Lebanon restricts dollar cash-outs in bid to bolster currency

The Lebanese Central Bank has issued a circular requiring non-financial institutions that carry out money transfers from abroad to begin cashing out the amounts strictly in Lebanese pounds, sparking panic among a populace that has long hedged its savings in dollars. 

The bank justified the January 14 announcement as a bid to shore up the national currency and to render transfers via Western Union, MoneyGram, and OMT more transparent.

But the decision raised fears in a country where businesses and citizens alike are losing faith in the local currency and where US dollars are seen as a bulwark against instability. Many panicked that the decision would be expanded to include banking remittances.

Lebanese nationals working abroad are a key source of remittances for the country, sending US$1.2 billion home in 2018 according to the Central Statistics Department.

The frenzy over the new remittance regulations pushed Banque du Liban (BdL) to issue a second statement, clarifying that its decision would be limited to non-financial institutions and not affect bank transfers.

Yet, this decision alone is worrying as it sheds light on the fragility of the Lebanese pound at present, especially with inflation reaching 7.6 percent. 

Loss of trust

The new central bank policy may be seen in light of an already declining demand and loss of trust in the Lebanese pound. Reports emerged last year that more than half a billion dollars had been shifted from Lebanese pound accounts to dollar accounts in October.

This lack of faith took another blow when caretaker Finance Minister Ali Hassan Khalil was quoted claiming there are plans to restructure Lebanon’s debt. Khalil’s statement led to a 6 percent drop in government bonds traded in dollars. The minister followed up with a corrective statement seeking to assure the public that restructuring was absolutely not on the table, but the damage had been done.

As uncertainty compels individuals from the middle to wealthier classes to convert their savings accounts from Lebanese pounds to dollars, numerous stories have emerged of banks offering exceptionally high interest rates to convince people to keep their money in the local currency.

As uncertainty compels individuals from the middle to wealthier classes to convert their savings accounts from Lebanese pounds to dollars, numerous stories have emerged of banks offering exceptionally high interest rates to convince people to keep their money in the local currency.

One of them was Bassem, who told Asia Times that when his family informed the bank that they would like to convert their retirement fund into a dollar account “they offered us the same interest rate we used to have on an account frozen on a yearly basis, but on a monthly basis on the

Sources close to the central bank tell Asia Times the main reason behind the new regulation is that BdL is looking for sources outside the banking sector to support its foreign currency reserves, which are necessary for sustaining the pound’s peg to the dollar. 

In light of diminishing foreign investment, BdL has been largely dependent upon “financial engineering” with local banks, whereby the banks provide BdL with hard currencies in exchange for immediate profits in the form of high interest rates.

The main, longstanding source of these foreign currencies was the banking sector’s own investments abroad. These have been depleted, leaving the banks very low on foreign currency and rendering them incapable of supporting BdL’s desperate hunt for dollars.

The impact has reverberated to the import of “vital commodities,” including petroleum products, wheat and foodstuffs, with importers receiving notices from banks informing them that financing of imports was suspended due to a shortage of dollars. 

If BdL cannot keep its foreign reserves up, it will inevitably lose its grip upon the currency thus spelling crisis for the government, the banking sector, and the real-estate sector. This would explain why BdL is now targeting foreign currencies coming from abroad in the form of money transfers via companies such as Western Union, Moneygram, and OMT. A substantial amount of the remittances that come to Lebanon are via these companies due to their relatively lower transfer fees and the ease and immediacy of the process.

To make matters worse

The BdL circular was issued days after Goldman Sachs published a report warning that the Lebanese government has no choice but to restructure its public debt in order to avoid what Khalil described last month as an “economic crisis turning into a financial crisis.”

In order to achieve sustainable debt levels, the report says the government must cancel around 65 percent of its debt. That would place the banks at immediate risk, however, given that their exposure to government debt is approximately $36.5 billion — or around two times “the capital base of the banking system as a whole.”

The report concludes, much like Khalil, that it is unlikely the government will actually implement a restructuring. Without action, it warned, the possibility of a sovereign default is rising.