The protests in Lebanon began with only an “innocent” demonstration against the new tax (the state wanted to tax internet communications applications such as WhatsApp), but quickly grew into demands for the withdrawal of the entire ruling “elite”. This problem has got deeper roots.
The Lebanese economy relies on imports for which businesses pay in US dollars. Although the local pound-to-dollar price has been officially fixed at £ 1,507 / USD since 1997, it has recently dropped 40% to over £ 2,000 in the real street market. This is a huge problem for an import-dependent economy. At the same time, Lebanon is the third most indebted country in the world, where national debt accounts for up to 150% of the country’s GDP.
Meanwhile, the Lebanese government has been able to pay its debt to its creditors. It has recently made a $ 1.5 billion interest repayment on European bonds. Although Lebanon has never experienced a default in history, it is speculated that this is one of the options in the near future. The yield on the March bond maturing next year increased by 105% and the cost of state debt insurance also went up. Lebanon’s markets cease to trust and the government is approaching the day of settlement (clearing) after years of excessive spending and borrowing.
a $ 1.5 billion interest repayment on European bonds. Although Lebanon has never experienced a default in history, it is speculated that this is one of the options in the near future. The yield on the March bond maturing next year increased by 105% and the cost of state debt insurance also went up. Lebanon’s markets cease to trust and the government is approaching the day of settlement (clearing) after years of excessive spending and borrowing.
Meanwhile, the recent government bond repayment has allowed the Lebanese government to avoid collapse, but has once again put even more pressure on the country’s dollar reserves, which are now lacking in the purchase of essential goods – fuel, wheat, medicines. However, the problems of the local financial system began before the escalation of the street riots. Since the end of the 15-year civil war in 1990, tourism, real estate and banks have been the source of US dollars in the country. The banking sector offered unusually high interest rates of 7% on deposits, up to 20% per anum at a time of acute dollar shortage in 2016.
Pyramid game of state and bank
However, some call the unsustainable and poor financial system a regulated pyramid scheme in favor of the banking sector, which is paid by the rest of the Lebanese people. One of the problems is the linking of the Lebanese pound to the dollar, which artificially protected the currency for two decades.
However, the disproportionate increase in debt must have been reflected at some place. Since September, the actual exchange rate has started to differ significantly from the official fixed rate. According to the IMF, the pound value of the dollar was overvalued by 50%. The current decline from £ 1,500 to £ 2,100 (to 1 USD) is therefore a more realistic expression of the value of the local currency. More than a third of the national debt is held by local commercial banks, the third element of the pyramid scheme, the other two include the government and the central bank. According to some opinions, repayment of debts will once again transfer a significant amount of dollars to the pockets of the local establishments – bank owners and their largest depositors. This pyramid could have worked as long as dollar deposits were regularly flowing into commercial banks (often owned by politicians in power). This created the appearance of financial stability,
masking the unsustainability of the financial system based on clinging to the outdated anchor of the Lebanese pound to the dollar. But the pyramid game collapsed, bringing not only a banking crisis but also a currency, debt and economic crisis. Without new dollar deposits in banks that have held this scheme together for a long time, both the state and the central bank can offer banks interesting incentives, however commercial banks simply have nothing to deposit on the central bank’s account. Thus, the central bank is unable to pay commercial banks an annual $ 4 billion interest on $ 60 billion of deposits. And this way the state is losing money to pay off huge
Impact of capital controls on the economy
Capital controls practically paralyzed the withdrawal of money from banks. The banks were closed for several weeks. They then opened, but introduced significant limits on money transactions and withdrawals. People are starting to feel that their money is not theirs at all. Someone else is dictating to them how much, under what conditions and whether they can use it at all.
Obviously, official media reports lessen the seriousness of the situation or are silent. “It is not possible to see a clear acknowledgment of the seriousness of the situation at the moment on a higher level … we are in a state of denial.” says a non-governmental organization member.
Banks have introduced strict capital controls based on the fear of a total money leak from the country. While the official restrictions on withdrawals from banks are at the level of maximum one thousand dollars a week, people’s real experience speaks of $ 200 – 300 in some banks and additional large withdrawal fees. Bank clients can stand for several hours in a queue, only to learn that the bank will simply not give them their money. For example, the limits also apply to debit cards when used abroad, or are not to be used at all.
Thus, a local butcher, or a petrol station operator, cannot buy goods, or not raise the price to an increasingly weaker pound. Only banknotes or other intermediaries can operate under such conditions. Yes, bitcoin. Free, decentralized, uncensored currency.
Interest in bitcoin has increased
“Bitcoin is especially useful for people living abroad and sending money to families in Lebanon,” says the Beirut bitcoin user, who by this means helped 35 families last month, with the value of each bitcoin transaction worth more than $ 10,000. He does not accept local bank payments for the services because he can pay a maximum of $ 200 per day with a credit card. Therefore he distributes the fiat money in cash through his network of people. “Most of the companies continue to operate with a creative way of ensuring the circulation of money,” says the bitcoin trader.
Bitcoin transactions, of course, are increasing. According to another trader, the number of his clients increased from 30 to 200 people in the last month. Usually people send him bitcoin from abroad, which he converts into dollars and distributes to the recipients. However, the number of customers sending bitcoins abroad is also increasing. “It works. Bitcoin serves many businesses. They send money abroad for imported goods. One client sent bitcoins worth $ 100,000 in this way.”
Many businesses need to look for new ways to enable customers to pay for the goods they sell and at the same time to pay their suppliers. Car dealer Rkein Motors began to accept bitcoin as a payment option. However, even exchanging fiat for bitcoin is not easy, especially if such transactions rely on traditional banking channels, whether online or withdrawing cash from
the bank. Again, low bank limits are an obstacle. What works in this situation are personal relationships and networks that exist outside the paralyzed banking infrastructure.