Lebanon’s Central Bank Vice Governors Recommend Transition to Floating Exchange Rate by September

24 days ago
Lebanon’s Central Bank Vice Governors Recommend Transition to Floating Exchange Rate by September

Lebanon’s central bank vice governors have put forth a proposal to release the country’s local currency from its long-time peg and transition to a managed float by the end of September. A copy of the proposal was viewed by Reuters on Thursday.

Since the start of an economic crisis in 2019, the Lebanese pound has seen a dramatic decline in value, dropping by over 98% on the parallel market. In a significant move in February, the central bank decided to devalue the official exchange rate from its long-standing peg of 1,500 Lebanese pounds to the U.S. dollar to a new rate of 15,000.

Last Thursday, the central bank’s vice governors gathered with a group of parliamentarians to discuss potential adjustments to the country’s monetary policy. A key proposal on the table is the transition to a “managed floating” system aimed at accurately representing the true value of the pound.

Their proposal said the bank would “commit to setting the rules and regulations to move exchange rate into a floating system by end of September 2023 with the ability to intervene when necessary”.

It also proposed setting up a new electronic platform for foreign exchanges, but said the bank would continue to buy U.S. dollars in the market when possible to avoid leaning on reserves to prop up the pound.

Central Bank Governor Riad Salameh oversaw the country’s pegged currency during his 30-year tenure, which is set to expire at the end of the month.

Salameh is facing charges both at home and abroad of embezzlement of Lebanese public funds. He denies the accusation.

Under his watch, the central bank set up the controversial exchange platform known as Sayrafa as a way to stabilise the Lebanese pound, which nevertheless continued to decline.

Lebanese authorities and international institutions criticised Sayrafa for its lack of transparency, unsustainability and the opportunity it created for arbitrage.

One of the bank’s four vice governors, Salim Chahine, told Reuters earlier this week that the bank was planning to phase out Sayrafa once Salameh leaves office.

Without a named successor to Salameh, first vice governor Wassim Mansouri will take over primary responsibilities. Local broadcaster Al-Jadeed quoted Mansouri as saying lawmakers would review their proposal over the next few days.

The plan also proposes that parliament amend legislation to allow the central bank to lend the government up to $1.2 billion over a six-month period and issue bank notes bigger than 100,000 pounds.

Lebanon’s economy began collapsing after decades of corruption, profligate spending and mismanagement by the ruling elite, including a policy of central bank lending to the state to support a bloated public sector.

The plan said the 2023 budget should be approved by the end of August and that next year’s budget by the end of November.

The document also said the government should approve the gap resolution and restructuring laws by the end of September.

Those laws and the budget completion are among measures required for Lebanon to get access to $3 billion in from the International Monetary Fund.

But the IMF says vested interests in Lebanon have hampered a financial reform programme.