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French Version

The Central Bank should devalue the pound in stages

By Rabieh al Sha'er

Economic reforms precede gradual devaluation of the Lebanese pound - or collapse! The economic crisis in Lebanon is unique in its diagnoses from other cases in the world.

Argentina at one point pursued the same fixed-currency policy as Lebanon where the Argentinean currency was pegged to the US dollar exchange mechanism for eight successive years, until the peso collapsed and lost three times its value.

China also followed Lebanon's example in the fixed-currency policy against the US dollar and experienced 10 percent GDP growth over the next 10 years and maintained a very low interest rate and a high inflation rate, making it a unique example in the world. The reasons behind the success of the Chinese example are mainly due to the fact that the purchasing powers of the Chinese currency are less than its real value.

The success of stabilizing the currency exchange policy depends to a great extent on the size of the foreign currency reserves of the Central Bank (around $11 billion in Lebanon). But if this reserve was depleted as a result of a pressing crisis the local currency would eventually collapse.

So what is the best way to avoid this collapse or limit its impact on Lebanon?

It is advisable for the Central Bank to maintain the current Lebanese pound exchange policy despite the political crisis, Israeli war and the fall of investments in the real economy.

Paris III financial pledges, in addition to the Saudi and Kuwaiti deposits, have helped Lebanon avoid a crisis. But this does not exempt the Lebanese state from shouldering its responsibility by avoiding the risk of fallout.

The devaluation of the currency exchange price must be based on a political-economic decision that precedes the crisis that might be triggered by the markets and which might not anticipate its timing.

If we assume, for example, that the Lebanese currency must lose 40 percent of its current value to avoid an unlimited collapse, then the decision by the government and the Central Bank in this regard must be carried out in stages.

The Central Bank can devalue the Lebanese pound exchange price by 10 percent each year and for the next four years (this amounts to LL0.50 each day). But this step should be taken on the condition that an agreement should be reached with the donor states and institutions that participated in Paris III and a joint and clear statement should be issued, pledging to depreciate the Lebanese currency gradually to reassure the market and avoid a collapse.

There will be voices objecting to this call under the pretext that the public debt, especially after Paris III, is half-composed of foreign currencies despite a law which prohibits that. Others will argue that the biggest percentage of the public debt is domestic and is owed to Lebanese banks and thus any devaluation will hurt the banking sector - the backbone of the Lebanese economy.

But despite the legitimacy of these concerns, the continuation of this situation will not guarantee that the specter of financial and economic collapse will be avoided.

Concerning the foreign debt in foreign currencies, the friendly countries must be confronted with the reality: Either they write off parts of these debts or Lebanon will refrain from settling this debt as in the case of Argentina. The investors resumed lending to Argentina despite its action and the economy revived again.

Lebanese banks must also bear some responsibility because if the state reaches the brink of bankruptcy there fate will be attached to it. Banks must sacrifice part of their profits. But this way it can avoid total collapse or bankruptcy.

This is an excerpt of an article by Rabieh al-Sha'er, a writer and researcher on public policy.

Beirut 02-03-2007
The Daily Star

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