Fixed LL2,000 dollar exchange rate could spur black market

A man at an exchange office in Beirut.

BEIRUT: The new LL2,000 fixed rate for exchanging U.S. dollars for Lebanese pounds could force exchange houses underground and create a third parallel market, financial researchers said Wednesday. “The move has opened the door for a black market,” Mohamad Faour, a postdoctoral researcher in banking and finance at University College Dublin, told The Daily Star.

The Syndicate of Exchange Dealers announced Tuesday that they were setting the buy rate for dollars at LL2,000, to relieve some of the pressures caused by unofficial rates that have soared way above the 20-year peg of LL1,500.

They did not fix a sell rate.

The augmented rate, fueled by a shortage of dollars in the Lebanese market, has threatened imports of essential goods, reduced people’s purchasing power and devalued their savings.

Exchange shops in Beirut were complying with the new purchase rate Wednesday, taking customers’ dollars for LL2,000. However, dollars for sale were scarce, with many shops turning away customers seeking to sell their Lebanese pounds.

Earlier this month, buy rates at exchange houses across the country rose as high as LL2,450.

This unofficial rate allowed people to essentially make a profit, by exchanging their dollars at the high rate and proceeding to making purchases or paying bills with their Lebanese pounds at the LL1,500 peg.


Now, with price ceilings set at LL2,000, it will be difficult to convince people to sell their treasured dollars to exchange houses, when they know their real value, explained Mike Azar, a Tripoli-based finance professional. “People have every incentive to hoard their dollars right now so they’re not going to sell them,” he said.

Therefore, exchange houses will eventually run out of dollars to sell, and deals will take place outside the licensed establishments.

“It will become a black market, with much less visibility,” Azar said.

Beyond the shortage of dollars that the new fixed rate has already begun to cause, the sudden rate drop means exchange buyers will make a loss if they sell the dollars they recently bought at a higher rate for the new rate of just over LL2,000.

According to Faour, this means dealers are likely to stash their dollars until the average value of new and stocked cash minimizes losses - increasing the likelihood of an underground market developing.

“Hoarding means there’s a gap in the market ... and customers might begin selling [dollars] via a connection in an informal market,” he said.

As the new market would provide a hard cash that is in high demand, black market traders will be able to charge premiums on the dollars they sell.

The syndicate’s statement warned that any dealer found to have breached the fixed rate will be subject to “legal and administrative” penalties.


The decision to introduce a price cap on the purchase of dollars came following lengthy consultations between syndicate representatives and Central Bank Gov. Riad Salameh.

Its timely announcement coincided with the formation of Prime Minister Hassan Diab’s new government, in an apparent attempt to restore public confidence in the weakening national currency and create an impression of stability.

“These are technical measures that give the authorities time to find a more comprehensive solution to the [currency crisis] through reforms,” said Nassib Ghobril, chief economist at Byblos Bank.

“This is temporary and it is not an alternative to structural reform,” he added.

Ghobril downplayed the emergence of a black market, saying it is “premature” to speculate.

“We need to remember that there is an official rate that is still in place,” he added.

Salameh has previously said that BDL has no authority over the prices set by currency exchange shops and that Lebanon will continue to stick by its official peg.

Freshly appointed Finance Minister Ghazi Wazni was less optimistic, telling local TV channel Al Jadeed Wednesday that is was “difficult, if not impossible” for the exchange rate to return to pre-crisis levels.

A version of this article appeared in the print edition of The Daily Star on January 23, 2020, on page 4.




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