Lebanon: before the chaos begins
Many countries have decided to no longer use their own currency but to adopt the American dollar as the standard means of exchange. For certain poorly managed economies, and for all countries ravaged by corruption, dollarization is often that last resort to avoid bankruptcy. Economic actors and consumers are always the first to anticipate this dollarization by relieving themselves of their national currency and making more exchanges in dollars. It is in fact much simpler to give prices in a stable currency than to have to adjust them on a daily basis if they are given in a currency that is constantly depreciating. By refusing to accept anything other than dollars, and by demanding to be paid in dollars, economic actors kill off their national currency past the point of no return and establish a de facto dollar standard. Initially, the governments of the countries in question block – by introducing new laws and regulations – this unrelenting movement, until they end up bending to public pressure after being struck by the fury of their peoples.
This is what Ecuador did in the year 2000, and it’s what Lebanon must decide to do as soon as possible. For this type of country, officially moving to the dollar increases government revenue that is then denominated in the Greenback and no longer in a currency that suffers head-on with inflation and avalanche-like devaluations. Adopting the US currency as the sole standard immediately stabilises inflation since all products and services are then priced in a reliable currency. From an inflation rate of 50% – per month – in 1999, the dollarization bill introduced in Ecuador in 2000 led to a levelling-off at between 3 and 3.5% from 2004 onwards! This is because moving to the dollar brings with it the trust of consumers who no longer have to worry about getting rid of their currency, who can put their faith in prices and tariffs, and who can finally start to work on long-term projects again. The proof of this is that, while the duration of mortgage loans in the countries of South America that use pesos is never more than 5 years, it is possible to set up a fixed rate mortgage over 30 years in Panama, a country that has officially dollarized. And with good reason because the removal of risk of devaluation means debtors no longer have to pay higher and higher interest rates on their debt when their national currency tanks, and it also means importers and exporters can trade in total security and breathe life back into smaller economies, like Lebanon that has become entirely outward-looking. Finally, dollarization circumvents governments’ calamitous management, with companies and individuals perfectly able to do their business even if their country defaults on its payments.
Dollarization therefore prevents government incompetence and corruption from infecting the real economy. It also contributes in a decisive way to stabilising the commercial banking system, like in Ecuador where crises have been stopped in their tracks and where banks are now exemplary. It is therefore crucial for Lebanon to halt the extreme rarefication of “fresh” foreign currencies by completely liberalising their capital flows i.e. by allowing their unfettered importation and exportation. This country must therefore urgently – and officially – adopt the dollar or the euro standard, withdraw the lira from circulation, and adopt a stable, involatile currency as a means of taxing and spending. As for the central bank – the Bank of Lebanon –, it will no longer have any freedom to choose whatever monetary policy since it will be bypassed by the Federal Reserve in Washington or the European Central Bank in Frankfurt. The Bank of Lebanon will then no longer be able to launch any more “financial engineering” programmes that have accelerated the country’s downfall. It will need to be dismantled and dissolved, to be replaced by an organism duty-bound simply to oversee banks. Its assets, like the national airline company MEA or its supposedly-giant stock of gold, will be sold in order to convert all pounds in circulation into dollars or euros at an acceptable rate.
A free and liberated market would thus pull many Lebanese out of poverty, thanks to a much better controlled rate of inflation, among other things. Full, total, and unrestricted dollarization is the only hope for dragging Lebanon from its woes, the sole means of containing the terrible harm the political class is inflicting.