Money works as a medium of exchange, in part because its value is mutually agreed on in transactions. Lebanon is now reckoning with the economic consequences of when that is no longer true. It has been a long time since Lebanese knew the actual value of their money. There are, at the moment, at least four vastly different exchange rates at which the Lebanese pound (LBP) is exchanged into U.S. dollars (USD). The result is a daily struggle with misery and absurdity.

In 1997, the pound was pegged to the dollar at the rate of 1,500 to 1, and the two were used interchangeably on that basis until October 2019. But after the country slid into an economic crisis a year and a half ago, the currency lost its value steeply on the open market, losing 80 to 90 percent of its worth, even as the official rate stayed stuck at its 1997 peg.

To avoid a run on the banks, Lebanese were then barred from withdrawing dollars deposited before the economic crisis. They can withdraw in Lebanese pounds but at a loss compared to the market rate. The central bank allowed withdrawals at a rate arbitrarily set at 3,900 pounds to the dollar, even as the market rate soared beyond that, reaching 15,000 pounds to the dollar at one stage last month. It has now plateaued between 11,000 to 11,500 pounds to the dollar as of last week. Meanwhile, a fourth exchange rate of 6,240 pounds to the dollar emerged when the central bank proposed issuing money at that rate to 800,000 recipients of a World Bank emergency aid loan of $246 million.

In short, everyday Lebanese with now humble earnings are navigating a mind-boggling maze of multiple exchange rates and are paying for a crisis caused by the incompetence—or corruption—of the financial and political elite.

Many money-changers, economists, and bankers said Lebanese people’s savings were effectively being arbitraged away on a mass scale to reduce bank losses while preserving the elite’s privileged access to its cash. The richest have been bailed out, thanks to political connections or “wasta,” which allegedly allowed many to rescue their savings from a collapsing system.

The peg to the U.S. dollar was always fragile so long as Lebanon remained a country that exported little and imported most of its needs. To keep the peg going, Lebanon’s central bank offered ever higher interest rates to private banks, which passed some of those interest rates on to customers to lure depositors. But eventually, something had to give. As both the government and central bank’s debt mounted in 2019, depositors began to lose confidence, the diaspora whose remittances were the main source of foreign earnings began to withhold deposits, and the system started to unwind as Lebanese took to the streets to protest the country’s impending economic collapse. A government default on a euro-denominated bond in March 2020 triggered an accelerating downwards spiral.

A disproportionate cost of the crisis was imposed on the country’s small to medium depositors. None of the country’s banks declared bankruptcy, and an earlier suggestion that a haircut is imposed only on large depositors or shareholders was brushed aside. Moreover, the absence of capital controls law that legally forbids capital flight was allegedly exploited by the rich to transfer their money to banks in Switzerland or France. Although the exact number is disputed, reports say as much as $6 billion could have been smuggled out of the country. Meanwhile, small to medium Lebanese depositors, including the protesters who warned of the collapse in 2019, had to deal with informal capital controls freezing their accounts or withdraw at a hefty loss.

A senior banker who spoke to Foreign Policy on the condition of anonymity admitted the wealthy used their political connections to transfer their money overseas. “Banks have imposed tight capital controls with the objective of halting the financial collapse,” the banker said. “However, the political and wealthy elite put more pressure on the banks to transfer money overseas. In the absence of a capital control law, such transfers are not illegal yet, in many ways, are immoral and wrong. Such incidents have occurred in most banks and usually with intense pressure on bank management.”

Mohammed is one of the many money-changers in Lebanon’s capital, Beirut. He chose to be identified just by his first name and shared how the mercurial exchange rates were working to the detriment of average consumers and were being arbitraged in a way that amounted to indirect theft. Mohammed receives Lebanese pounds from a supermarket that withdraws them from its local bank at 3,900 pounds to the dollar. But since the supermarket needs dollars to import the goods it sells—and banks are not giving it any—it needs to procure the dollars from the black market. Mohammed tracks hundreds of others like him on WhatsApp groups where, he said, the free market rate is decided. “If more dollars are in demand, then the rate plummets, which is now always the case,” he said. Then he sends texts replete with cheerful emojis to those who have dollars stashed under their mattresses. “Good morning everyone [sunshine emoji]. The rate is exceptionally high today, at 11,800 LBP for the dollar,” read one of Mohammed’s texts. “Cal
l me.” With wads of Lebanese pounds in his bag, Mohammed zips through the streets of Beirut on his motorbike and provides at-home cash delivery.

