Lebanon Plan Sees 93% Currency Slide, Turns Bulk of FX Deposits to Pounds

A general view shows residential buildings in Beirut, Lebanon January 20, 2022. REUTERS/Emilie Madi
A general view shows residential buildings in Beirut, Lebanon January 20, 2022. REUTERS/Emilie Madi
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Lebanon Plan Sees 93% Currency Slide, Turns Bulk of FX Deposits to Pounds

A general view shows residential buildings in Beirut, Lebanon January 20, 2022. REUTERS/Emilie Madi
A general view shows residential buildings in Beirut, Lebanon January 20, 2022. REUTERS/Emilie Madi

A government plan for tackling Lebanon's financial crisis projects a 93% devaluation of the Lebanese pound and converts the bulk of hard currency deposits in the banking system to local currency, according to a blueprint seen by Reuters.

Of $104 billion of hard currency deposits, the plan foresees returning just $25 billion to savers in US dollars, with most of what's left converted to pounds at several exchange rates, including one that would wipe 75% off some deposits.

The plan sets a 15-year timeframe for paying back all depositors, Reuters reported.

The World Bank has described Lebanon's crisis as one of the worst depressions in world history. Depositors have been largely frozen out of US dollar accounts since October 2019, during which time the pound has lost more than 90% of its value.

A financial plan is crucial if Lebanon is to secure an IMF bailout, widely seen as the only way for it to chart a path out of the crisis. Lebanon began talks with the IMF last week.

The plan, based on Sept 2021 data, foresees an exchange rate of 20,000 pounds per dollar, compared to the official rate of 1,500, which the government has yet to adjust even as the central bank has applied an array of higher rates.

Unifying the exchange rate is an IMF policy recommendation.

In recent weeks, central bank intervention has strengthened the pound to 21,500 from a low of 34,000 last month.

The government has estimated the overall losses in the financial system at $69 billion.

A previous attempt by Lebanon to secure IMF support got nowhere in 2020 due a dispute between the central bank, commercial banks and ruling parties over the scale of the losses and how they should be distributed.

This time, the losses are divided out as follows: $38 billion by depositors; $13 billion through a reduction in the capital of banks' shareholders; $10 billion in a government perpetual bond; and $8 billion by the central bank.

The plan foresees wiping out 75% of the value of $16 billion in deposits accrued thanks to high-interest rates since 2015, through a conversion to pounds at a below-market rate.

Similarly, it reduces by 40% the value of $35 billion worth of deposits that resulted from pounds being converted into dollars at the official exchange rate after October, 2019, also through a conversion to pounds at a below-market rate.

It aims to return $25 billion of deposits in hard currency to people who had less than $150,000 in their account before the crisis erupted. Those with between $150,000 and $500,000 would be able to get the full value, but in pounds at the market rate.

Depositors with more than $500,000, now valued at $22 billion, would receive shares in the banking sector of the value of $12 billion. In addition, they would get $5 billion of government perpetual bonds in a state asset management company.

"The 15-year timeframe for depositor repayment is an indication that the country will remain over-indebted for a long time," said Mike Azar, an expert on the financial crisis.

"The consequences are continued uncertainty, low confidence, and depressed economic growth."

The plan notes that money supply in pounds was expected to grow "exponentially increasing narrow money supply significantly". This means inflation is a significant risk.

"High inflation will counteract all efforts to recover deposits as their real value and the depositors' purchase power will decrease," it said.

Addressing long-term inflation, which has already soared with the collapse of the pound, it notes that interest rates could be a powerful tool once the credibility of the financial sector returns.

However, it noted that interest rates were currently not effective "given no confidence" the central bank and the banks.#

Central bank gold reserves could be "an exceptional tool to stabilize the value of the (pound) if it can be exchanged for (pounds)", it added.



IMF: Middle East Conflict Escalation Could Have Significant Economic Consequences

Displaced families, mainly from Syria, gather at Beirut's central Martyrs' Square, where they spent the night fleeing the overnight Israeli strikes in Beirut, Lebanon September 28, 2024. REUTERS/Louisa Gouliamaki
Displaced families, mainly from Syria, gather at Beirut's central Martyrs' Square, where they spent the night fleeing the overnight Israeli strikes in Beirut, Lebanon September 28, 2024. REUTERS/Louisa Gouliamaki
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IMF: Middle East Conflict Escalation Could Have Significant Economic Consequences

Displaced families, mainly from Syria, gather at Beirut's central Martyrs' Square, where they spent the night fleeing the overnight Israeli strikes in Beirut, Lebanon September 28, 2024. REUTERS/Louisa Gouliamaki
Displaced families, mainly from Syria, gather at Beirut's central Martyrs' Square, where they spent the night fleeing the overnight Israeli strikes in Beirut, Lebanon September 28, 2024. REUTERS/Louisa Gouliamaki

The International Monetary Fund said on Thursday that an escalation of the conflict in the Middle East could have significant economic ramifications for the region and the global economy, but commodity prices remain below the highs of the past year.

IMF spokesperson Julie Kozack told a regular news briefing that the Fund is closely monitoring the situation in southern Lebanon with "grave concern" and offered condolences for the loss of life.

"The potential for further escalation of the conflict heightens risks and uncertainty and could have significant economic ramifications for the region and beyond," Kozack said.

According to Reuters, she said it was too early to predict specific impacts on the global economy, but noted that economies in the region have already suffered greatly, especially in Gaza, where the civilian population "faces dire socioeconomic conditions, a humanitarian crisis and insufficient aid deliveries.

The IMF estimates that Gaza's GDP declined 86% in the first half of 2024, Kozack said, while the West Bank's first-half GDP likely declined 25%, with prospects of a further deterioration.

Israel's GDP contracted by about 20% in the fourth quarter of 2023 after the conflict began, and the country has seen only a partial recovery in the first half of 2024, she added.
The IMF will update its economic projections for all countries and the global economy later in October when the global lender and World Bank hold their fall meetings in Washington.
"In Lebanon, the recent intensification of the conflict is exacerbating the country's already fragile macroeconomic and social situation," Kozack said, referring to Israel's airstrikes on Hezbollah in Lebanon.
"The conflict has inflicted a heavy human toll on the country, and it has damaged physical infrastructure."
The main channels for the conflict to impact the global economy have been through higher commodity prices, including oil and grains, as well as increased shipping costs, as vessels avoid potential missile attacks by Yemen's Houthis on vessels in the Red Sea, Kozack said. But commodity prices are currently lower than their peaks in the past year.
"I just emphasize once again that we're closely monitoring the situation, and this is a situation of great concern and very high uncertainty," she added.
Lebanon in 2022 reached a staff-level agreement with the IMF on a potential loan program, but there has been insufficient progress on required reforms, Kozack said.
"We are prepared to engage with Lebanon on a possible financing program when the situation is appropriate to do so, but it would necessitate that the actions can be taken and decisive policy measures can be taken," Kozack added. "We are currently supporting Lebanon through capacity development assistance and other areas where possible."