Lebanon pound (LBP) has unraveled and more currencies are at risk
The collapse of the Lebanon pound has been in a freefall as the country’s economy has unraveled. Official statistics place the LBP exchange rate at 15,010 against the dollar. But in reality, the situation is much worse than that. Just recently, Bloomberg quoted the exchange rate at 150,000.
Why is the Lebanon pound worthless?Copy link to section
The history of Lebanon is an extremely sad one. The country, which was 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 have no medicine, inflation has soared, and the number of Lebanese citizens fleeing the country has increased. Reforms needed before the country receives funding by the International Monetary Fund (IMF) have stalled amid rising political bickering.
Lebanon has been in a crisis mode for decades. In 1982, the country went through a major war known as Operation Peace foe Galilee. The war happened when the Israeli military invaded Lebanon. The other major war happened in 2006 war, which involved the Israeli military and Hezbollah.
These wars led to a brain drain and many foreign companies to exit the country. This, coupled with the lasting political uncertainty, made the country ungovernable. With no foreign capital, the Lebanese central bank failed to maintain its peg against the US dollar.
As I wrote in this article about the Hong Kong dollar peg, it is difficult for countries to maintain such arrangements. Hong Kong has managed to hold the peg in place because of its strong foreign reserves. The latest numbers shows that the city has over $430 billion in dollar reserves, which is higher than the city’s GDP.
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More frontier countries are at riskCopy link to section
The collapse of the Lebanon pound is not unique. I believe that more currencies from the frontier markets will move in the same direction. For one, most of these countries face similar challenges to Lebanon.
For example, the Pakistani rupee has dropped by over 597% against the US dollar since 1997. In the past five years, the currency has dropped by more than 147%. And there are concerns that the currency’s crash will continue even when the government receives funds from the IMF.
Many African countries are going through the same situation. I recently wrote about the collapse of the Zimbabwe dollar as the country faces a severe US dollar shortage. There are risks that the currency will continue to worsen.
It is worth noting that many frontier countries face the same fundamental challenge as Lebanon. These countries have little to export and depend mostly on imports and diaspora remittances. Also, they have a mountain of debt, which they are struggling to service.
For example, in East Africa, the Kenyan shilling has been in a freefall as the new government has struggled. Its revenues have stalled while the cost of servicing foreign debt has jumped. In an interview last week, the economic advisor to the president warned that the situation could get worse as he prepared civil servants to anticipate more salary delays.
Sadly, for most frontier countries, there is no easier way out as the Federal Reserve continues tightening and foreign debts soar. In the next few years, we will see more frontier currencies collapse.