THE OFFICIAL EXCHANGE RATE (LBP V/S USD)
HISTORY AND LEGAL GROUNDS
Me. Janick Harrouk
THE OFFICIAL EXCHANGE RATE (LBP V/S USD)
HISTORY AND LEGAL GROUNDS
IT IS NOT THE FIRST TIME IN LEBANESE HISTORY THAT THE VALUE OF THE LEBANESE POUND DECREASES AGAINST THE USD; DURING THE CIVIL WAR, FOR EXAMPLE, THE LBP/USD RATE FACED SOME CHAOTIC EPISODES. MOREOVER, SINCE THE BEGINNING OF THE ECONOMIC CRISIS IN 2019, THE LEBANESE POUND HAS LOST MORE THAN 80% OF ITS VALUE ON THE BLACK MARKET; HOWEVER THE OFFICIAL RATE REMAINS UNCHANGED AT LBP1507.5 PER USD.
THE OFFICIAL RATE OBEYS TO CERTAIN RULES AND REGULATIONS AND DOESN’T FOLLOW MARKET CHANGES WHICH GIVES IT CERTAIN STABILITY BUT AT THE SAME TIME DOESN’T REFLECT THE REALI[1]TY OF THE MARKET.
1.THE OFFICIAL EXCHANGE RATE: THE SETTING
In 1948 and following the Lebanese inde[1]pendence, Lebanon signed an agreement with France in which it separated its national currency from the French Franc that was unstable back then. On May 24, 1949 a Monetary Law was promulgated stipulating that the coverage in gold and in foreign currencies convertible to gold must represent, at least, 50% of the coverage of the issued currency. The remaining 50% will consist of govern[1]ment securities or commercial papers. By the end of the year 1961 the coverage rate in gold reached 92.2%. On August 1, 1963 the Code of Money and Credit was promulgated (Legislative Decree 13513). A central bank was created under the denomination “Banque du Liban” (article 12), a moral person of public law with a financial autonomy that was granted the exclusive right to issue the national currency i.e. the Lebanese Pound (article 47). The rate of the Lebanese Pound was set in pure gold (article2). The Code of Money and Credit included many articles related to the rate of the Lebanese Pound, some of these articles were supposed to be implemented by the Minister of Finance in collaboration with the Central Bank. Article 229 of the said code stipulated that the new rate of the Lebanese Pound will be set in agreement with IMF but until this rate is set by law, the Minister of Finance will take transitional measures and the Lebanese Pound exchange rate against the US dollar will be set to 0.888671 gram of pure gold, the “transitory legal rate”. This rate was supposed to be as close as possible to the market rate. Based on the above article, the Minister of Finance issued the resolution n˚4800 dated December 30, 1964. The transitory legal rate of the Lebanese Pound against the US dollar was set to the rate of 3.8 Lebanese pounds per US dollar.
In 1973, and following the decision of the US administration to reduce the value of the USD against gold, the Minister of Finance issued a new resolution in which a new transitional legal rate was set (Resolution n˚883, March 28, 1973). The resolution stipulated that taxes and fees that are collected by the state and other public sectors related to amounts issued in foreign currencies will be calcu[1]lated on the basis of the average price of the stock exchange market in Beirut that was achieved during the period ranging between the 25 of each month and the 25 of the following month (article 1). The resolution also stipulated that periodi[1]cal financial statements are to be prepared on the basis of the US dollar valued at 42.2222 Troy ounces of pure gold, and on the basis of the average closing rates of foreign currencies at the corresponding dates (article 4). On the 5th of October 1973 a Legislative Decree confirmed the above procedures used for adopting a new gold rate against the US dollar and for adopting foreign-currency market rates against the Lebanese pound (Decree n˚6104), and the Government was granted the same day and for a period of six months the authority to set a new transitional rate for the Lebanese pound after consulting the Banque du Liban and the International Monetary Fund (Decree n˚6105). However the Government didn’t use that prerogative.
2- THE OFFICIAL EXCHANGE RATE SINCE 1975 TILL DATE
During the Lebanese civil war the exchange rate of the Lebanese pound against the US dollar started to deteriorate. In 1984 the rate of the Lebanese pound against the US dollar was of 6.8 LBP/USD and it reached 455LBP/USD in 1987 i.e. 67 times its precedent value and then reached 2825LBP/USD in May 1992. In 1997 the value of the Lebanese pound was pegged against the US dollar at 1507.5 and the Lebanese Pound and the US dollars were used interchangeably in the economy on a daily basis. Since 1997, the value of the Lebanese pound remained stable and the Banque du Liban succeeded in maintaining a stability that was necessary to attract investors. Since October 2019 the Lebanese Pound has lost 80 to 90% of its worth (in the black market), although the official rate remains unchanged ever since 1997. Until today, there is no law that has been voted in order to determine the official exchange rate of the Lebanese pound in a fixed weight of gold. It was more practical to keep a transitional rate that will be more flexible and will adapt more to the market fluctuations. Also it would have been difficult during the civil war to vote a law that will set an official rate with the chaotic circumstances that the country was facing.
However the transitional rate that was used to give the Lebanese authorities certain flexibility for setting the official exchange rate seems useless since the transitional rate that was supposed to be close to the market doesn’t reflect the reality of the market. Moreover no decision has been taken yet to set a new official rate even a transitional one that will reflect more the real value of the Lebanese Pound although article 229 of the Code of Money and Credit clearly stipulates that it is to the Minister of Finance to take transitional measures to set this rate in the absence of a text of law that will set the rate. The lack of resolutions to set a new “realistic” official rate exchange for the Lebanese pound against the US dollar is encouraging the black market. On another hand the government doesn’t seem to take any resolution to reevaluate the Lebanese Pound although the devalu[1]ation seems inevitable based on the actual economic situation. The legislator of 1963 thought it will be better to grant the Minister of Finance flexibility in the evaluation of the official exchange rate. The intention was to be the closest possible to market value which couldn’t have been the case if it was set by law. Nevertheless the unprecedented economic crisis shows that the flexibility isn’t enough, and in our present case the Minister of Finance didn’t take any deci[1]sion to set a new official rate. Thus the black market continues to rule and keeping the Lebanese Pound pegged to 1507.5 against the USD is unrealistic and inefficient, but in the absence of an agenda of reforms and since no one is willing to assume the responsibility of devaluating the Lebanese Pound the official exchange will remain as it is far away from the reality of the market.