Is dollarization the best option for the collapse of the Lebanese economy?
BEIRUT – After his car broke down on his way from Beirut to his hometown in Bekaa, eastern Lebanon, Ramzi Kassem, a father of three and public sector employee, had to pay 1 500 dollars to replace the engine of his car.
“I pay $100 a month in private generator fees. At the pharmacy, the price of drugs is set according to the daily dollar exchange rate, just like the prices of raw materials at the supermarket. Everything is priced in dollars,” Kassem told Al-Monitor.
Hanan Mustafa, a young Lebanese woman in her 30s, paid $12 for a lab test she took at a hospital in Sidon, southern Lebanon.
“I had the option of paying in Lebanese pounds at the black market exchange rate (it was 33,000 Lebanese pounds to the dollar that day), so it was the same. I paid in dollars,” she told Al-Monitor.
Lama, a 26-year-old from the south who works in Beirut (she didn’t want to reveal her full name), told Al-Monitor she was paying $170 in rent for a room in Beirut, and the landlord only accepts cash payments.
“I can pay the rent because my salary is in dollars, even though I only earn $700. Wages have fallen amid the current collapse of the local currency. The companies claim that $700 is worth around 21 million Lebanese pounds as we speak. While that number may seem huge, it doesn’t buy anything,” she added.
Goods and services such as household goods, auto parts, clothing, health insurance, hospitals, rents and subscriptions are sold either in dollars or at the daily market rate of exchange.
There is no official ruling forcing people to price their items in dollars. However, there is no denying the fact that the national currency has collapsed against the dollar.
The Lebanese economy is chaotic and progressively dollar-based as the dollar has dominated pricing, payment, trade and even people’s savings due to the collapse of the Lebanese pound since the economic crisis erupted. in October 2019, leaving the country on the brink. of total financial collapse.
A dollar-based economy is one in which the country officially adopts the dollar instead of its local currency. Some observers and economists believe that this would be a solution to the current monetary crisis in Lebanon and a way to ensure monetary stability. However, others are against such an economy on the grounds that clinging to the national currency would reflect Lebanon’s independence and sovereignty.
Patrick Mardini, President of the Lebanese Institute of Market Research (LIMS), told Al-Monitor that the dollarization of the economy would help the Lebanese people overcome the current crisis and limit poverty.
“When institutions are paid for their goods and services in dollars, they guarantee a margin in dollars that covers the wages and salaries of their employees. It also helps them succeed in paying taxes and duties to the Lebanese state in dollars, which allows the state to dollarize the salaries it pays to public sector employees,” he added.
Contracts with public and private sector employees would therefore be converted into dollars, Mardini added, which would reduce the imbalance between income and expenditure of institutions in the two mentioned sectors.
According to Mardini, the Central Bank of Lebanon would, in this case, buy the Lebanese pound in circulation and the money from the bank accounts and destroy it afterwards. This operation would cost between 3 and 4 billion dollars and would put an end to the monetary crisis and the collapse of the national currency, he explained.
Many countries around the world have adopted a different currency from their local currencies, such as France, Italy, and Germany. The only difference is that these countries did not suffer from a serious economic and monetary crisis like Lebanon.
Minister of Tourism Walid Nassar made a decision on June 2, allowing tourist establishments to set their prices in dollars until the end of September 2022.
According to Mardini, the move has proven successful, as “tourism revenue this year is estimated at around $4 billion, which is better than the previous two years.”
“I believe that one of the most important reasons for the success of the tourism sector this year is the decision to dollarize prices, which should be extended to the winter season and to all sectors such as industry and agriculture. “, continued Mardini.
Economist Jean Tawila agrees. He told Al-Monitor: “The adoption of the dollar in the commercial, tourist and medical sectors, among others, and of the Lebanese pound in other sectors such as the public sector would have dramatic repercussions in Lebanon, because it deepens the gap between the rich and the poor. »
“Currency is based on trust. In Lebanon, people have lost faith in the national currency, which is currently printed to secure public sector salaries,” Tawila said.
“How many dollars does the Central Bank have left?” Over 80% of our economy is dollarized, so dollarizing the remaining percentage would be the best option,” he added.
“I was one of those who clung to the local currency, but three years after the start of the economic and monetary crisis, and after having spent around 25 billion dollars of the Central Bank’s reserves, and the refusal of the political authority to carry out economic reforms, full dollarization seems to be the only option to stabilize the currency. Dollarization will force political parties to make a joint political decision in this regard,” he added.
However, Jad Tohme, lawyer and coordinator of the legal committee of the People’s Anti-Corruption Observatorydoes not believe in the option of global dollarization in Lebanon.
He told Al-Monitor that “the essence of the crisis lies in the wrong monetary and financial engineering policies that caused inflation and led to the collapse of the national currency, knowing that the Central Council of the Central Bank is to blame as it managed the implementation of the Currency and Credit Codewhich covers currency regulation.
He added: “The national currency was supposed to be protected instead of being allowed to crumble.”
Tohme pointed out that it was unwise for Lebanon to default on its Eurobond debt payments in March 2020. While those dues were worth $1.3 billion, Central Bank reserves s then amounted to approximately $37 billion. The default destabilized the country’s financial situation and led the economic crisis to worsen, he said.
Tohme added: “To emerge from the current crisis, the current laws, namely the Currency and Credit Code, must be implemented within the framework of a clear monetary policy. Also, the Central Bank and prosecutors should control the black market, while the official exchange rate should be unified. In addition, a transparent financial policy and a new financial engineering policy should be put in place to take into account the interest of the populations in returning their deposits. These are the main headings on which an integrated reform plan should be based.