World
Experts weigh in on Lebanon’s Bloomberg platform for regulating pound rate
Lebanon’s central bank is seeking to introduce a new currency exchange platform through Bloomberg, acting central bank governor Wassim Mansouri said last week in an interview with Al Arabiya.
The central bank had already said it would phase out its own exchange platform, known as Sayrafa, and was considering Bloomberg as a substitute following concerns about Sayrafa’s lack of transparency and governance.
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The Bloomberg platform is an electronic platform that determines exchange rates set up through international providers. The Central Bank of Lebanon (Banque du Liban or BDL) will soon ask all market players, banks, and monetary exchangers to list themselves on the platform to be able to place exchange rate orders.
Until now, the rate of the Lebanese pound was fixed through political interference, the BDL source said.
The primary purpose of operating through the Bloomberg platform now is to divert the demand for the US dollar and allow the central bank to undertake the operations, Nassib Ghobril, Chief Economist at the Byblos Bank Group, told Al Arabiya English.
Consequently, the move will see a transparent inflow of Lebanese pounds to the central bank, thereby reducing the liquidity of the Lebanese pound and arbitrage in the market, Ghobril further said.
“For the first time, we will know the real value of the Lebanese pound, as central bank interference in the market will be minimal,” he explained.
With time, the platform will liberalize the market rate and push for more transparency in dealings, Ghobril added.
The move comes 40 days after BDL Vice Governor Wassim Mansouri was appointed as interim Governor.
A money exchange vendor counts US dollar banknotes at his shop in Beirut, Lebanon January 19, 2023. (Reuters)
Mansouri is armed with a reform package, underlining the need for a free-floating rate and refusing to fuel government debt with depositors’ money. The move ends fixing the parity rate of the US dollar versus the Lebanese pound as the country went through multiple political upheavals.
At the beginning of last month, Mansouri decommissioned the controversial exchange platform Sayrafa after the then central bank Governor Riad Salameh’s 30-year tenure ended. The World Bank had cautioned that buyers on the Sayrafa platform might have made as much as $2.5 billion through arbitrage trades.
Technically, trading in the Lebanese pound on the Bloomberg platform will be operational in a month as discussions with Bloomberg have reached an advanced stage, a BDL source, who requested anonymity, told Al Arabiya English.
The move is one of the International Monetary Fund (IMF) proposals to launch a bailout for Lebanon, as unifying the pound rates will seemingly lead to stability in the forex market. This is all the more important, given that Lebanon’s economic output contracted by an estimated 40 percent from 2019 to 2022, and the pound lost about 98 percent of its value in the parallel market. While triple-digit inflation has decimated real incomes, unemployment and poverty have increased sharply.
The source said that fixing the pound and, consequently, interest rates on treasury bills and other lending instruments lasted decades at the expense of draining BDL’s foreign reserves. The source added that it is up to the Council of Ministers and the country’s political elite to lay down a viable monetary plan and align itself with the IMF’s recommendations.
A man leaves a currency exchange shop in Sidon, Lebanon January 25, 2023. (Reuters)
Since the exchange rate of the Lebanese pound was pegged to the US dollar value in 1997 (1 US dollar = 1,507 Lebanese pounds) and the strategy continued until 2019, Lebanon’s currency had remained relatively stable. But by the end of October 2022, Lebanon began employing a new official exchange rate of 15,000 Lebanese pounds to the dollar. This rate was hovering on the parallel market at around 88,000 Lebanese pounds.
Once the move to the Bloomberg platform is formalized, there will be no more discounted rates for the US dollar. Eventually, BDL will issue circular 161, killing the controversial Sayrafa platform and the opportunities it created for profiteering.
Top on the agenda is the challenging revision of all government revenues through a realistic 2024 budget that will equate all taxes on a floating rate, Ghobril stated. He added that all government services will be dollarized for the first time. It is understood that the matter may need the approval of the higher judicial council.
Other banking sources and market players don’t share Ghobril’s optimism.
“I don’t think the proposed platform will eliminate the parallel market,” Marwan Barakat, the Chief Economist of Banque Audi, told Al Arabiya English. Nonetheless, Barakat admitted that the platform is crucial in increasing the usage of the Lebanese pound.
He added that the platform looks like a form of exchange control, awaiting the law on Capital Control of banks and sectoral reforms.
“The parallel market is still active under the current operating environment and it will not vanish any time soon,” he cautioned.
It also remains to be seen whether the economy can sustain a free-floating rate at the risk of dollarizing all market transactions.
“We need to take into consideration the foreign currency demand for importers, trade facilitators and all the other stakeholders who are in need of the greenback to import food and raw materials into the country,” Ghobril further said.
Whether the Bloomberg platform will be effective enough to liberalize the rate remains unclear. However, the real issue today is whether Lebanon’s economy and its black-market forces can sustain a floating exchange rate mechanism and the whereabouts of much-needed subsidies for imports such as fuel, medicines, and food that the Sayrafa platform used to deliver.
With Reuters
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