06 March 2023

Lebanon puts its faith in the dollar amid economic meltdown

06 March 2023

Businesses in Lebanon are increasingly leaning on one of the world’s most reliable assets, the US dollar, as a way to cope with the worst financial crisis in its modern history.

When Moheidein Bazazo opened his Beirut mini-market in 1986, during some of the fiercest fighting in Lebanon’s civil war, he did not expect it to thrive.

But several years later, he had shelves full of food and needed 12 employees to help him manage a bustling business.

Those days are over.

Mr Bazazo now mostly works alone, often in the dark to reduce his electric bill.

Regular customers are struggling to make ends meet, and as they buy less so does he, leaving some shelves and refrigerators bare.

With the Lebanese economy in shambles and its currency in free fall, Mr Bazazo spends much of his time trying to keep up with a fluctuating exchange rate.

“I once lived a comfortable life, and now I’m left with just about 100 US dollars after covering the shop’s expenses” at the end of the month, Mr Bazazo said, crunching numbers into a calculator.

“Sometimes it feels like you’re working for free.”

The Lebanese pound has lost 95% in value since late 2019, and now most restaurants and many stores are demanding to be paid in dollars.

The government recently began allowing grocery stores like Mr Bazazo’s to start doing the same.

While this “dollarisation” aims to ease inflation and stabilise the economy, it also threatens to push more people into poverty and deepen the crisis.

That is because few in Lebanon have access to dollars to pay for food and other essentials priced that way.

But endemic corruption means political and financial leaders are resisting the alternative to dollarisation: long-term reforms to banks and government agencies that would end wasteful spending and jump-start the economy.

Other countries like Zimbabwe and Ecuador have turned to the dollar to beat back hyperinflation and other economic woes, with mixed success.

Pakistan and Egypt also are struggling with crashing currencies but their economic crises are largely tied to an outside event, Russia’s war in Ukraine, which has caused food and energy prices to soar.

Lebanon’s woes are much of its own making.

As the country felt the impacts of the Covid-19 pandemic, a deadly Beirut port explosion in 2020 and Russia’s invasion Ukraine, its central bank simply printed more currency, eroding its value and causing inflation to soar.

Three-quarters of Lebanon’s six million people have fallen into poverty since the 2019 crisis began.

Crippling power cuts and medicine shortages have paralyzed much of public life.

Currency shortages prompted banks to limit withdrawals, trapping millions of people’s savings.

It has led some in desperation to hold up banks to forcibly take back their money.

The damage of the last few years was magnified by decades of economic mismanagement that allowed the government to spend well beyond its means.

The head of the country’s Central Bank was recently charged with embezzling public funds and other crimes.

Lebanon is nowhere near implementing the kinds of reforms needed for an International Monetary Fund bailout, such as restructuring banks and inefficient government agencies, reducing corruption, and establishing a credible and transparent exchange-rate system.

Mr Bazazo acknowledges that pricing in dollars will help him manage his finances and cut a small portion of his losses but worries it will drive away some customers.

“Let’s see what happens,” Mr Bazazo said, sighing.

“They’re already complaining.”

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