The new government in Lebanon has limited time to soothe tempers. Beirut's streets have been hit by regular demonstrations. This is a file picture from one such in October. Image Credit: AFP

Beirut: The sharp slide of the Lebanese pound seems to have been arrested for now after a grouping of currency exchange houses set it at 2,000 pounds to the dollar. This after weeks of volatility during which it ranged between 2,000-2,500 to the dollar, a period during which there was acute political and monetary uncertainty and rioting on the streets.

The official exchange rate, however, has been at 1,500-1,515 pounds to the dollar since 1992.

Any money exchange house that violates the 2,000 pound peg will have to face heavy legal penalties, according to a source at the Syndicate of Money Changers, the group which set the new currency level.

“A violator could have the permit suspended or withdrawn,” the source at the Syndicate added.

But bankers are still uncertain whether the new peg would hold. Much will thus depend on the newly formed cabinet’s economic and monetary policies. Even then, “The exchange value won’t go below 1,,850 pounds to the dollar,” said a banker.

It was on Tuesday that the Syndicate announced the 2,000 pound exchange mark, following an agreement reached with the central bank governor.

The authorities had intervened forcefully to arrest the currency’s slide, by setting limits on withdrawals from banks and on dollar conversions. Since the beginning of the year, the dollar rate had been fluctuating between 2,100-2,800 pounds.

Peg vs. higher exchange rate

Some banking sources suggest that, for the near future, maintaining a dollar peg will be the cheaper option compared to raising the rate.

“I don’t expect the official rate to change in the next few months,” the banker said. “We need to explore the new cabinet’s monetary policies. There is sustainability this year - this is not only because of the political aspect, but because banks still have liquidity.

“If the pegging changes [rate is increased], then it will have a negative impact on creditors and depositors. The whole economic cycle is influenced by any positive vibe… the government formation has been the best example.”

Some settling down

The currency fluctuations did settle down a bit as soon as the new cabinet’s formation was announced. According to Ebrahim, owner of a money exchange house at Mar Elias, said the rate went down from 2,430 pounds to 2,100.

“Then the Syndicate fixed the rate - in the past two days, several clients tried to convince me to purchase dollars at more than 2,000 pounds.

“We couldn’t do so - but some clients are trying to benefit and sell the dollars they’ve been keeping at higher rates.”

A chance for governance

Lebanon's new cabinet led by Prme Minister diab will need to intervene decisively to arrest the slide in the economy.

Of course, much rests on what the government will do to arrest the seemingly endless slide into economic disarray.

The Prime Minister, Dr. Hassan Diab, chaired a meeting of the cabinet on Wednesday to discuss protestor demands and the ailing economy.

“Once the government gains the vote of confidence, it will gradually start gaining internal and external trust through anti-corruption reforms, finalizing a budget, reducing the deficit without additional taxes, and proving to the world that it is not under the influence of Iran,” said one investment banker. “This would allow inflow of external foreign currencies funds - CEDRE commitments of $11 billion, support from Gulf countries, and diaspora transfers.

“And encourage people to put dollars back in the economy instead of safekeeping them.”

Once government’s actions are under way, the economy would recover gradually and currency rates will stabilize once again. “For the next four to six weeks though, uncertainty will continue with no apparent US dollar inflows expected soon,” the banker added.

The Finance Minister Ghazi Wazni preferred to say Lebanon is suffering “financial instability” rather than a “banking and liquidity crisis”. “This is the major challenge that we face in the next few months to reassure depositors about their savings and deposits. Our responsibility is to instantly go to work.”