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finance & economyOctober 1, 2022

Lebanon will gradually phase in new official FX rate, PM says


Lebanon will roll out a new official exchange rate of 15,000 pounds per dollar gradually, with initial exceptions to include banks' balance sheets and housing loan repayments to which the old rate will still apply, the Prime Minister said, Reuters reports.

In a Reuters interview, Najib Mikati sought to clear up confusion caused on Wednesday when the Finance Ministry said the 1,507 rate would end on 1 November, part of efforts to unify numerous exchange rates that have emerged during the country's financial crisis.

Mikati said the gap between the market rate of 38,000 and other rates must close 'sooner or later' – an IMF demand included in a draft funding agreement inked in April – but this would take time.

'The Finance Minister's statement portrayed things as if things will change all at once – no, there will be exceptions and things will be done in certain phases,' Mikati said.

The pound has crashed by more than 95 per cent from the official rate since Lebanon's financial system collapsed three years ago, plunging swathes of the population into poverty in the worst crisis since the 1975-90 civil war.

Mikati said the 15,000 rate would initially apply to customs duties on imports and to VAT on goods priced in dollars. The Central Bank would issue circulars and decisions determining the wider applications, he said, with elaborating.

'It won't happen overnight,' he said.

Lebanon's crisis erupted in 2019 after decades of profligate spending by a State riddled with corruption and waste, together with unsustainable financial policies.

But ruling politicians have made scant progress in addressing the crisis, which the World Bank, in a January report, described as a deliberate depression orchestrated by the elite.

Reform steps

After the IMF criticised Lebanon last week for 'very slow' progress towards reforms, Mikati said the government was committed to a deal and was on the cusp of finalising two steps sought by donors.

He said the government was set to hike the tariff charged by the State-owned power firm – a big drain on state coffers – for the first time since the 1990s.

He added this would lead to the provision of more than 10 hours of power a day to homes that currently barely get any, and which depend on expensive privately-owned generators to keep the lights on.

The government would also submit to Parliament next week a law setting the framework for restructuring the banking sector, which has been paralysed by the crisis, trapping savers' dollar deposits.

With no sign of action to resolve the situation, some depositors resorted to extreme measures this month, demanding their deposits by force in a spate of bank holdups that have led banks to close.

Mikati, a billionaire tycoon, said he 'understood' such actions 'but the money won't come back this way'.

'I know their pain,' he said, while warning such actions would lead to 'the law of the jungle'.

Bank losses

The IMF has said small depositors should be fully protected in a financial recovery plan which has been a major point of contention since 2020, particularly over how $72 billion of financial sector losses will be distributed.

Mikati, who is currently serving in a caretaker capacity until he can form a new government, said the latest plan has been submitted to Parliament for discussion, to be implemented when the IMF deal is sealed.

The IMF has said large banking sector losses need to be recognised and addressed up-front, while respecting a hierarchy of claims prioritising depositors and state assets over banks.

Banks, in turn, say the State should shoulder the burden.

While the IMF has said the plan should have limited recourse to public assets, the government envisions the creation of a fund drawing partially on State assets to compensate larger depositors.

Mikati said the plan would not immediately draw on State assets, but such assets should be used to compensate depositors in the future when the State's financial situation improved.

middleeastmonitor