Lebanon's Ailing Economy Further Strained by Drop in Foreign Currency Reserves

Financial strains at levels unheard of since the Lebanese civil war raise concerns for the stability of a country where political tensions are never far from the surface

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A gas station is closed during a protest against tight supply of dollars in Beirut, Lebanon September 18, 2019.
A gas station is closed during a protest against tight supply of dollars in Beirut, Lebanon September 18, 2019. Credit: REUTERS/Mohamed Azakir

Cars line up to fill their tanks but the worker at the gas station in Lebanon's capital city waves them off, standing by the "Strike!" signs. "No fuel today," he shouts.

The day of industrial action, replicated at gas pumps across the country, was not really about fuel, it was about the dollars needed to pay for it, or rather the lack of them.

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"We don't want a crisis ... the sector is bleeding," said Fadi Abu Chakra, a spokesman for fuel distributors who led the strike this week. "We (get paid) in Lebanese pounds, and we need dollars to pay importers. Where are we supposed to get dollars if the banks are not giving them?"

A stagnant local economy and a slowdown in cash injections from Lebanese abroad have reduced the central bank's foreign currency reserves, making it difficult for businesses to buy the dollars they need from banks.

Some say they are being forced to go to money exchange houses which charge rates above the official peg of 1,507.5 pounds to the dollar.

Lebanon has not seen such financial strains since its 1975-1990 civil war. The steady pressure has raised concerns for the stability of a country where political tensions – local and regional – are never far from the surface, and which hosts around a million Syrian refugees.

Banks in the Middle Eastern state still sell dollars at the official exchange rate but some business owners say they are not able to get the quantities they need from them.

Saddled with one of the world's heaviest public debt burdens at 150% of annual gross domestic product, Lebanon's government has declared an economic emergency to try and get its finances under control.

"The economic situation is tough but we are not a collapsing country at the financial level," Finance Minister Ali Hassan Khalil told a news conference this week.

"Yes, there is not much liquidity in foreign currencies in people's hands in the market, but the dollar exchange rate is still maintained in the banks."

Lebanon's banking association said banks were satisfying demand for foreign currency and dollars were available. The central bank said lenders were able to tap its supply of U.S. dollars to meet customer requests.

"When they are in shortage they buy (dollars) from the central bank," Governor Riad Salameh told Reuters.

However, three bankers contacted by Reuters said they were rationing the amount of dollars they could sell for Lebanese pounds.

"The central bank gives a daily quota of dollars for each bank, but people are asking the banks for more dollars than the quota," said one senior banker, who asked to remain anonymous to speak freely.

The central bank did not respond to a request for comment.

"It's the first time in the history of the Lebanese banking sector that the demand in the dollar market is not being met in this way," the banker said.

The banking sources said there was no problem withdrawing from dollar or Lebanese pound deposit accounts.

"It's not an issue of dollar shortage but rather higher demand," said another banker, declining to be named because she was not authorised to discuss the matter publicly.

Seven importing companies contacted by Reuters said they were finding it harder or more expensive to obtain dollars. They asked to remain anonymous out of concern that speaking publicly would damage their businesses.

A leather importer said banks were taking a few days longer to turn pound checks into dollars, "and sometimes they tell us sorry, we can't exchange them."

Financial strains

The Lebanese pound has been pegged at its current level against the U.S. dollar for more than two decades and the government has pledged to keep it there. It wants to avoid a devaluation that could hurt people's savings and spending power.

Salameh, who has un the central bank for a quarter of a century, has since 2016 boosted reserves through a series of measures, including attracting inflows with high interest rates on long-term, high-value deposits. But this has absorbed liquidity from banks.

And amid anaemic economic growth and political instability, traditional sources of foreign exchange including tourism, real estate and money sent home by citizens abroad have slowed.

The central bank's foreign assets, excluding gold, fell around 15% from an all-time high in May last year to $38.7 billion in mid-September. The central bank said it had received a $1.4 billion dollar boost in late August from private depositors.

Reflecting the increased pressure on Lebanon's finances, Fitch ratings agency recently downgraded it deep into junk territory. Rival ratings agency S&P Global kept Lebanon's credit rating at B-/B but warned that it could be lowered, saying it considered its foreign exchange reserves sufficient to service government debt in the "near term".

On Wednesday, Finance Minister Ali Hassan Khalil said Lebanon was committed to repaying its debts in all currencies.

"We have never been late to fulfil our commitments, not even for an hour," he said.

Last year, foreign states and donors pledged $11 billion for Lebanon for a 12-year infrastructure investment program so long as the government enacts reforms.

"The currency peg risks being tested unless we see significant political commitment and implementation of announced reforms, which could be supported by the disbursement of some donor funds," said S&P's Lebanon analyst, Zahabia Gupta.

Both dollars and pounds are legal tender in Lebanon, which is a net importer of goods with a persistent need for dollars to fund trade and government deficits.

Amid the demand for dollars, some money exchange houses have raised the amount of Lebanese pounds required to buy dollars beyond the margins set by the central bank.

A Lebanese clothing company owner said it stopped importing material this summer and now sources locally, blaming sluggish demand and bank dollar conversions too small for currency needs.

"Getting dollars at the moment is difficult," said an importer of alcoholic drinks. "The bank is adamant it will not exchange to dollars. You have to go to a (money) exchanger."

His company, which imports around $10 million of goods annually, has not cut imports yet, he said.

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