The Downward Spiral of Lebanese and Syrian Currencies

The reasons for the twin collapse of the Lebanese and Syrian pounds (LL and LS) are many: drying up of revenue sources, multiple and abyssal public deficits, poor governance—or governmental vacancy-endemic corruption, nihilistic politicians operating in a context of instability and regional conflicts. The two countries have quite different political and economic systems. Lebanon is ultra-liberal, corrupt to the core and, of course, pro-Western. Syria is more of a planned economy—with, in recent decades, something of a liberal turning and more corruption—until the war began in 2011 and tore everything down.

The war has left deep wounds that are impossible to heal without colossal international aid which has failed to materialise on account of the economic and financial sanctions decreed by the Western powers. The country’s leaders—the same autocratic family in power for half a century now—have destroyed the people’s hopes for a better life.

Yet while Lebanon and Syria have travelled divergent pats, they have much in common. Lebanese families have Syrian relatives and vice versa. Rich Syrian families have contributed to the development of a Lebanese banking sector which has long been prosperous, and there are many industrial ties as well. At the beginning of the new century, when the Syrian financial sector was commencing a timid liberalisation, Lebanese banks took stakes in Syria or established branches there.

Neither with you nor without you

Nor must we forget that the two countries shared the same currency until Lebanon created its own on 24 January 1948, having acquired its independence and broken all legal ties with mandatory France and with Syria. The customs union between the two countries was subsequently denounced by Syria in 1950.

In Lebanon, although, as a guarantee of stability, the pound is officially pegged to the dollar (at the rate of 1507 pounds to the dollar), has been consonantly plunging to abysmal depths since October 2016 in the parallel markets. At the present time its depreciation is up to 90% with a black-market rate of exchange around 15 000 pounds to the dollar (as against 9,800 in July 2020). Nobody knows where the plunge will stop considering the country has not had a government since last August and the explosion in Beirut Harbour destroyed an entire neighbourhood of the capital and forced the resignation of a government meant to carry out decisive reforms.

“With these imperturbable political leaders we get the impression we are talking to a huge rock or a steel wall”, Jad Tabet says bitterly. He’s an important member of the civil society and general secretary of the Union of Engineers and Architects. Until 2008, the banks were the flagships and driving motors of the economy, now they are all on the verge of bankruptcy and though it is quite illegal they will not let depositors withdraw dollars from their accounts, except in dribs and drabs and at exorbitant rates. In a highly dollarized economy dependent on imports, shopkeepers are in a bad way and bankruptcies and unemployment are rampant.

In view of this environment, outgoing Prime Minister Hassan Diab issued a warning: the reserves of the Banque du Liban (BDL) are not enough to finance all the subsidies (wheat, fuel, medicaments, medical equipment and food) beyond the month of June.

Living an illusion

Difficulties or failure? Lebanese banks used to be swimming in profits thanks to their Lebanese depositors, expatriates settled in the Gulf Monarchies and Syria. For the latter country, Lebanon was at once a safety valve, a refuge and a base from which Syrian businessmen and industrialists could operate while taking advantage of the attractive interest rates available there until 2019. Everything seemed rosy until the crack-up and the Lebanese government’s cumulated loss of revenues and the incapacity of the monetary authorities to fill the abyssal gap in the balance of payments which has turned out to be the chief cause of the crisis. Foreign currency was no longer coming in and countries like Saudi Arabia became reluctant to invest their surpluses.

Actually, the local banks were themselves prompted to charge their depositors’ high rates by the BDL which was called upon to make up for the deficits of the public services which accumulated mountains of debt (50 billion dollars’ worth for the electricity sector alone). The warnings issued by experts and by international bodies to the effect that the situation was getting out of hand (the debt-to-GDP ratio had been close to 180% for years) proved useless, for in the short run nothing is more reassuring than self-deception.

Thus, just a few months after the autumn 2019 street protests and the drastic penalties adopted by the banks to limit depositors’ access to their accounts, Premier Hassan announced on 7 March 2020 that for the first time in its history, the country was defaulting on a part of its public debt (1.2 billion dollars’ worth of Eurobonds which had reached their maturity date). He thereby sent a very negative signal to the financial markets. “The Lebanese,” he added, have been living under the illusion that all was well when their country was drowning in an ocean of debt”.

That same month, the Lebanese government revealed it would be defaulting on the totality of its foreign currency debt: 35.8 billion dollars at the end of November 2020.

