‘No One Knows’ Where Lebanese Pound Is Headed, Says Central Bank Governor

(Bloomberg) -- Lebanon’s central bank governor has suggested he’s struggling to contain the divergence of the pound from its peg to the dollar as the country faces its worst financial crisis in decades.

“No one knows,” Riad Salameh said, when asked how much further the pound would depreciate on the black market. “When I spoke in the past, the dollar hadn’t reached 2,000 pounds,” he said, according to the state-run National News Agency. The pound has been pegged at 1,507.5 to the dollar since 1997. Salameh later stressed that the central bank’s policy on the official rate remains unchanged.

Salameh, who’s been at the helm of the central bank since 1993, has repeatedly said the central bank has enough reserves to defend the peg and would maintain the fixed exchange regime.

“The central bank governor may be giving up on combating the black market rate,” said Ziad Daoud, Bloomberg’s chief Middle East economist. “The gap between the official rate and the black market is too daunting to bridge.”

Lebanon is confronting one of its most serious financial and political crises since the end of the 1975-1990 civil war, with the economy paralyzed, the currency sinking and foreign investors increasingly concerned the government will be forced to default on its debt next year.

The central bank and local lenders have been rationing dollars, pushing up demand for the foreign currency and creating a black market rate that’s currently 30% higher than the fixed rate. The move has stymied trade and imports in a country that’s almost entirely reliant on foreign goods.

Nationwide demonstrations began on Oct. 17 after the government said it would impose fees and raise taxes to plug its budget deficit. Banks closed for more than a week and have since tightened restrictions on transfers abroad and withdrawals to preserve dollars. The government’s funding model relies heavily on remittances from the millions of Lebanese living abroad. Those flows have gone into reverse.

The country has been without a functioning government since October when former Prime Minister Saad Hariri resigned in the face of the protests. The president earlier this month assigned Hassan Diab, an academic and former education minister, to form a new cabinet, which the new premier-designate said would be made up of independent experts. It remains unclear whether Diab will succeed in doing so as several major political parties have said they won’t participate and see him as backed by Hezbollah.

Investigating transfers

Speaking to reporters after meeting with a parliamentary committee studying the draft 2020 budget, Salameh said the bank would investigate all transfers that took place in 2019, referring to media reports that banks allowed top officials to transfer their money abroad and restrictions only applied to small depositors.

“We are addressing this crisis gradually,” Salameh said. “We hope the country improves so the economy can improve.”

Last month, the central bank capped interest rates and said it would pay 50% of interest on foreign currency deposits in Lebanese pounds. Banks are doing the same. S&P Global Ratings said such measures, along with banking restrictions, amount to “selective default.”

©2019 Bloomberg L.P.

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