Lebanon Sends New Sign of End to Currency Peg

(Bloomberg) --

Lebanon began allowing holders of U.S. dollar bank accounts to withdraw deposits in local currency at a rate set daily by lenders, the latest indication authorities are abandoning a decades-old exchange peg.

Withdrawals are subject to banks’ restrictions and the decision will be in place for six months, the central bank said in a statement on Tuesday. It added that there’s no obligation on clients to draw down their accounts. All other banking services will be subject to the official exchange rate, it said.

Lebanon has been struggling with a severe dollar shortage since inflows from citizens overseas dried up as the country’s political and economic crises deepened last year, prompting lenders to at first limit withdrawals and then effectively stop dispensing the greenback. That’s sparked a surge in rates on the black market, where a dollar now fetches 3,200 Lebanese pounds, compared with the official rate of 1,507.5.

Earlier this month, the central bank made its first move away from a peg that was until recently an anchor of stability, instructing lenders to allow depositors with up to $3,000 in dollars to empty accounts at an exchange rate of 2,600. Clients holding an equivalent amount in Lebanese pounds were allowed to transfer their funds into foreign currency before making use of the weaker rate.

With foreign-currency reserves at critical levels and after a foreign debt default, the government has approached the International Monetary Fund to discuss its draft plan to rescue the economy in the hope of getting aid. The blueprint heavily relies on billions of funding from the IMF and donor countries, and includes a gradual change in the currency peg starting in 2021.

Under the plan, outside assistance would be complemented by savings from the government’s debt-restructuring program and a return to international markets in three years. Lebanon also seeks to roll over domestic debt, mostly held by the central bank, at reduced rates.

©2020 Bloomberg L.P.

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