Compass Money: Protests Engulf Lebanon After Currency Depreciation
Protesters in Lebanon blocked roads across the country after the value of the Lebanese pound reached a record low on November 29. They also burned trash dumpsters and tires in a bid to persuade the government to step in and control the pound’s value.
The Lebanese pound has been depreciating for approximately two years now, losing 90 percent of its value during this time. However, the current economic crisis has roots dating back to 1990, when the country’s civil war ended. The government put in place a new policy that tied the value of the Lebanese pound to that of the U.S. dollar. The exchange rate was determined to be 1507 Lebanese pounds for 1 U.S. dollar. So, Lebanese banks needed to always have a significant amount of U.S. dollars in reserve, both for exchange and to buy imports. Foreign investment, and thus the supply of U.S. dollars, remained high until 2011 when political tensions grew in the Middle East and the Lebanese terrorist group Hezbollah began gaining political and military power. The Lebanese central bank drastically increased the interest rate to entice foreign investment. But banks could only follow through with raising interest rates by repaying the old investors with money from the new investors. The banks could not keep up this cycle, so starting in 2019, people in Lebanon could no longer get their money from banks.
In October 2019, people in Lebanon began protesting, calling on the government to act on the economic crisis. The cabinet ended up resigning, creating a political crisis. The political crisis meant capital inflows completely stopped. Additionally, COVID-19 hit the country in early 2020, further harming an economy largely based on tourism. Also, the Beirut blast took place in August 2020, killing hundreds of people and creating a need for extensive funds to rebuild the city. These factors led to the further depreciation of the Lebanese pound, and one U.S. dollar is currently worth about 24,000 Lebanese pounds.
Moreover, the government, led by Lebanese Prime Minister Najib Mikati, has not met in nearly two months due to political conflict with Saudi Arabia and issues surrounding the investigation into the Beirut blast. Judge Tarek Bitar, who is in charge of the investigation, hopes to punish senior officials in the government, which is controversial in a country where political corruption is rampant and the judicial and executive branches do not act independently.
Now, in a country where 75 percent of the population has been plunged into poverty, people are unsure what else to do besides take to the streets to voice their frustrations. In an effort to improve the economy, the central bank agreed to a forensic audit by global professional services firm Alvarez & Marsal. Experts say that cooperation in the audit and the successful implementation of other accountability measures has the potential to lead to an agreement with the International Monetary Fund to deliver monetary assistance to Lebanon.