Cost of Change

A recent visitor to Beirut recounted not being able to pay her taxi driver for a trip from the airport. She hadn’t run out of money, Lebanon’s ATMs had stopped dispensing dollars.

The streets in most of the city, after the initial weeks of unrest, were quiet. But banks were closed, and the political crisis created by weeks of protests no nearer to resolution.

This crisis started to bleed into the economic system almost immediately after the protests began, and recent events have left analysts and markets tallying the damage already inflicted and the potential for more to come.

First, there is the lost productivity from months of blocked roads and stalled tourism. Then there is the banking system and the Lebanese Pound’s peg to the US dollar, which was on increasingly questionable ground before the protests, and now looks endangered.

Protesters would argue that these costs pale in comparison to the mismanagement of decades of rule by civil-war era sectarian leaders, who have been collectively named the “Sulta.”

TBY met Riad Salamé, Lebanon’s central bank governor, in Beirut over the summer, months before the protests began.

Mr. Salamé is among Lebanon’s only independent government officials. The rest of the state apparatus is divided between rival religious sects as decided in the informal national pact that ended the civil war.

Mr. Salamé consistently, for decades now, has insisted that while there are political issues, Lebanon’s monetary house in very much order. The protests have thrown that foundational stability into question.

The condition the Lebanese economy found itself in prior to the protests was verging on dire. Debt was at 155% of GDP after successive governments postponed reforms to the bloated and inefficient state bureaucracy and borrowed to support a system of state patronage.

The state’s chief expense was servicing this. There seemed to be some hope for change after a conference in Paris linked USD11 billion in financial aid to specific reforms.

The money was sorely needed to fund basic government functions and build essential infrastructure, but the changes it required were the real story.

The government was to slash its deficit and remove costly subsidies. Eventually, the state-owned electricity sector would have been privatized, eliminating the state’s largest expense aside from servicing debt.

However, politicians decided to try to reduce the deficit in other ways. One strategy was the so-called WhatsApp tax that sparked the protests.

The Governor of the Central Bank is far from responsible for the situation the country finds itself in today. He has managed a series of crises and maintained the peg, but the unconventional tools of the past several years have become suddenly much more costly.

The central bank was borrowing dollars from commercial banks and paying high interest rates for this. This system could be sustained as long as foreign currency deposits into Lebanon’s banking system continued to rise, which they did because of the high interest rates commercial banks paid for them, knowing they could receive an even higher rate from the central bank.

Since the protests began, foreign currency deposits have become outflows. The dollar supply seems to have dried up.

Suddenly there is a black market for dollars valuing them a third higher than the official exchange rate.

A Lebanese government bond maturing in March of 2020 has crossed 100%. That same note was at 15% weeks before when the protests began, and so a policy that maintained stability now threatens it.

In our interview, Mr Salamé explained the reasoning for his unconventional approach: “The Central Bank in Lebanon has a mandate for stability. The law in Lebanon does not limit our activity by imposing a cost approach on us. On the contrary it gives us a mandate to maintain stability without prescribing anything about the cost.”

Hopefully these tools have not become obsolete.