Saturday, April 1, 2023

With 123% inflation and an economy in the grocery store, Lebanon is dollarizing;

When Moheidein Bazazo opened his convenience store in Beirut in 1986, he didn’t expect to be caught up in some of Lebanon’s fiercest civil wars. But after a few years, he had full grocery shelves and needed a dozen employees to help him run the business.

Those days are gone. Now Bazazo almost always works alone, often in the dark reducing the electricity bill. It is difficult for them to have regular appointments, and because they buy less, it does so, leaving some vacuums and fridges.

With the Lebanese economy in shambles and its currency in free fall, Bazazo spends a lot of time trying to keep up with the fluctuating exchange rate. Companies like yours have become increasingly dependent on the world’s most trusted currency – the US dollar – to weather the biggest financial crisis in modern history.

A Merchant Sets A Price In Dollars For One Of His Products.  Photo: Ap

A merchant sets a price in dollars for one of his products. Photo: Associated Press

“Before, I had a comfortable life and now I only have about $100 left over to cover my grocery expenses” at the end of the month, Bazazo said, running the numbers on a calculator. “Sometimes it seems that someone works for free.”

A currency in free fall and the dollar as a resource

The Lebanese pound has lost 95% of its value since the end of 2019 and now most restaurants and many businesses require payment in dollars. The government recently started allowing food pantries like the one in Bazazo to start doing the same.

While this “dollarization” aims to alleviate inflation and stabilize the economy, it is also driving more poverty and further crisis.

The annual variation of the CPI in Lebanon in January 2023 was 123.5%, 1.5 points higher than the previous month. The monthly variation of the CPI (Consumer Price Index) was 8.4%, so that the accumulated inflation in 2023 is 8.4%.

The reason is that few Lebanese have access to dollars to pay for food and other necessities at that price. But endemic corruption makes political and economic leaders reluctant to dollarize: long-term reforms of banks and public institutions that end up ruining and renovating the economy.

In other countries

Other countries, such as Zimbabwe and Ecuador, have turned to the dollar to curb hyperinflation and other economic woes with mixed success.

Pakistan and Egypt also have transparent currencies, but their economic crises are largely tied to an external event: Russia’s war in Ukraine, which has sent food and energy prices soaring.

The Economic Crisis Forces Traders In Lebanon To Deal In Dollars.  Photo: Ap

The economic crisis forces traders in Lebanon to deal in dollars. Photo: Associated Press

Lebanon’s problems are largely of its own making.

As the country struggled with the effects of the COVID-19 pandemic, the deadly 2020 Beirut port explosion, and Russia’s invasion of Ukraine, the central bank simply issued more currency, weakening its value and accelerating inflation.

Three quarters of six million Lebanese have fallen into poverty since the 2019 crisis began: power outages and medical shortages have stuck much of public life.

The scarcity of currency has led banks to limit withdrawals, capturing the savings of millions of people. This led some in desperation to attack the banks by force of money.

The damage done in recent years is compounded by decades of fiscal malfeasance that allowed the government to spend beyond its means. The director of the country’s Central Bank was recently accused of embezzlement and other crimes.

Store In Beirut With Prices In Dollars.  Photo: Ap

Store in Beirut with prices in dollars. Photo: Associated Press

The Lebanese pound fluctuates almost every hour. Although officially pegged to the dollar since 1997, the value of the pound is now dominated by the black treasury, which has become the standard for most goods and services.

In the last month, its value has fallen from about 64,000 pounds to the dollar to 88,000 on the black market, while the official price is 15,000. To make things worse for rural areas that depend on importing food, foodstuffs and other products valued in dollars, the government recently tripled – in Lebanese pounds – the amount of tax importers must pay on those goods.

This is likely to lead to further price increases. For small businesses, that could mean selling products at a loss just minutes after they hit the shelves.

Dollarization would give the impression of greater economic stability, but it would also widen already huge economic inequalities, said Sami Zoughaib, an economist and director of research at a Beirut-based think tank.

“We have a class that has access to dollars… (and) another part of the population that earns in Lebanese pounds and now sees their income completely decimated,” Zoughaib said.

The transition to a more dollar-dominated economy came not by government decree, but because businesses and individuals refused to accept payments in a currency that was constantly losing value.

First, luxury goods and services are priced in dollars for the rich, tourists and private owners who have the price of imported diesel. Then there was most of the restaurant. And now in the grocery store.

Translation: Elisa Carnelli

Source: Associated Press

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