Lebanese are struggling to make ends meet as prices skyrocket and purchasing power diminishes. In a bid to help citizens bide the crisis, the government created an extremely expensive central bank subsidy program (CBSP) in late 2019, costing $6 billion annually, which is three times the total government expected expenditure for 2021.
LIMS noted that this policy is financed by the remaining dollar deposits of financial institutions at the central bank. Those funds actually belong to depositors, who kept their money at the banks in US dollars, believing they would be protected against the devaluation of the Lebanese pound. The central bank is currently spending depositors’ dollars on the subsidy program and when those depositors try to withdraw their dollars, they instead receive freshly printed Lebanese pounds (LBP). The permanent increase of the LBP supply is the main reason behind the local currency devaluation and inflation. From this perspective, the CBSP is actually reducing people’s purchasing power by increasing the prices of non-subsidized goods.
As for the subsidized goods such as fuel, medication, wheat and other consumer items, they are in shortage in Lebanon and smuggled to neighboring countries. Therefore, LIMS argued that the CBSP must end immediately. A more comprehensive direct support via a cash transfer program would be a better alternative if external funding is mobilized, since the central bank reserves are down to the required reserves. Studied by the World Bank, this plan is estimated to cost about $1.2 billion—compared to $6 billion for subsidies—and would cover the basic needs of 75% of the Lebanese population.
However, LIMS also clarified that the primary problem to solve is the loss of purchasing power caused by the devaluating currency. Instead of addressing the consequences of the problem, a currency board should be established as a long-term solution that would actually put inflation under control and kick-start the Lebanese economy.
- How Are Lebanese Coping With Diminishing Purchasing Power, April 2, 2021: Legal Agenda, Article AR
- Hyperinflation And The Catastrophic Unemployment In Lebanon, April 5, 2021: Annahar, Article AR
- Lebanon… Food Security At Risk And Repercussions Are Worrying, April 9, 2021: Anadol Agency, Article AR
- The Economic Crisis Threatens Food Security In Lebanon, April 10, 2021: Al Arab, Article AR
- Lifting Subsidies Or Losing The Reserves?, April 29, 2021: Al Istiklal, Article AR
- Subsidies Must Be Better Directed, But Will Remain An Unsustainable Temporary Fix, April 27, 2021: Al Jadeed, TV Interview AR