Lebanon’s currency recovery since Hariri’s return is a mirage

The news that Lebanon’s former Prime Minister Saad Hariri will form the next Lebanese cabinet prompted mixed feelings. For the majority of the Lebanese, including many of the anti-government protesters that celebrated his resignation last year, Hariri’s reappointment will only worsen the country’s crisis.

But for a small minority, including Hariri’s own Sunni supporters, his return is a step toward Lebanon’s economic and financial recovery. They say that his newly formed cabinet will carry out a series of reforms that will allow for an International Monetary Fund bailout.

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Hariri’s reappointment did lead to a small recovery in the Lebanese currency. Hours after his appointment, people trying to unload the US dollars they bought over the last year led to a drop in the exchange rate, from around 9000 Lebanese lira to the dollar to around 6700 lira.

However, the Lebanese market’s small recovery is somewhat of a mirage. It does not reflect Lebanon's dire reality, but instead a knee-jerk reaction to an appointment that is itself based on wishful thinking.

The economy is simply about trust, and the ability of the ruling establishment to reassure their citizens as well as the international community that their investment, be it political or financial, is worth it. This bond of trust, which was established by Saad’s late father former Prime Minister Rafik al-Hariri, was shattered after the successive government opted to transform Lebanon’s banking system into a Ponzi scheme. The government squandered the savings of the Lebanese, while Hezbollah’s hegemony over the state led the Arab Gulf states to abandon their historic support for Lebanon’s economy.

Regardless of Saad Hariri’s own assertion that he is the person for the job, neither the Lebanese nor the international community – including his traditional backers in the Gulf – have demonstrated full support for him.

Once all the jubilation around Hariri’s return is over, and his cabinet fails to carry out the reforms it promises, the currency exchange rate will go back to its soaring heights.
Hariri should learn a lesson from early in his father’s premiership that his current drive is doomed to fail.

In 1992, the cabinet of former Prime Minister Omar Karami was forced to resign after nationwide strikes protested against the plummeting of the Lebanese pound to 2,100. This paved the way for Rafik al-Hariri - backed by Saudi Arabia - and his larger than life persona to move in and declare himself as savior. Hariri established the country’s post-war economic system, which his successors failed to develop or sustain. Unfortunately, while Saad claims to be playing his father’s role, without the trust of the Lebanese and the international community, he is instead in the position of Karami – beset by crisis and unpopular.

The recent recovery of the Lebanese pound has nothing to do with a regain of trust but quite the opposite. The frightened Lebanese are being further exploited by the same money exchangers who have been controlling the market and monopolizing the exchange of dollars. This black market is controlled by Hezbollah and other local elements, who have the ability to manipulate the market by coercion. They sometimes use the Lebanese state to arrest uncooperating exchangers, or inject fresh dollars into the market, which leads to the Lebanese dumping their own dollars that Hezbollah then conveniently buys back at a much lower price.

The decision of the Lebanese Central Bank-BDL to implement a quasi-capital control on Lebanese pound withdrawals is an important factor that pushed many of the Lebanese to either stop purchasing dollars for lack of local currency or to sell dollars for necessity. This BDL capital control has come too late as such a measure should have been implemented more than a year ago when it was clear that the Lebanese financial system was taking a nosedive. If implemented then, it would have protected and mitigated the collapse of the Lebanese pound.

Consequently, the money which Hezbollah has invested in greasing the tracks for Hariri’s return to government will soon fizzle out, and the Lebanese will be left with nothing but more economic hardship. The increase in the inflation will be massive. Hariri and the Lebanese have no way forward but to reestablish their connections with the international community and the Arab Gulf states, something which Hariri’s current political horse-trading and his strategy of appeasing Hezbollah won’t achieve.

The return of Saad Hariri and the accompanying magic tricks and misdirection, including the manipulation of the dollar black market, is nothing but fool’s gold. So too is any hope of reform as long as Hezbollah’s hegemony remains over Lebanon and its ill-fated future.

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Makram Rabah is a lecturer at the American University of Beirut, Department of History. His forthcoming book Conflict on Mount Lebanon: The Druze, the Maronites and Collective Memory (Edinburgh University Press) covers collective identities and the Lebanese Civil War.

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