Those who advised greater caution went unheeded. The ship was leaking badly and there was panic on board. In July 2020, former director general of finance Alain Bifani revealed that some 6 million dollars had left the country since October 2019 despite rigorous restrictions and a ban on capital transfers.

Someone had to take the blame. The BDL governor Riad Salame and the bankers were held responsible for a system as vitiated as it was vicious, and which could not endure by serving unrealistic interest rates to entice depositors who often had no other source of income in a country which was practically at a standstill.

From adulation to vilification

Today all confidence has vanished. Only yesterday, international finance gave Riad Salame the highest score among managers of central banks. Now he is accused of having set up a kind of Ponzi system, a fraudulent financial construction—and singled out for his “disastrous” performances, even though the blame for his wrongdoings must be shared with the politicians and the system he served.

At the request of the Swiss courts, the Lebanese Department of Justice has opened a preliminary investigation into an illegal transfer of funds to Switzerland organised by the governor of the BDL. Riad Salame. He was, for many years, former Prime minister and entrepreneur Rafic Hariri’s personal investment banker, when he was employed by the US firm Merril Lynch Fenner & Pierce. He has denied any professional misconduct.

At the same time, many aggrieved depositors have initiated legal proceedings against Lebanese banks and against the BDL, long considered an inviolable stronghold, a sort of State within the State.

Is there a glimmer of hope in the dark sky where storms are gathering day after day? “Lebanon is suffering from a severe and extensive economic depression” is the verdict of the World Bank in a study published in April, with a real GNP in decline for the past three years, an inflation which has peaked at 84.8% while 55% of the population is living under the poverty line, according to the United Nations Economic and Social Commission for Western Asia. “Lebanon is threatened with total and dangerous collapse […] beyond compare with what happened in Greece, Venezuela or Argentina”, was the warning pronounced by Lebanese expert Paul Salem, president of the Middle East Institute in Washington, in an interview given to a Lebanese radio station on 11 April in conjunction with meetings between the IMF, the World Bank and officials from the new US administration. The expert added that the Biden cabinet was aware of these dangers and was prepared to act with its partners. “There is an urgent need to prevent a financial and social explosion, in coordination with the IMF. The international community is worried,” he stressed.

Syria in a monetary cul-de-sac

Would the prospect of an end of the Lebanese crisis have any positive effects, however limited, in Syria? The Syrian pound has also hit its historical low. Paradoxically enough, it was with the official end of the fighting in 2018–2019 that the country’s ordeal really began. Due to the impact of the Lebanese crisis, the black-market rate of the Syrian pound fell to 1,000 SP to the dollar at the beginning of December 2019 when the official rate, as posted on the website of Syrian Central Bank, was 434 pounds. At no time during the bleak years of the war had the pound fallen to such levels on the parallel market.

In fact, the billions of dollars held by Syrian depositors in Lebanese banks were suddenly frozen, causing a scarcity of dollars on the Syrian market and the depreciation of the Syrian pound. Bashar Al-Assad himself has claimed that Lebanese banks hold some 40 billion dollars of Syrian money, although the sum is no doubt considerably less.

Be that as it may, at the beginning of April, the pound was trading on the black market at 3,700 SP per dollar after having peaked at 4,700 SP on March 17, i.e., four times less than two years ago. Syrian business circles are accustomed to the ups and downs of their currency, ascribing them to market manipulations. Was it to calm people’s tempers that on 13 April Bashar Al-Assad dismissed the governor of the central bank, Hazem Qarful? “One more masquerade or smoke-screen?” a Damascus shopkeeper wondered aloud while unemployment ran rampant, petrol was as scarce as ever, and prices skyrocketed.

Was this the right time? other observers wondered. For right now Assad is busy preparing for his re-election on 26 May. And the fact is that this dismissal is pretty meaningless in a country laid to waste, with an obliterated opposition, thousands of political prisoners, a Covid epidemic that continues to spread and where Islamists have resumed their attacks against his army? And a desperate population.

“Yesterday a friend invited me to lunch and the bill amounted to the equivalent of a teacher’s monthly wage” a Damascus resident who wished to remain anonymous told Orient XXI. At least a few people can afford to eat. Because only a few hundred kilometres from the capital, in an apocalyptic landscape, some 2.8 million Syrians displaced by the war are crammed into makeshift camps in the North-West province of Idlib, a once prosperous agricultural region, ruled over today by a group of jihadists.