Lebanon edges away from its decades-old peg

Beirut: Lebanon said it will allow small depositors to withdraw funds from dollar accounts at a weaker rate than the decades-old fixed regime, the first official move away from the country’s currency peg amid a severe liquidity crisis.

With hardly any dollars circulating in the banking system, lenders will pay out at a “market rate” in Lebanese pounds to clients with accounts of up to $3,000, according to a central bank circular issued Friday.

The rate will be set daily via an electronic platform including local lenders, the central bank and exchange bureaus, according to a separate statement. Customers must empty their account in one go, and the scheme will run for three months.

Separately, clients holding accounts in Lebanese pounds equivalent to $3,000 can transfer the amount into foreign currency at the fixed rate of 1,515 pounds to a dollar, and then withdraw at the new market rate, so they aren’t at a disadvantage.

With the exception of funding made available to importers of essentials such as fuel and medicine, Lebanon’s peg has in effect broken already, undone by the lack of sufficient hard-currency reserves and the drying up of dollar inflows, the government’s main source of funding.

The dollar shortage led to the emergence of a black-market rate that breached 2,800 per dollar this week. Prices of food and goods have spiked by over 50% since October, when nationwide protests erupted and brought down then-Prime Minister Saad Hariri’s cabinet.

Lebanon has begun talks to restructure its $90 billion debt pile, promising to present a comprehensive recovery plan for its “broken” economy before the end of this year. The government faces the triple headwinds of a currency crisis and unsustainable fiscal and current-account deficits, and now has the impact of the coronavirus pandemic to cope with.