With inflation at 123% and an economy in shambles, Lebanon “dollarises”

When Moheidein Bazazo opened his Beirut convenience store in 1986, during some of the fiercest fighting of the Lebanese civil war, I didn’t expect it to thrive. But several years later, he had shelves full of groceries and needed twelve employees to help him run a busy business.

Those days are gone. now Bazazo he almost always works alone, often in the dark to reduce the electricity bill. Regular customers are having a hard time making ends meet and, as they buy less, so too, leaving some shelves and fridges empty.

With the Lebanese economy in shambles and its currency in free fall, Bazazo spends much of his time trying to keep up with a fluctuating exchange rate. Companies like yours are increasingly relying on one of the world’s most reliable assets, the US dollar, to hold them together worst financial crisis in its modern history.

“I had a comfortable life before, and now I only have about $100 left after I cover the store expenses” at the end of the month, Bazazo said, running through the numbers on a calculator. “Sometimes it feels like you work for free.”

A currency in free fall and the dollar as a resource

The Lebanese pound has lost 95% of its value since late 2019 and now most restaurants and many businesses require them to be paid in dollars. The government recently began allowing food pantries like the one in Bazazo to start doing the same.

While this “dollarization” is intended to ease inflation and stabilize the economy, it also threatens to do so push more people into poverty and exacerbate the crisis.

The annual rate of change of the CPI in Lebanon in January 2023 was 123.5%, 1.5 points higher than that of the previous month. The monthly change in the CPI (Consumer Price Index) was 8.4%, so the accumulated inflation in 2023 is 8.4%.

This is because few Lebanese have access to the dollar to pay for food and other necessities at that price. But endemic corruption makes political and financial leaders resistant to the alternative to dollarization: long-term reforms of banks and public entities that put an end to waste and revive the economy.

Other countries

Other countries, such as Zimbabwe and EcuadorThey have turned to the dollar to curb hyperinflation and other economic woes with mixed success.

Pakistan and Egypt are also battling currency collapses, but their economic crises are largely tied to an external event: Russia’s war in Ukrainewhich has sent food and energy prices skyrocketing.

Lebanon’s problems are largely of your harvest.

As the country has suffered the effects of the COVID-19 pandemic, the deadly Beirut port explosion in 2020, and the Russian invasion of Ukraine, the central bank just issued more currencyweakening its value and causing inflation to accelerate.

Three quarters of the 6 million Lebanese they have fallen into poverty since the onset of the 2019 crisis. Power outages and medicine shortages have shut down much of public life.

Shortages of money have led banks to limit withdrawals, trapping the savings of millions. This has led some desperate people to storm banks to get their money back by force.

The damage done in recent years has been compounded by decades of economic mismanagement that have allowed the government to overspend. The director of the country’s central bank was recently accused of embezzlement public crimes and others.

The pulverized Lebanese pound fluctuates almost every hour. Though officially pegged to the dollar since 1997, the pound’s value is now dictated by an obscure black market rate that has become the standard for most goods and services.

Last month its value fell from around £64,000 per dollar to £88,000 on the black market, while the official price is £15,000. To make matters worse for a country that depends on imported food, fuel and other products that are priced in dollars, the government recently tripled, in Lebanese pounds, the amount of taxes that importers have to pay for these goods.

This is likely to lead to further price increases. For small businesses, that could mean selling products at a loss within minutes of hitting shelves.

Dollarization might give the impression of greater financial stability, but it will also widen already huge economic inequalities, said Sami Zoughaib, an economist and director of research at the Beirut-based think tank Policy Initiative.

“We have a class that has access to dollars… (and) another part of the population that earns in Lebanese pounds and now he saw his income completely decimatedZoughaib said.

The transition to a more dollar-dominated economy happened not by government decree, but because businesses and individuals refused to accept payments in a currency that was steadily depreciating.

First, luxury goods and services have been valued in dollars for the wealthy, tourists and private generator owners, who have to pay for imported diesel. So was most restaurants. And now the grocery stores.

Source: AP