World’s biggest currency crash prompts Lebanon to intervene anew

Lebanon’s central bank is taking a page from a playbook it’s used before to try and douse the currency crisis raging in the country for three years with a plan to price dollar sales at a weaker level than its own official exchange rate.

In an announcement late on Wednesday (Mar 1), the central bank said it will intervene by selling dollar cash to individuals and companies at 70,000 pounds (S$6.29) per US currency. That compares with the official exchange rate of 15,000, which will stay unchanged after the pound’s 90 per cent devaluation a month ago.

Policymakers will also cap demand for currency buyers and pay public sector employees at a more favourable rate. The pound gained after the latest decision, reaching about 80,000 per dollar in the black market.

Lebanon’s first official devaluation in a quarter century has already made the pound this year’s worst-performing currency in the world. But it’s shown almost no sign of emerging from a free-fall in trading on the parallel foreign-exchange market, where it crashed to a record 90,000 on Wednesday. 

Besides the measures announced by the central bank, the Finance Ministry also amended the rate at which it collects customs fees to 45,000 per dollar, only three months after setting it at 15,000.

Given Lebanon’s limited international reserves, the pound stands little chance of returning to stability any time soon, according to Nasser Saidi, formerly a minister of economy and a vice governor at the central bank.

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It’s “failed policy, we have seen it before,” he said. “Whatever remaining money is at the central bank is being used to subsidise public employees.”

Lebanon is in a financial crisis that’s been described as one of the worst globally since the mid-19th century. The government defaulted on US$30 billion in international debt in 2020 and allowed the economy to crater, with a combination of triple-digit inflation and a currency meltdown wiping out people’s life savings. 

Central bank Governor Riad Salameh, whose term expires later this year, has said he plans to leave after a three-decade tenure that’s been partly blamed for the country’s implosion.

The goal of the latest step is to reduce pressure on the pound by injecting hard currency at a rate more in line with its market levels. The central bank earlier tried to avoid a sharper depreciation by restricting local-currency supply while simultaneously limiting the amount of dollars it pumps through its Sayrafa foreign-exchange platform.

Previous such efforts to inject dollars only briefly shored up the pound.

“This operation will fail and is becoming more expensive because the economic cost is increasing,” Saidi said. “We are taxing the cash economy that is running into a hyperinflationary spiral.” BLOOMBERG