On March 21, the Lebanese lira reached a new record low of LL140,000 to the dollar on the parallel market. That same day, Banque du Liban (BDL) further eased the ceilings for converting lira into dollars at its Sayrafa platform rate, which is lower than the prevailing parallel market rate.

BDL also authorized certain foreign exchange agents to process such conversion requests — a role that was previously limited to banks only.

The effect of BDL measures was immediate. At the beginning of April, the lira exchanged hands at LL100,000 to the greenback on the parallel market.

Between April 1 and May 1, the lira-to-dollar rate remained stable, fluctuating between LL97,000 and LL98,000 to the dollar. Starting May 4, the lira gained a little ground and has since traded at around LL94,500 to the dollar, despite the ongoing political and judicial turmoil in the country.

So, what are the factors that contribute to the stability of the national currency over the past two months — a significant contrast to the major fluctuations it experienced in the previous period?

Three financial experts shared their insights with L’Orient-Le Jour.

Marwan Barakat, head of the research department at Bank Audi

The national currency’s stability is entirely due to the central bank’s intervention in the foreign exchange market through its Sayrafa platform, which was achieved thanks to daily transactions carried out (through the platform), averaging more than $100 million a day.

This amount was almost entirely covered by dollar purchases by BDL on the parallel market through money transfer agencies.

As far as the central bank’s monetary policy over the coming months is concerned, it seems that over the next two months (until the end of BDL Governor Riad Salameh’s term of office on July 31) it will be based on attempts to maintain the stability of the lira-to-dollar exchange rate on the parallel market at around LL100,000 per one dollar.

At the same time, the central bank will try to maintain its foreign exchange reserves at around $9 billion and keep the official lira-to-dollar peg at LL15,000 to the dollar.

For the time being, the central bank is making efforts to postpone the issuance of new banknotes with denominations higher than LL100,000.

The aim of all these measures is to help control the inflation rate, especially following the notable increase observed during the initial months of this year.

It should be noted, however, that Sayrafa platform transactions and the BDL main Circular No. 161 — which organizes foreign exchange operations — serve merely as short-term palliatives and do not offer a permanent solution to the situation.

In the longer term, the outlook for the exchange rate depends on Lebanon’s ability to contain its twin deficits.

This means, firstly, controlling and reducing the external deficit (current account deficit), which reduces the quantity of dollars available on the Lebanese market, and secondly, controlling money creation, which inflates the quantity of Lebanese lira in circulation on the domestic market.

Majd al-Masri, head of the Syndicate of Money Changers

BDL has always been able to intervene to stabilize the national currency through its Sayrafa platform. This was the case at the beginning of April.

In concrete terms, when BDL injects dollars into the market through its platform, it effectively stabilizes the lira-to-dollar exchange rate. The central bank carefully determines the appropriate quantities of dollars to be pumped to achieve a state of equilibrium.

To accomplish this goal, BDL employs specific mechanisms involving key players within its reach. It either injects Lebanese lira into the market by purchasing dollars from banks and affiliated independent money changers, or it withdraws lira from circulation by selling dollars to the Lebanese public.

But as soon as the short-term measure ceases, the exchange rate is bound to rise as a result of public concerns and panic. This pattern has been observed in previous episodes of currency fluctuations.

How long will BDL continue to inject dollars into the market? Will this mechanism remain in place until a new head of state is elected, or just until tourism activity picks up again, which could bring more foreign currency into the economy?

This remains uncertain. What is certain, however, is that these current measures are generating substantial losses for BDL, to the tune of LL10,000 for every dollar, which is the difference between the parallel market and Sayrafa exchange rates.

How are these losses financed? Are they being financed from depositors’ money, from BDL’s assets abroad or from gold stocks?

Nothing is clear, and this is problematic. Given the daily money volume that is being traded and the losses incurred, he does not believe the central bank can maintain the Sayrafa rate in the long term. This is rather a short-term solution that buys time in the hope that things will improve.

In light of the recent developments, especially the fact that French courts have issued an international arrest warrant against Salameh, BDL officials reportedly told me that in the event of the governor resigning or being removed from office, or in any other eventuality, a system independent of any individual has long been in place to ensure that “the machine remains functional.” This reassuring signal is necessary to ensure continuity and economic and monetary stability.

Siham Rizkallah, associate professor specializing in monetary policy at the Faculty of Economics at Saint-Joseph University (USJ) in Beirut

First of all, it should be noted that the lira-to-dollar exchange rate on the parallel market is not stable, but rather stabilized as a result of the continuous interventions of BDL through its Sayrafa platform.

To accurately determine the true rate of the national currency, it would be necessary to suspend all types of interventions for a minimum period of one month. By doing so, the intersection between supply and demand in the market could be observed, providing a clearer picture of the currency’s actual value. This would allow for a more accurate assessment of the currency’s market equilibrium.

Meanwhile, BDL’s daily buying and selling transactions of dollars can be seen as a short-term strategy with a limited timeframe, with the primary objective being to navigate through the remaining period until a significant change occurs: either the end of the governor’s term and appointment of a successor or the election of a new head of state.

Although interventions via Sayrafa have managed to maintain a balance on the market for the time being, foreign currency reserves are now at a critical level, equivalent to $9.3 billion, which is equivalent to just six months’ worth of imports.

This budget does not represent BDL’s net reserves, but what remains of the compulsory reserves of customer deposits placed with the central bank.

Furthermore, the interventions conducted through Sayrafa are specifically aimed at securing a sufficient supply of dollars for state employees. The figures presented by BDL demonstrate that these operations are now being executed without depleting the reserves.

In addition to the declared reserves, there are also the IMF Special Drawing Rights deposited with BDL. Initially worth more than $1.1 billion, they are gradually being depleted at an average rate of $100 million a month, part of which is being used for intervention on the foreign exchange market, i.e., the equivalent of current expenditure, instead of being used for productive investment.

This situation is not sustainable in the long term. BDL is merely buying time, as it does every time, and as was notably the case with the 2016 financial engineering measures.

The aim this time is to appease public sector employees and get them through the remaining two months [until the end of Salameh’s term in office].

Maintaining this mechanism beyond this deadline is not a viable option due to the limited resources available and the state’s inability to effectively collect taxes in dollars without formalizing the dollarization of the Lebanese economy.