The Lebanese Pound (LBP) has crashed and more currencies are at risk
Invezz.com – The collapse of the Lebanese pound has been a free fall as the country’s economy has fallen apart. Official statistics place the LBP exchange rate at 15,010 against the dollar. But in reality, the situation is much worse than that. Bloomberg recently quoted the exchange rate at 150,000.
Why is the Lebanese pound worthless?
The history of Lebanon is extremely sad. The country, once a leader in the Middle East, has become a failed state. Beirut, once seen as the Paris of the Middle East, has become one of the worst places in the region.
Hospitals in Lebanon are out of medicine, inflation has skyrocketed and the number of Lebanese citizens fleeing the country has increased. Reforms needed before the country receives financing from the International Monetary Fund (IMF) have stalled amid growing political disputes.
Lebanon has been in crisis mode for decades. In 1982, the country went through a major war known as Operation Peace Enemy Galilee. The war occurred when the Israeli army invaded Lebanon. The other big war occurred in the 2006 war, in which the Israeli army and Hezbollah participated.
These wars caused a brain drain and many foreign companies left the country. This, added to prolonged political uncertainty, made the country ungovernable. Without foreign capital, the Lebanese central bank was unable to maintain its peg against the US dollar.
As I wrote in this article. on parity with the Hong Kong dollar, it is difficult for countries to maintain such arrangements. Hong Kong has managed to maintain the peg due to its strong foreign exchange reserves. The latest numbers show that the city has over $430 billion in dollar reserves, which is higher than the city’s GDP.
Watch here:
More border countries are at risk
The collapse of the Lebanese pound is not unique. I think more currencies from the frontier markets will move in the same direction. On the one hand, most of these countries face challenges similar to those of Lebanon.
For example, the Pakistani rupee has fallen more than 597% against the US dollar since 1997. In the last five years, the currency has fallen more than 147%. And there are concerns that the currency slide will continue even as the government receives funds from the IMF.
Many African countries are going through the same situation. I recently wrote about the collapse of the Zimbabwean dollar. as the country is facing a severe shortage of US dollars. There are risks that the currency will continue to worsen.
It is worth noting that many border countries face the same fundamental challenge as Lebanon. These countries have little to export and are mainly dependent on imports and remittances from the diaspora. In addition, they have a mountain of debts that are difficult for them to pay.
For example, in East Africa, the Kenyan shilling has been in free fall while the new government has struggled. Its income has stagnated while the cost of servicing the foreign debt has skyrocketed. In an interview last week, the president’s economic adviser warned that the situation could worsen as he prepared civil servants to anticipate more salary delays.
Watch here: https://www.youtube.com/embed/7aAHixlkRgM?feature=oembed
Sadly, for most frontier countries, there is no easier way out as the Federal Reserve continues to tighten and foreign debts soar. In the coming years, we will see more frontier currencies crash.
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