“Financial surrealism”: the Lebanese prefer beer to banks

BEIRUT, June 17 (Reuters) – Faced with the choice of leaving their savings blocked in the bank or investing them at a huge loss, some Lebanese are opting for a punt. For them, it is the only sensible option in a financial system distorted by the crisis.

Largely stranded in their dollar deposit accounts since late 2019, when the Lebanese pound collapsed and the banking system collapsed amid widespread political protests, some savers are seeing investments in export-oriented companies as a way to access hard currencies and get something for their “lollars,” the nickname for US dollar-denominated deposits “trapped” in Lebanese banks.

Alcohol exporters, including craft brewers and gin merchants, are a popular choice.

“If you invest with me today in trapped dollars, I will return them to you in fresh dollars,” said Kamal Fayad, managing director of 961 Beer, a Lebanese beer exporter.

Under informal capital controls, depositors can still issue checks to their accounts denominated in US dollars, but these checks cannot be used overseas and if sold on local exchanges, they lose out. minus 75% of their value.

The large discount reflects the difficult situation of having dollars parked in Lebanese banks. Deprived of funding in dollars, banks restrict customers’ access to their funds and currently pay 3,900 Lebanese pounds to the greenback, about a quarter of the value of dollars on the black market.

Fayad said he was in talks with investors to raise the equivalent of more than $ 1 million, which would include between $ 3 million and $ 4 million.

“Investors would rather take the risk on me than keep money in the bank, at least I’m doing something good for the industry. Today I’m more secure for them than a bank,” did he declare.

The willingness to take the financial blow reflects desperation over emerging from the crisis in Lebanon, which was blocked by internal political struggles aggravated by a devastating explosion in the capital’s port last year.

The economic collapse plunged half of the 6 million inhabitants into poverty, wiped out savings and reduced the purchasing power of consumers.

International donors have said they would only help if major reforms are implemented to tackle widespread corruption, but a nearly year-long standoff on the composition of a new government means they are a long way off to be introduced.

“It really is political and financial surrealism,” said Toufic Gaspard, an economist who worked as an adviser to the International Monetary Fund and as an adviser to a former finance minister.

“If a patient refuses to take medication for 20 months, what is expected to happen? Of course, the patient’s health will deteriorate. This is exactly what we are seeing in Lebanon, the dwindling reserves, the further depreciation of the currency. and more commodity shortages, ”he said.

The offices of the Minister of Finance and the Minister of the Economy did not respond to a request for comment.

IMPORT SHORTAGES

Lebanon is dependent on imports and for years the central bank has helped finance the trade deficit by offering high interest rates on dollar deposits in commercial banks. Banks passed these rates on to their customers, attracting a flood of deposits and large profits for a banking system whose assets reached up to 167% of the country’s economic output in 2015.

The system imploded when the government defaulted on its debt last year. The central bank’s foreign exchange reserves have grown from over $ 30 billion before the crisis to around $ 15 billion in March, and an expensive program of import subsidies is pushing usable reserves to the point of depletion.

Import shortages are now having an impact on the daily life of ordinary Lebanese. Long queues for fuel recently led to clashes in northern Lebanon, as pharmacies went on a two-day strike last week as drugs ran out.

Many importers face delays in paying central bank subsidies, straining cash flow, said Hani Bohsali, head of the Food, Consumer Products and Beverage Importers Union.

“Just talking to traders, I can tell you that there are $ 50-100 million in unpaid bills for food imports. The goods arrived, they were sold, but they were not covered by the central bank, ”he said. .

He said such delays had become a real threat as importers did not know when they would be paid and could not rely on banks to finance imports.

“You have to finance your purchases from your own financial strength, using money from your own personal accounts or new dollars that you withdraw from foreign accounts,” he said.

The central bank did not respond to a request for comment.

The government is seeking to reform the grant system, but has failed to end it until an alternative system of cash grants is approved by parliament.

MORE DEPRESSION

Confidence in banks, once seen as a pillar of stability, has evaporated since the government defaulted and bank branches, boarded up with metal plaques, became the target of protests.

The financial sector, the state’s biggest creditor, is said to have losses of more than $ 80 billion, according to the outgoing government estimate last year, a figure that dwarfs Lebanon’s annual economic output.

Fearing for their savings, many Lebanese tried to withdraw their money from the banks by paying off the debts of individuals and businesses.

An executive at a Beirut-based financial services company, who spoke on condition of anonymity, said he had seen increased demand from investors to finance exporters and manufacturers, leading to the closure of some of these companies from their bank credit facilities.

Andre Malak of The Three Brothers, a Lebanese gin producer, has seen his outward investment increase by 30% since the crisis.

“We started to see an increase in interest since the onset of the recession when people wanted to take their money out of the bank and put it in a free space,” he said.

Mike Azar, a Beirut-based financial adviser, said the Lebanese financial system has deleveraged over $ 20 billion since October 2019 and that the use of trapped dollars to pay off outstanding debt has helped further devalue the currency, as the sale of checks in exchange for US dollars raised demand for an already declining supply.

The central bank, meanwhile, plans to allow depositors to withdraw some of their trapped dollars through a new program with a limit of $ 800 per month, half in dollars and the rest in Lebanese pounds at a government rate of d. ‘about 12,000.

This would mean a haircut for depositors given that the black market rate is around 15,000 and is increasing day by day.

“The central bank wants to reduce the dollar liabilities in the system, but does so in a way that does not reduce the loss but materializes it only in the form of a devaluation of the currency, a further depreciation of the remaining deposits and of a new depression. of the real economy, ”Azar said.

Reporting by Davide Barbuscia; Editing by Samia Nakhoul and Carmel Crimmins

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