The balance sheets of the Banque du Liban during the first half of November showed the stability of the main monetary indicators, which reflects the cessation of the liquidity absorption of the dollar by the parallel market, which largely explains the stability of the dollar exchange rate in the last days . Thus, the Central Bank actually implemented what it previously promised, in its statement released during the last week of October, in which it announced that an exchange platform would not be a buyer of dollars “until further notice”.
However, all indications are that what is currently underway is a monetary calm of limited effect, which will precede a storm expected in the coming weeks, due to a series of decisions that could force a return to the expansion of the volume of la money supply in sterling in the market.
Budget indicators
According to budgets, the central bank’s reserves did not change significantly between early and mid-November, remaining stable at around $10.3 billion. In this sense, these numbers did not reflect purchases of dollars from the parallel market, as occurred between mid-September and late October, when the Central Bank increased its reserves by about $653 million following the purchase of cash dollars directly from the market. (cf the cities). Noting that these operations contributed in that period to negative pressure on the lira exchange rate, following the reduction in the supply of hard currency money on the market.
The size of the money supply in circulation in the Lebanese pound has reversed the same trend. Since the volume of such liquidity stabilized in mid-November at the £70.99 trillion limit, with a modest decrease to the levels at the beginning of the month, which amounted to around £75 trillion, which indicates that the Banque du Liban stopped printing money and putting it on the market to finance the purchase of dollars from the market.
It should be noted here that the volume of this liquidity has increased rapidly previously, from £45 trillion in mid-September to £75 trillion in late October, as a result of the pumping of sterling liquidity to buy dollars from the market at that stage. At the time, these developments contributed to an increase in the dollar’s exchange rate against the lira (cf the cities), as any additional sterling liquidity in the market quickly turns into immediate demand for dollars, given the loss of confidence in the local currency.
But in all cases, it is clear today that the Banque du Liban has, since the beginning of this month, stopped buying dollars from the market, which has led to a cessation of the injection of sterling money in this way and a slowdown in the expansion of the outstanding money supply in sterling, which was also reflected in the easing of pressures on the Lebanese pound in the parallel market over the past two weeks. At the same time, the budgets reflected – also as a result of this event – that the other asset item has ceased to expand, which is the one that includes the losses accumulated in the budget.
A money storm is coming
All of the above, precedes an expected monetary storm today, with the entry into force of the 2022 budget, including increases in social assistance in wages and salaries. The cost of the wages and salaries item of the general budget, after adding the budget-approved welfare item, will rise from £1.3 trillion to around £3.3 trillion (i.e. a roughly 3-fold increase, with retroactive effect of the last ten months). And while it was expected that the bulk of this increase would be financed through increased imports, which would be associated with the customs dollar adjustment, it became clear that the budget included overstatements in the estimation of many import items, while the timing of the implementation of the customs dollar amendment is not clear so far.
In this sense, it is clear that the increases in expenditure items, the most important of which is wages and salaries, will be to the detriment of the size of the money supply and the value of the cash that the Banque du Liban prints, to lend at the State and finance its expenses. This will mean increasing pressure on the monetary policy tools adopted by the Banque du Liban to control the local currency exchange rate and the volume of sterling money supply on the market. Noting that this negative evolution is not necessarily related to the approval process of social assistance, which came as a natural and necessary consequence of the deterioration in the value of wages for public sector workers, but rather from the lightness in the approach to the management of imports of Lebanese state correcting them in parallel with the deterioration of the exchange rate.
Added to this factor will also be the increase in the exchange rate approved for bank withdrawals, which will go from 8,000 pounds per dollar to 15,000 pounds per dollar, as well as the increase in current expenditure allocations in all public administrations. Again, all these factors together will contribute to an increase in monetary pressures in the coming months, in particular due to the imbalance between supply and demand for hard currency in the market. Above all, to all these pressures will be added the most important factor, which is the complete distrust following the disruption of all paths towards a financial solution, in light of the presidential and government vacuums and the suspension of the implementation of the IMF reforms international.
In short, the monetary calm that Lebanon has enjoyed over the past two weeks is the exception, not the rule. As for the first and the last rule, it will continue to delve into all the repercussions and dimensions of the collapse, as long as the Lebanese state lacks a comprehensive financial vision for the treatment, and this is precisely the case for the currency market and the position of the Lebanese pound in it.
