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In recent weeks, the Lebanese lira hit a record low of over 100,000 LBP against the dollar. Until four years ago, the currency was pegged to the dollar at a fixed exchange rate of 1,500 LBP and remained so until February, when the government confirmed a new rate of 15,000 LBP, still far from the currency’s real value.

The value is set by the so-called ‘black’ or ‘parallel’ market which developed when the government refused to lift the currency peg and the exchange rate started swinging upward in the summer of 2019. Used by virtually everyone, there is nothing hidden or parallel about this market.

Every morning, a courier delivers stacks of 100,000 LBP bills on his scooter to one of the many money exchange shops to start the working day.

“In Lebanon, the situation is evolving,” says Antoine*, the third-generation owner of an exchange point in Beirut, referring to the LBP/dollar exchange rate at the parallel market. Checking the daily exchange rate on dedicated apps every morning has become as regular as drinking a cup of coffee for those living in Lebanon.

At the time of writing, it requires 97,000 LBP to buy $1. The currency's depreciation has skyrocketed, reaching 98% since the outset of the economic crisis, which has its roots long before 2019.

The peg

After the end of the civil war, the lira was artificially pegged to the dollar for more than twenty years. Such monetary policy is usually implemented by commodity-based economies. This never was the case for Lebanon, a country with a negative trade balance of around $15 billion before 2019.

The peg was intended to attract foreign investments and boost the post-war recovery. “It was supposed to be temporary, but they got addicted to it,” a financial expert close to the matter told ������, referring to the Lebanese ruling class.

However, the figure of 1,500 LBP never reflected the real value of the currency against the dollar. The difference was covered by Banque du Liban (BDL), Lebanon’s central bank.

According to the source, at least since 2011, Lebanon has been living beyond its means, accumulating a deficit. “At first money was flowing into the country,” Rim Fayad, general manager at Dare Advisors and content creator for the financial page @ddoesbusiness on Instagram, told ������.

On top of remittances from the Lebanese diaspora, tourism from the Gulf, and the straining of the banking sector, the global financial crisis of 2008 brought an additional flow of money into the country because of distrust in Western banks, which were considered close to collapsing.

“The economy was not productive, but the turning point was the Syrian war,” Fayad added. “Gulf countries banned their citizens from visiting Lebanon in 2013, leading to a sudden stop in money inflow and resulting in property sales and bank account closures”.

To address the need for dollars, the BDL implemented the ‘financial engineering’ scheme in 2016. Lebanese banks advertised “exorbitant interests” up to 31%. “This allows to bring in some money used to both cover the peg and fuel the consumptions, while liabilities and mid-to-long term deficits grow exponentially,” the expert explained.

The government used to issue debt, but it became problematic when banks started selling Eurobonds to international investors. “This magnified the problem,” Fayad stated.

Then as people took to the streets in October 2019, Lebanese banks put a cap on USD withdrawals, but not everyone was aware of what was about to happen. Since then, the country counts multiple exchange rates. “It’s like having many currencies at the same time,” Fayad said.

Like a drug deal

Those who work in the exchange market start their day with phone calls, or by scrolling through multiple Whatsapp and Telegram group chats on sale-purchase of dollars. The first fluctuations of the pegged exchange rate were a sign that something in Lebanon's financial system had jammed.

Before long, “the biggest, regulated Ponzi scheme in history”, as the expert put it, began to creak until it gave way. Thus, the government took steps to prevent exchange at rates different from the peg, shutting down websites and exchange shops, and arresting the heads of the Exchange Operators' Union.

“When it all started, it was like buying drugs,” Antoine said. At the turn of 2019 and 2020, trusted operators would deliver cash hidden in cars or scooters, with a quick ride around the block and a hasty goodbye.

Today, traders communicate through the same chat groups still in place to regulate the market based on available dollars, with one of the largest groups having 21,000 members. At any time, the traders state the amount of dollars or lira to buy or sell and set a price.

Lira Rate, a widely used app to check the daily value of the lira against the dollar, sets the exchange rate based on market sentiment resulting from this daily morning routine.

Many like Antoine felt safer joining large group chats, as exchanging at the real - although unofficial - rate was considered a crime. “But it all was just acting,” all the sources agreed, as there was never the intention, nor the possibility, to shut down the so-called black market.

Next steps

“Today Lebanon is a no-profit country,” the expert said, as it heavily relies on remittances and international funds that flow into the country through NGOs. Nearly four years into the banking crisis, the country has not adopted a capital controls law.

“Although we have an informal capital control since day one as nobody is allowed to withdraw dollars freely or to transfer money abroad,” Fayad said, there has been a flourishing of an additional, dedicated market: the sale-purchase of bank accounts. “At least if you are not politically affiliated or have some connections”.

The kind of connections well expressed locally by the word ‘w�����ٲ�’.

Without an official estimation of its size, the parallel market is the new normal. According to locals, even the BDL has become an unofficial player by authorising some big exchange operators to source dollars in the market on its behalf, printing lira to pay for it.

Inflation soared to 171% in 2022 and the country has largely reverted to a cash-only economy, as the LBP/dollar exchange rate applied in bank transactions is lower than the real value of the currency against the dollar and would result in a loss of money.

The public sector is the most affected by the depreciation amid the progressive dollarisation of the economy. Military personnel, police officers, and public employees are often seen queuing at exchange shops or turning to side jobs such as driving for Uber to make ends meet.

Without action, the exchange rate is expected to continue rising, but some changes are on the horizon. The governor of BDL, Riad Salameh, is set to leave in July after 30 years in office, with no consensus yet on a replacement.

As the banking sector is distributing losses and reserves are melting fast, getting a hand on gold reserves could be tempting for the BDL in order to buy time, but parliamentary approval would be needed.

“In this case, years would go by, and people would adapt or emigrate, perhaps reaching a point when the country imports less but more remittances come in, allowing this bad system to maintain itself,” the expert said.

Another scenario could see the involvement of the IMF, but a new government with the will and mandate to implement comprehensive reforms is critically needed, as stated by the IMF itself.

While the IMF may not be able to recover the $72 billion in financial losses, it could provide some confidence and unlock other funds, according to Fayad.

“But above all, the gas in our sea is our hope,” she said, referring to the maritime demarcation agreement with Israel. “However, even if the country has gas, it will need time before reaping the benefits”.

*Names have been changed

Agnese Stracquadanio is a freelance reporter currently based in Lebanon. She holds a master's degree in international relations and has previously worked for Reuters.

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