|The struggle for the Lebanese lira must go on (Daily Star)
|With a dollarization rate hovering around 70 percent for the last decade (BDL), the Lebanese economy is in the middle of the absurd. This is because the Lebanese authorities cannot print dollars, and thus, cannot influence the various macroeconomic and financial processes which must be transformed if the economy is to embark on a viable and sustainable process of economic development.
Indeed, the increase in foreign debt is a side effect. The central issues undermining the lira are trust and cooperation on the one hand, and government policies on the other. Without trust and cooperation, no money-printing structure can succeed in creating the prosperity its citizen's desire.
Without trust, the very essence of the system is in trouble. While trust is not a commodity per se, it can be developed and nurtured through specific policies. The policy side of the problems concerning the lira is critical. Indeed, if you went around Lebanon and wanted to buy a piece of property, you would observe that price quotes are in U.S. dollars.
Millions of dollars worth of Lebanese property changes hand every year. We buy and sell Lebanese land with American dollars. The concern with dollarization does not emanate from an anti-American sentiment. In fact, the improved management of the Lebanese economy is desired not just by the Lebanese, but also by potential business partners in the U.S., Europe and the region. Dollarization is an economic disease, not a political one.
As such, it must be addressed with the appropriate economic policy tools. The most important policy requirements in the struggle for the lira is the passing of a law that states: "No Lebanese land/real estate can be purchased or sold with a currency other than the lira." This law, which must be enacted by Parliament and enforced by the executive in partnership with commercial banks, must not prevent people from changing their money back into U.S. dollars. Indeed, to do so will undermine the liberal traditions of the Lebanese economy and would further erode the trust of the people. Will such a law have a significant impact on the economy? The answer is yes! If one looks at the growth of the real estate sector in Lebanon during the last decade, one observes that new projects involving tourist ventures, shopping malls, office blocs, and housing projects have grown in absolute and relative terms (Lebanon Opportunities, special annual issue, July 2004).
Moreover, it is one of the sectors that has attracted the largest number of expatriate and regional investors. Such a law will have a direct and significant impact on the demand for the lira. Even if the parties involved change their liras back to dollars, the demand for the lira will increase dramatically. As such, if such a law is to be enacted, the monetary authorities must be ready to absorb an increased demand for the local currency.
The increased lira demand will eventually ease the pressures on the exchange rate, allow monetary authorities to plan for a freer floating rate. The fixed dollar-lira exchange rate is part of the problem. Indeed, to understand what it means for the economy, imagine yourself tied down with a short fixed-length leash to another creature. You have neither autonomy nor freedom. At the core of Lebanon's economic woes is a lack of self-confidence and the absence of a coordinated response to the economic problems we face.
Indeed, those who print the dollar print it for the U.S. people, and are hardly ever concerned with the economic hardships the Lebanese people endure. The challenge is to give birth to a technocratically empowered public bureaucracy which formulates a coordinated response to the many, simple and complex, issues of economic and financial management.
Lebanon can and must respond to the challenge.
Armen V. Papazian, assistant professor of finance at the Lebanese American University, wrote this commentary for The Daily Star
Armen V. Papazian
The Daily Star