Lebanon’s first official devaluation in a quarter century has created a severe liquidity squeeze, as lenders scour for local currency in a country already wracked with a strike by bankers and a crackdown on exchange shops.

The central bank, also known as Banque Du Liban or BdL, is trying to prevent an even sharper depreciation by restricting local-currency supply while also limiting the amount of dollars it pumps through its Sayrafa foreign-exchange platform, according to people familiar with the matter.

BdL didn’t immediately reply to a request for comment.

The interest rate lenders charge one another for Lebanese pounds has soared to as high as 55% this week as they try to close their foreign-exchange positions at the central bank after its devaluation of 90% earlier in February, two of the people said, declining to be identified because the information isn’t public.

Demand from customers for the local currency has taken off because they have to repay dollar loans — taken out long before the crisis — in pounds at a much weaker exchange rate.

“In an attempt to slow down the currency devaluation, BdL orchestrated a liquidity shortage in cash pounds,” said Mike Azar, a financial analyst who’s been closely following the Lebanese crisis. “That ultimately translates to depressing economic activity in order to slow down the devaluation.”

Trading volume on Sayrafa, which is mainly used by banks and licensed foreign exchange bureaus, was only $15 million on Thursday, according to BdL’s daily summaries, down from as much as $300 million in a single day last month.

Lebanese Saga

It’s the latest twist in a financial crisis that’s been described as one of the worst globally since the mid-19th century.

Lebanon defaulted on $30 billion in international debt almost two years ago and saw its economy crater, with a combination of triple-digit inflation and a currency meltdown wiping out people’s life savings.

Although the central bank moved the official exchange rate to 15,000 pounds per dollar, from 1,500, the US currency in the black market hit another record high of around 80,000 pounds this week.

The chaos has forced businesses to price products exclusively in dollars to protect their profit margins, and authorities are now allowing supermarkets to do the same.

With the exception of local produce, supermarkets will adopt the average of the rate in the black market, according to caretaker Economy Minister Amin Salam, who said this was the optimal way to protect consumers.

Adding to the turmoil, people torched several bank branches in the capital, Beirut, lashing out against the strike that began last week.

Bankers are protesting recent judicial decisions that force them to pay depositors in cash. In a statement, the Association of Banks in Lebanon said their money is not available as most is with the government and the central bank.

Although lenders are on an open-ended strike, ATMs are dispensing cash within limits set by BdL.

“The more you shut down pathways for currency transactions, all else being equal, the more the pound would depreciate because there is less intermediation and price discovery between buyer and seller,” Azar said.

Source: National News Agency – Lebanon