The central bank chief of Lebanon announced that the country’s currency will be devalued by 90% on February 1st

On February 1st, Lebanon will implement a new official exchange rate of 15,000 Lebanese pounds to 1 US dollar, according to the central bank governor, Riad Salameh. This marks a 90% devaluation from its previous rate of 1,507, which has remained unchanged for 25 years.

The new rate is still far from the current parallel market rate, where the pound is being traded at around 57,000 per dollar.

Salameh stated that this change will affect banks, causing a decrease in the equity of the financial institutions at the heart of Lebanon’s 2019 financial crisis.

Experts predict that the change will have limited impact on the overall economy, which has become increasingly reliant on the US dollar and where most transactions occur based on the parallel market rate.

The value of the pound has declined by approximately 97% since it deviated from the rate of 1,507 in 2019.

In an interview with Reuters, Salameh stated that commercial banks in Lebanon “will experience a reduction in the portion of their equity that is in Lebanese pounds when converted to US dollars at the rate of 15,000 instead of 1,500.”

To mitigate the effects of this change, banks will be given a period of five years “to make up for the losses caused by the devaluation,” Salameh stated.

This new rate of 15,000 is part of an effort to standardize multiple exchange rates, in accordance with the draft agreement that Lebanon reached with the International Monetary Fund last year, which outlines the conditions for accessing a $3 billion bailout.

Presently, multiple exchange rates still exist, including the official rate, the Sayrafa exchange platform rate offered by the central bank which is currently 38,000 Lebanese pounds per US dollar, and the parallel market rate.

The IMF has advocated for an immediate unification of exchange rates and has stated that Lebanese authorities must promptly address the estimated $70 billion in financial sector losses, widely considered to be the outcome of years of excessive spending, corruption, and mismanagement.

However, draft government plans suggest a more gradual approach. An analyst, Mike Azar, stated that the five-year timeframe for making up for losses is not in line with the IMF’s stance that the losses must be quickly addressed.

Without a comprehensive restructuring plan for banks, they will need to raise capital from shareholders to cover their losses or transfer the losses to depositors by allowing them to withdraw their dollars in local currency, Azar explained.

He added that “since banks can’t do this immediately, the central bank is giving them a five-year period to do so.”

The IMF agreement is widely seen as the only means for Lebanon to restore confidence in its financial system and recover from its collapse.

The change in the exchange rate is not anticipated to resolve one of the most difficult aspects of the crisis for the average Lebanese citizen – the inability to freely access their dollar savings.

While official capital controls have not been imposed in Lebanon, banks have implemented their own restrictions on withdrawals in both dollars and Lebanese pounds since 2019.

Source: UpdatedNews Canada