On July 1st, 2022, the World Bank published its annual GDP per capita report, showing that Lebanon dropped from 5,510 USD to 3,450 USD, ranking the country as a “lower middle-income country” for the first time in 27 years. From 1995 to 2022, Lebanon was ranked as an “upper middle-income country.  

Given those realities, most of Lebanon’s public sector has been on strike, demanding a wage increase to offset their loss of purchasing power. As a result, the strike has put the struggling economy in an even more paralyzing situation. Courts, ministries, municipalities, and other bureaus needed for regular administrative procedures were closed or severely inactive. Imports and exports for instance were heavily affected by the public employees’ strike.  

LIMS warned against any increase in public sector salaries since the government budget is already at a deficit. Furthermore, the government is incapable of borrowing funds from any source due to its default on Eurobonds back in March of 2020. To fund further spending, the only option would be raising money supply. However, in doing so, this would further exacerbate inflation, and devalue the Lebanese pound (LBP). Therefore, any attempt to raise wages without monetary reform will just fuel this vicious circle of inflation-wage increase. 

On the other hand, workers at the central bank joined the strike after a warrant was issued to bring forth the central bank governor. The central bank wasn’t yet affected by the long-term strikes organized by other public sector employees. LIMS explained that the strike held by central bank employees, would not change the exchange rate’s trajectory because it is expected to be short lived. The LBP will remain volatile and maintain its persistent devaluation. LIMS reiterated the importance for Lebanon to switch to a new monetary arrangement that would impose more discipline and restraints on authorities

LIMS revealed that the “customs dollar” would have negative repercussions on Lebanon. Increasing the customs exchange rate by around 13-fold would lead to a huge uptick in the cost of living, having an impact on all residents. Furthermore, higher tariff payments would jeopardize the ability of competitive, local businesses to export. For instance, if the cost of imported goods used by the tourism industry increases, tourists will prefer to visit competing destinations like Turkey or Egypt. Furthermore, the “customs dollar” will encourage smuggling of imported goods from Syria and customs evasion, which is already widespread in Lebanon, generating lower revenues from what is currently expected.
 
While LIMS is in favor of the unification of all exchange rates, the institute views that it must happen simultaneously with the decrees of all customs fees. Rather than adding a new arbitrary exchange rate of 20,000 LBP to the dollar, LIMS suggests using the central bank’s electronic foreign exchange platform rate (also called the Sayrafa rate) currently floating at around 24,000 LBP to the dollar. Simultaneously, customs fees should be drastically reduced to offset the increase in the exchange rate, or even removed entirely and unilaterally. Unifying the exchange rates will reduce the arbitrage opportunities resulting from the multiple exchange rates regime, while the reduction of tariffs would offset the recessionary and inflationary impact of this adjustment on the economy.

In July, LIMS continued the campaign to generalize the dollarization experience that started in the tourism industry for the summer season. LIMS explained that the Ministry of Economy and Trade should learn a lesson from the Ministry of Tourism and allow the entire private sector to dollarize prices. In fact, the Lebanese pound (LBP) has been experiencing continuous devaluation and instability, making the currency increasingly unusable. Instead, every industry in Lebanon could benefit from a stable currency such as the US dollar. Allowing such a move would then permit salaries to be dollarized, as businesses can only pay wages in dollars, if they charge for their goods and services in USD. If implemented, dollarization could become popular in the private sector, which could then expand to the public sector.

Given those schemes, LIMS sees the dollarization of the economy inevitable. The only possible way to keep the LBP is by adopting a currency board. Establishing a fully functional currency board would guarantee the stability of the LBP by cloning the US dollar through a rule-based monetary arrangement that requires 100% reserves at all times.

LIMS Media Interviews:

LIMS insisted on the need to lift price controls and subsidies on every product, including bread and medicine. Lifting price controls would allow for the price to be set fairly, based on what consumers can pay, and bakeries can offer. As for lifting the subsidies, this step is necessary to stop draining the central bank’s reserves—which are actually what is left of the depositors’ savings.

Additionally, LIMS objected to blaming Syrian refugees for the bread shortage. Having additional clients should actually be good news for bakeries and should lead to an increased income for government. However, the Ministry of Economy and Trade managed to convert this opportunity into a loss-making activity because of subsidies. LIMS argued that the economic burden caused by the refugee crisis is a direct cause of government policies. The economic aspect of the refugee crisis on Lebanon would be immediately alleviated, if subsidies were lifted on goods and services, such as wheat, fuel, and electricity, just to name a few.

LIMS Media Interviews:

LIMS Media Interviews:

On July 11, the Euro dropped from 1.21 to the dollar in the past year and reached a one-to-one exchange rate with the US dollar for the first time in two decades.

LIMS explained the Euro’s depreciation traces back to the lose monetary policies adopted by most central banks around the globe during COVID lockdowns. As a result, those very polices led to worldwide inflation. Then, the central banks started raising their interest rates to combat inflation, but the European Central Bank could not go as far as the US Federal Reserve did for several reasons. Firstly, the global economy is heading toward a recession, which will mostly impact Europe, due to the war on Ukraine. Secondly, Europe has been historically slower to adapt to recessions and the Euro is less trustworthy than the US dollar. Thirdly, the economic slowdown might reopen the door for some eurozone countries to reconsider their use of the common currency. Therefore, the euro devaluation is not a temporary speculative one and will most likely persist in the upcoming months.

LIMS Media Interviews:

• Will Lebanon Be Affected By The Euro's Volatility Against The Dollar? Economist Reveals, July 13, 2022: Lebanon 24, Article AR
• Decline Of Euro Against The Dollar: What Are The Reasons And Where Are We Heading Globally?, July 19, 2022: OTV, TV Interview AR

LIMS Policy Paper:

• A Chance To Revive Public Transport During The Fuel Price Hike. Policy Paper AR

Participants decided to conduct an advocacy campaign targeting Tripoli’s members of parliament (MPs) to convince them to (1) work with the Ministry of Interior on enhancing the city’s safety and security, (2) follow up with local authorities on ensuring touristic sites are clean, and (3) request from the relevant ministries to allow re-opening the Quality Inn Hotel at Rashid Karami Exhibition Center.

Moreover, the advocacy campaign would include an awareness campaign highlighting Tripoli’s cultural and historical sites and unique qualities. Participants named their awareness campaign “Ahla Bhal Talli in Tripoli”, adding “in Tripoli” to the ministry’s slogan. The campaign’s purpose is to prove that Tripoli needs special attention and one size fit all polices are unsuitable. Also, this campaign includes organizing a rally at Rashid Karami Exhibition Center, where participants will voice their demands to their MPs and try to obtain their engagement in favor of the suggested polices.