He charges a tiny commission for every exchange and hands over the dollars to the bosses at the supermarket who transfer them to their suppliers abroad to import goods. But the supermarket does not pay for the difference between the local bank rate of 3,900 pounds and the market exchange rate of 11,000 to 15,000 pounds. Instead, it passes on the raised prices of its imported commodities to consumers, even though they also withdrew their money at 3,900 pounds.

Nizar Ghanem, a Lebanese analyst on economic policy and director of the Triangle think tank, said the cost of the financial crisis is being thrown at the weakest intentionally. “The central bank is deliberately letting trade happen at multiple exchange rates,” he said. “On the one hand, it prevents people from withdrawing money and keeps the banks safe, and on the other, if they do withdraw, then the unofficial haircut is on them. … Instead of restructuring banks, which would have meant that the International Monetary Fund looked at the balance sheets and the total losses to determine which banks should go bankrupt, the cost was forced on small depositors.”

Khaled Zeidan, chairperson of local bank Banque de Credit National, said the banks had become a target of protesters, but they were losing too. “Generally speaking, banks are, in fact, the biggest losers during the current crisis once we consider that the capital of banks is in Lebanese pounds and has therefore depreciated in real terms significantly,” he said. However, he agreed the exchange rate of 3,900 pounds allowed banks to cut their losses.

“The current circulars issued by the [Central Bank of Lebanon], particularly circular 151, allow banks to provide each USD account holder to withdraw up to $5,000 in LBP at a rate of 3,900, which is higher than the official rate but lower than the black market rate. This circular does help banks reduce their overall dollar liabilities as the size of the USD deposits shrinks.”

Despite the protests, a collapsed economy, and a port blast that destroyed many parts of the country’s capital city, there has been no change to the country’s fundamental politics. The government has so far failed to present a coherent fiscal and monetary plan to extract the economy from the crisis and has continued to drag its feet on reforms demanded by the International Monetary Fund (IMF) before it provides the bail-out loan desperately needed to revive the economy.

Instead, the international community is caught in a bind. It cannot provide the IMF loan without reforms, but it also cannot let the poor starve. According to the United Nations, more than 55 percent of the country’s population was seen as “trapped in poverty and struggling for bare necessities” in 2020 as compared to 28 percent in 2019. “Extreme poverty has registered a threefold increase from 8 percent in 2019 to 23 percent in 2020,” the U.N. added.

To resolve the conundrum, the World Bank decided to provide $246 million to the poorest populations, but the central bank’s decision to arbitrage it at 6,240 pounds to the dollar, half the market rate, caused widespread outrage. Lebanon’s central bank ostensibly wanted to use the remainder of the money to maintain subsidies on flour, fuel, and medicine. But activists said subsidies have become a tool for the corrupt ruling class to keep a lid on popular anger and are further exploited in for kickbacks and, via smuggling, to support regional allies. “Why is Viagra subsidized?” Ghanem asked. “A few families control the pharmaceutical industry in Lebanon, and they decide what is subsidized for their own profit. They lobbied against a law on exactly what should be subsidized.”

Sami Nader, an independent analyst, said the fuel subsidy was exploited to smuggle cheap fuel to Syria and thereby support President Bashar al-Assad’s regime. “Subsidies do not support the poor but the traders and smugglers who smuggle fuel into Syria and, of course, the powers that protect them,” Nader said. “All over the world, the best way to subsidize the poor is cash transfer.”

The crisis in Lebanon has plunged people deep into poverty. There are regular runs on staples at grocery stores, even on locally produced items like olive oil. Food prices have increased by 400 percent with the price of bread doubling and the price of vegetables quadrupling. Food insecurity has sharpened sectarian fault lines and deepened the divide between Syrian refugees and their Lebanese hosts. The refugees are now castigated for consuming subsidized commodities. Everyone in Lebanon have been forced to cut their spending, in turn reducing the earnings of local businesses. The tourism industry, one of the few in the country that was fundamentally sound, is reeling from the pandemic.

It is a grim picture for most Lebanese, except for the elites who seem to have escaped the crisis unscathed. Political parties are still wrangling over ministries and have delayed the formation of a new government. That means no one has the authority to impose the changes the country needs and put an end to the arbitrage system that benefits the wealthy.