Lebanon Banks Suck in Dollars to Maintain Peg

Lebanese banks are pulling out the stops to bring in dollars as the country strives to preserve a two-decade old currency peg, offering high returns to customers willing to change their hard currency into long-term Lebanese pound deposits. It is one sign of Lebanon’s determination to maintain monetary stability as political leaders’ warnings of economic crisis have fueled rumors that have led the central bank to issue repeated assurances about the peg’s soundness, Reuters reported.

But the central bank’s high interest rates that keep money flowing into banks are increasing risk within the financial system and strangling an already depressed economy. That all comes at a time of renewed political uncertainty as Lebanon nears three months without a government. With growth low and traditional sources of foreign exchange—tourism, real estate and foreign investment—undermined by years of regional tension, Lebanon is now relying more on the billions of dollars expatriate Lebanese deposit in local banks.

The banks buy government debt, which finances the country’s eye-watering public indebtedness, and deficits. There is broad agreement that Lebanon—the world’s third most indebted state—needs urgent fiscal reform to help the economy and reduce dependence on central bank operations described as unconventional by the International Monetary Fund.

But since parliamentary elections in May, politicians have failed to form a government that could tackle the deficit, reinforce confidence in the financial system and unlock billions in donor financing. Focusing on high interest rates has come at a price. “The priority today for the central bank is to raise rates to attract capital and preserve capital in foreign currency in Lebanon so we can continue with the policy of stabilizing the pound, which is the top priority,” Raed Khoury, Lebanon’s caretaker economy minister, told Reuters last month.

“It is the reason for Lebanon’s political and monetary stability and confidence in Lebanon. Of course these factors don’t come at a low cost. The cost is high for our economy.”

Ordinary Lebanese are feeling the effects of the weak economy. Lending is down and business activity is falling along with prices in a real estate sector that was once a pillar of the economy. Annual growth rates have fallen to between 1 and 2%, from between 8 and 10% in the four years before the Syrian war, and Lebanon’s debt-to-GDP ratio hit more than 150% at the end of 2017, the IMF said.