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The choice to fix or float the exchange rate of the local currency is one of the most important determinants of the political economy in any country. In Lebanon, the option of stabilizing the exchange rate was an important factor in the composition of the post-Taif political and economic systems. Therefore, how to deal with the lira’s exchange rate during this crisis will play an important role in shaping the parameters of the system that follows the crisis or collapse.
Angel Poligan – Mexico
Today, the government has limited options to remove the burden of a heavy legacy to stabilize the lira’s exchange rate for the past three decades. The stabilization of the nominal exchange rate of the currency requires the continued intervention of the Bank of Lebanon by pumping the hard currency demanded by the market (one dollar in most cases) to avoid the devaluation of the local currency. Or it interferes by absorbing liquidity in foreign currencies from the market to prevent the local exchange rate from inflating. In either case, the BDL needs significant hard currency reserves to practice setting a set value.
In view of the apparent depletion of the Lebanese bank’s dollar reserves, it can no longer set the exchange rate to an average of 1507.5 pounds per dollar. What the Lebanese market has witnessed since last September is an unofficial float of the Lebanese pound exchange rate. Similarly, the Lebanese are consuming imported goods and services (other than subsidized ones) at the market exchange rate controlled by the shortage of dollars in the business cycle. Therefore, the options are limited and will not be outside the scope of the assets that will support the Lebanese state in the future.
Exchange rate: politics and economy
It is necessary to highlight the overlap between the exchange rate of the local currency, as a monetary tool, and also in the general economy and political life. It is an axiom of economics that the lower the value of local currency, the more competitive it is for locally manufactured goods. Currency devaluation means depreciation of wages and locally produced raw materials relative to foreign currencies through which goods will be exchanged. This means that the price of local goods will be cheaper when exported abroad. On the other hand, the increase in the local currency exchange rate means freezing or reducing inflation for consumers and allowing them to consume at a relatively lower cost, that is, it increases the standard of living.
In 1991, Argentina adopted a fixed exchange system for the local currency, which led to the dollarization of public debt and the use of depositors’ funds and social security to finance the cost of fixation before the collapse in 2002.
Brock Bloomberg, Geoffrey Frieden and Ernesto Stein, in their article “Maintaining a fixed exchange rate: the political economy of stabilizing the exchange rate in Latin America”, explains that trying to determine the mechanisms to control the local exchange rate is a compensation between internal competitiveness and the consumption capacity of citizens. In a developing or weak economy, the floating exchange rate and currency devaluation are a catalyst for local producers to export their production and achieve higher profits; This results from transferring your income from the dollar to the local currency. So producers, especially industrialists, have always lobbied for the devaluation of the local currency. In return, citizens benefit from setting the local currency exchange rate to a high value by increasing consumption capacity.
However, it should be noted that exchange rate stabilization policies are usually temporary and linked to purely political or macroeconomic objectives. Therefore, trying to maintain the stabilization of the exchange rate without problems and negative repercussions on the economy is very difficult, except in the cases of countries whose income depends mainly on natural resources.
Argentine social contract
In Lebanon, the exchange rate setting of the lira became permanent. It did not take into account the ability of the Lebanese economy to hold the Banque du Liban’s dollar reserves. The latter financed the stabilization of the exchange rate through depositors’ funds. Here we can refer to the similar experience of Argentina in terms of trying to keep the exchange rate fixed. Argentina followed an exchange rate regime that established the exchange rate of the local currency at one peso per dollar. This stabilization has taken place since 1991 despite the disadvantages of permanent stabilization in an economy dependent on trade with neighboring countries with fluctuating currencies relative to the dollar. The move was a harsh response to hyperinflation and the collapse of the peso exchange rate several times in the 1980s. According to Augusto Delatori, Eduardo Yati, and Sergio Schimler, in a document titled “Live and Die with Excessive Stabilization of the Type of exchange “, the stabilization of the exchange rate in Argentina was part of the social contract and a central axis in the relationship of the state with the productive forces in that period until the fixation became an important institution in life Political development and Argentina’s economic system, and a basic government contract on which social and financial relations depended.
As a result of consolidation, the Argentine banking sector consolidated it and transformed it into an international sector, knowing that financial institutions did not develop and remained weak. Over time, Argentina’s public debt was dollarized, and funds from depositors and social security institutions were used to finance the cost of installation. In the end, however, the stabilization system collapsed in 2002 and riots arose due to the imposition of the Capital Control banks, and the political map in Argentina changed.
Contract renewal
In this historical context, it is possible to read what happened in Lebanon since 1992. By examining the effect of stabilizing the exchange rate of the Lebanese pound on the increase in the standard of living of the Lebanese people, it is only possible to interpret this decision as a support for consumption and its ease for populist goals. Especially since the exchange rate stabilization policy was not temporary on a given day, but was promoted on the basis that it is permanent. On this basis, the productive and productive sectors were exchanged in exchange for the governments of Prime Minister Rafic Hariri obtaining the popular legitimacy resulting from raising the standard of living and consumption.
However, we did not see that the owners of the productive sectors were clearly opposed in the early 1990s, and we did not form pressure groups to face the permanent fixation policy, which caused great damage to their local and external competitiveness. Despite the devastation caused by the civil war, many productive sectors in Lebanon still had sufficient flexibility to continue and survive during the most difficult years of the war. However, it gradually disappeared after 1992. The owners of these sectors benefited from post-1992 policies through inflation in property prices and the construction sector. They went from being producers to real estate sellers and building builders. The benefits of this trade, whether they invest in it fully or participate in stakes in it, are more profitable than production. With rising interest rates on Treasuries and deposits, investment in production has become less attractive.
Thus, the stabilization of the exchange rate of the Lebanese pound, in the years after 1992, was the focus of the social contract between the Authority, the citizens and the productive sectors. Prime Minister Al-Hariri’s governments built their popularity on the basis of a high standard of living and consumption on the ruins of productive sectors whose owners were willing to replace their profits with real estate and debt securities. The Banque du Liban financed the Lebanese fixed exchange rate and consumption, borrowing first, then from depositors’ money.
With the collapse of the Lebanese pound exchange rate today, the 1992 social contract concluded with the Lebanese collapsed. Rent recipients for the past three decades, politically and economically, have been trying to replicate the social contract itself, but this time at a much higher cost. Today, they use gambling tools to cool consumption, titled “The Standard of Living Lebanese Are Accustomed to.” Today, in particular, this trick should not be fooled by the Lebanese, because the “standard of living of Lebanese society” has suffered direct losses of $ 83 billion, in addition to displacing their children abroad after destroying the productive sectors . Therefore, research on the floating exchange rate should focus on protecting the weaker classes and their impact on the general economy, not on how to attract loans to finance consumption to preserve an imaginary lifestyle.
