In some sense, BDL’s current policy is Socialist, pooling all the dollar supply in the country into one pot and redistributing it according to its perception of “The Public Good,” but it’s also disrupting the efficient allocation of capital that is a tenant of a free market economy.
by Dan Azzi -Source: Annahar
A file photo of Lebanon’s central bank. (AP Photo)
The Central Bank (BDL) just announced that it will pump dollars to the Exchange Houses (Sarraf) to support the Lira exchange rate. People seem to forget that only last year, Sarraf operations constituted around 2% of the foreign exchange houses, with the rest, 98%, occurring at your local bank.
Most of us had never dealt with a Sarraf until the Lira rate started leaking outside the peg range of 1500-1515, so for example, when the Lira moved to 1600 last summer, any dollar we withdrew from the bank, and sold to a Sarraf, was worth 6% more, not a lot of money, but still a decent investment return for a few minutes work. When the rate moved closer to 2000, that was a 33% gain that incentivized every one of us to rekindle a relationship with a Sarraf. This all happened when the Central Bank, in an attempt to conserve its dwindling reserves, started rationing its dollar supply to banks, until banks stopped giving them out entirely.
It is self-evident that no serious attempt to support the Lira can happen until dollars get pumped into banks like they were for the last 22 years preceding this year and any claim that the Sarraf market is the problem is either amateurish or disingenuous.
Clearly, the central bank is correct in no longer supporting the peg (for all practical purposes) because the reserves are too valuable to waste on anything but the most necessary imports.
BDL’s strategy is to sweep most dollars entering the country (though fresh accounts, Western Union/OMT, Sarrafs) and to reallocate them to the sectors it deems crucial (like importing fuel, medicine, or grain). Let’s go through an example. Say Mr. Rich Guy has real dollars in cash and wants to spend them buying Beluga Caviar, imported from Russia for $100 a jar. He goes to the Sarraf, exchanges his $100 for 400,000 Lira (last week) and pays the store (or restaurant). The restaurant owner then goes to the Sarraf with the 400,000 to buy dollars to replenish his stock of caviar. He’s now competing with every other Lebanese, including Poor Guy who wants a new screen to replace the broken one for his smart phone and with Medium Guy who wants to buy the $100 to pay the Ethiopian domestic helper. He’s also competing with BDL which wants the Sarraf’s dollars to reallocate them according to its triage list. Thus the dollar rises to 5 thousand, so the restaurant owner decides not to replenish his stock. Medium Guy drops off the Ethiopian domestic helper at her embassy because he can no longer afford her salary. Poor Guy decides to buy a used flip phone. In some sense, BDL’s current policy is Socialist, pooling all the dollar supply in the country into one pot and redistributing it according to its perception of “The Public Good,” but it’s also disrupting the efficient allocation of capital that is a tenant of a free market economy.
Rich Guy is now pissed off, so I can see a scenario when he decides to take out both the Sarraf and BDL out of the middle. What if he offers to pay the restaurant a fresh, crisp $100 bill directly bypassing the Sarraf? There are some logistical problems with this. How does the restaurant give clients the bill? How does he identify Rich Guy? Do they negotiate the rate minute by minute? Do they use one of the new Lira Apps to determine the rate? Does he write the rate on the bill? All nontrivial problems, which will eventually resolve themselves because Rich Guy wants his caviar fix and doesn’t want Riad Salame to reallocate his $100 bill to buy grain. Once the market finds its equilibrium, this stops the relentless collapse of the Lira.
So what’s the right way to stop the slide of the Lira?
It’s simple, actually. If we can’t increase the supply of dollars coming into the country, then we need to reduce the dollars flowing out, which requires a reduction in demand for imports, assuming you don’t want to deplete the remaining BDL Reserves. After the unofficial Capital Controls were implemented, imports dropped by almost 70% and the remaining 2/3 of imports were fuel. By removing the subsidy on fuel, and heavily taxing domestic helpers, and a couple of other similar measures, you reduce dollars flowing to the outside. Some critics say that dropping the fuel subsidy disproportionately affects the poor, but if Syrians (and Jordanians and Egyptians) can afford to pay higher fuel prices, while their incomes are much lower, then so can we. In fact, instead of sending two Army divisions to the Lebanese-Syrian border to plug the hole in smuggling, just raise the price of fuel in Lebanon to the market price, and … presto … it’s over.
In fact, if you want to get cute, raise the fuel price higher than Syria’s and the smuggling reverses in the other direction.
Of course, this assumes they won’t use printing Lira as a camouflaged haircut on deposits, flooding the market with over $100 billion in Lira, when our GDP next year will be less than half last year’s, all chasing the same limited goods and services.