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August 13, 2011
Fresh debate over fate of Lebanon’s peg
Beirut, with the greenback at a 40-year low against major global currencies, the debate over the fate of Lebanon’s peg has erupted again. Emboldened by a sloppy economy and a deteriorating purchasing power, more than a few economists have geared up for what may be Lebanon’s latest battle, this time against “prescription-based” monetary policies of the past two decades.
“People are shocked when we discuss monetary policy alternatives,” said Dr. Georges Nehme, Economist and Antonine University professor in an interview with The Daily Star. “[Central bank Governor] Riad Salameh was successful par excellence at controlling risky investments, but his choice of monetary policy has not been successful at protecting the Lebanese pound,” added Nehme.
Nehme is among several economists and ex-officials hoping to make a crack in the unwavering currency policy adopted by Salameh since the mid-1990s. The goal, according to them, is to improve the country’s purchasing power and promote real economic growth, in part through an upward revaluation of the Lebanese pound against the United States dollar.
“The dollar has dropped nearly 50 percent against all currencies except the Lebanese lira, and our local currency has become inherently stronger since 1998, so we should reflect that in the exchange rate,” said Dr. Bachir El- Murr, professor at the Lebanese University, who argued that LL500 for the dollar is a fair approximation of the national currency’s value.
While Nehme believes that the short-term impact on Lebanon from the downgrade of the U.S. credit rating to AA+ is minimal despite the dollar peg, in the long-run, he argues that Lebanon cannot prosper without a floating exchange rate. For now, however, he proposes the adoption of a forward-looking crawling peg that minimizes speculation but also gradually brings the Lebanese pound near its fair value.
“In the late 1990s, Lebanon swam against the current by adopting a fixed currency regime that was being dumped by developed and developing countries. Now, with the falling dollar, we have an opportunity to strengthen the currency and the economy,” said Nehme.
But not all economists are on board. Speaking to The Daily Star, Nassib Ghobril, chief economist at Byblos Bank, expressed little enthusiasm for a change in monetary policy, citing investor confidence in the current peg and the risks associated with adopting a liberal approach to currency policy.
“The peg is the cornerstone of stability in the Lebanese economy, and we also can’t change it because the economy is heavily dollarized. In my view, it’s too early to talk about a change in monetary policy,” said Ghobril.
Ghobril’s view echoed that of Salameh who promised to “maintain the same policy for managing exchange rates because we believe that has given positive results, first in terms of increasing the confidence in the Lebanese economy and Lebanese financial sector, and secondly it has contributed to bringing down inflation and interest rates.”
Indeed, data published by the International Monetary Fund showed inflation in Lebanon averaging less than 3 percent since 1998, a compounded growth in prices of less than 40 percent during the past 12 years. Similarly, real GDP has leaped by an average of 5 percent during the past decade while capital inflows have snowballed, especially since the start of the global financial crisis.
However, according to Murr, “the central bank has failed to control inflation, and the published numbers are untruthful because the basket of goods does not represent the spending of Lebanese people.” He cited the rise in prices of basic consumer goods such as food products and real estate as proof that inflation has most likely exceeded 200 percent if measured properly.
Doubts over the credibility of official numbers also include Lebanon’s economic figures and both Nehme and Ghobril believe the government had an incentive to exaggerate. Nevertheless, according to Nehme, “if the Chinese-style growth rates were accurate, and given the prosperity of the banking sector, how do you justify the unemployment rate of 20 percent?”
Nehme also pointed to the starvation of productive sectors such as agriculture and industry from affordable banking loans, mainly because of the central bank’s need to maintain high interest rates to protect the peg, resulting in what he described as a jobless economic growth.
“The Central bank is forced to maintain high interest rates to attract foreign capital and protect the peg. This has raised the cost and borrowing needs of the government and starved productive sectors from affordable loans,” said Nehme.
Ghobril dispelled the notion that private sector loans were being sidelined by banks in favor of public lending because of the peg. “The trade-off between public and private sector lending is a myth. We have $6.6 billion in private sector lending,” said Ghobril, whose argument was quickly brushed off by Nehme arguing instead that “loans only go to large investors and are channeled to non-productive sectors, such as real estate, that don’t generate domestic employment.”
In reality, a revaluation of the dollar against the Lebanese pound faces bigger obstacles than the approval of economists and policymakers, although solutions are being proposed.
“The main obstacles are the dollar-denominated positions held by banks because they would have to realize their losses when the exchange rate changes,” said Murr who insisted on ensuring banks remain strong and profitable despite the proposed change in the value of the local currency.
While Nehme also believes that the financial sector should be strengthened and isolated from political debates, he argues that the central bank has so far favored the banks at the expense of the economy.
“Salameh is not the head of the banks syndicate to solely protect their interests. His policies have been so supportive of banks that they called for the renewal of his term,” said Nehme.
The renewed debate over monetary policy following the decline in the U.S. dollar has also thrown into question the roles of the government and central bank in promoting growth and stability. For Ghobril, the priority is to put the country’s fiscal house in order, mainly by decreasing expenditures to limit the government’s borrowing needs.
On the other hand, Nehme argues that a policy mix, which includes a revaluation of the Lebanese pound and a reform-oriented budget to support productive sectors, is critical to the achievement of real growth.
“In the absence of total cooperation between the government and central bank, a country can never achieve positive results,” said Nehme, citing the futility of Germany’s expansionary fiscal policy in the mid-1990s due to restrictive monetary policy by the Bundesbank.
Whether fiscal or monetary-based, the currency conundrum has pinpointed the heart of Lebanon’s debt and economic crisis, which is the lack of confidence in policy-makers. “The reason we still have this tight exchange rate is that right now it is the only factor of confidence in the Lebanese economy. When we have something else, such as a strong fiscal position, we can think of alternatives,” concluded Ghobril
Read more: http://www.dailystar.com.lb/Business/Lebanon/2011/Aug-13/Fresh-debate-over-fate-of-Lebanons-peg.ashx#ixzz1UsedIdOT
