Lebanon: Economy in Shambles as Dollarization Adopted as Currency

The Lebanese pound has lost 95% in value since late 2019, and now most restaurants and many stores are demanding to be paid in dollars. The government recently began allowing grocery stores to start doing the same. While this “dollarization” aims to ease inflation and stabilize the economy, it also threatens to push more people into poverty and deepen the crisis.

That’s because few in Lebanon have access to dollars to pay for food and other essentials priced that way. But endemic corruption means political and financial leaders are resisting the alternative to dollarization: long-term reforms to banks and government agencies that would end wasteful spending and jump-start the economy.

Other countries like Zimbabwe and Ecuador have turned to the dollar to beat back hyperinflation and other economic woes, with mixed success. Pakistan and Egypt also are struggling with crashing currencies but their economic crises are largely tied to an outside event — Russia’s war in Ukraine, which has caused food and energy prices to soar.

Lebanon’s woes are much of its own making. As the country felt the impacts of the COVID-19 pandemic, a deadly Beirut port explosion in 2020 and Russia’s invasion Ukraine, its central bank simply printed more currency, eroding its value and causing inflation to soar. Three-quarters of Lebanon’s 6 million people have fallen into poverty since the 2019 crisis began. Crippling power cuts and medicine shortages have paralyzed much of public life. Currency shortages prompted banks to limit withdrawals, trapping millions of people’s savings. It’s led some in desperation to hold up banks to forcibly take back their money.

The damage of the last few years was magnified by decades of economic mismanagement that allowed the government to spend well beyond its means. The head of the country’s Central Bank was recently charged with embezzling public funds and other crimes. The pulverized Lebanese pound fluctuates almost hourly. Though officially pegged to the dollar since 1997, the pound’s value is dictated now by an opaque black market rate that has become standard for most goods and services.

Last month, its value fell from about 64,000 pounds to the dollar to 88,000 on the black market, while the official rate is 15,000. Making things worse for a country reliant on imported food, fuel and other products priced in dollars, the government recently tripled the amount of tax — in Lebanese pounds — that importers must pay on those goods.

Over 90% of the population earns their income in Lebanese pounds, according to a 2022 survey by the International Labor Organisation and the Lebanese government’s statistics agency. Families that receive money from relatives abroad spend much of it keeping the lights on and covering medical expenses. They would have to be paid in dollars to adequately adjust, which most businesses and employers, especially the Lebanese state, are short on.

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AP News

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