from the market
According to the fortnightly budget published by BDL late last week, it was clear that the volume of foreign currency reserves held by the bank had returned to rise, from $10.19 billion at the beginning of this month to $10.25 billion in the middle of the month.
More clearly, and within a period not exceeding fifteen days, the volume of these reserves increased by about $63 million, which cannot be explained by the bank's return to buying dollars from the black market. Thus, it is possible to understand the pressure that the lira's value was experienced in the market during this period, as long as BDL entered the 'line of demand and absorption' of dollars (at the rate of $ 6.3 million per working day).
And since BDL resorted to printing cash in pounds to buy these dollars, it was natural that these developments were reflected in the number of banknotes circulating in the market, whose value rose from 72.34 thousand billion LBP at the beginning of the month to more than 74.77 thousand billion LBP in the middle of it. That is an increase of nearly 2.43 thousand billion LBP over a period not exceeding fifteen days.
Thus, the volume of the monetary mass in circulation in Lebanese banknotes today is 63% higher than that of the same monetary mass at the beginning of the year, whose volume did not exceed 45.76 thousand billion Lebanese pounds.
It was also remarkable that the "other assets" item in BDL's budget recorded additional increases during the first half of this month, as the value of this item increased from $91.32 billion at the beginning of December to about $93.51 billion in mid-December, reflecting An increase of $2.19 billion during this period.
Despite the importance of following up on the inflation of this item, as it represents the accumulated and hidden losses in the bank's budget, it is still impossible to estimate the consequences of this increase. Therefore, the bank mixes the total losses incurred in cash dollars and Lebanese pounds while recording all these operations according to the old official exchange rate.
For this reason, it is impossible to estimate the actual value of the additional losses recorded today under this item, which reflects - once again - the weak standards of transparency adopted in presenting the bank's figures.
The typical consequence
In conclusion, only further declines in the value of the Lebanese pound can be expected in the foreign exchange market when BDL prints and pumps pounds to purchase cash dollars from the black market. The natural result of these monetary measures is nothing but inflating the money supply of paper pounds, and reducing the money supply of hard currency, in return for increasing the demand for it.
Thus, what is currently happening in the market becomes understandable and natural. Noting that BDL violated, in the process of buying dollars from the market during this month, the promise it made when it announced the cessation of dollar purchases through the platform, which the markets were optimistic about during the previous stage, and this will affect the credibility of similar data that BDL periodically issues.
In all cases, it remains certain that judging BDL steps, and evaluating them objectively, is only possible after clarifying the purpose of using the dollars purchased from the market.
Until now, there is no confirmation that we overcame the obstacles that prevented using these dollars to buy fuel for the benefit of the Electricité du Liban, as promised by the Energy Minister. Additionally, there is no statement by BDL indicating the type of monetary policies the bank will follow and how it will organize the spending process from reserves.