Lebanon's central bank secures dollars to cover some imports

Lebanon's central bank secures US dollars for local banks at fixed rate to cover fuel, wheat and medicine imports

BEIRUT -- Lebanon's central bank issued guarantees Tuesday to secure U.S. dollars for local banks at the fixed official rate that would cover imports of fuel, wheat and medicine, a move aimed at easing the demand for dollars amid a worsening economic crisis.

Hours after the statement by the central bank, credit ratings agency Moody's maintained the Caa1 issuer rating of Lebanon but warned that Beirut is "under review for downgrade." It said such a downgrade could take place after three months.

In January, Moody's downgraded Lebanon's issuer ratings to Caa1 from B3 while changing the outlook to stable from negative.

Many Lebanese have been rushing to exchange shops in recent days to convert their local currency into dollars, a rush compounded by worries that Lebanon's dollar-reliant currency is losing value for the first time in more than two decades.

Hundreds of Lebanese civil society activists and others protested on Sunday over the economic crisis, blaming their leaders for decades of mismanagement and corruption that led to the crisis.

The central bank said the imports of gasoline, wheat and medicine it would secure hard currency for are "only for local consumption." The move will cover only imports into Lebanon amid reports that gasoline and wheat are being smuggled to neighboring war-torn Syria, which is under U.S. and European sanctions.

"The crisis will be contained for now," tweeted Jad Chaaban, a professor of economics at the American University of Beirut, predicting that pressure on the exchange rate will substantially ease, even in the black market.

Last week, $1 could be purchased for 1,650 Lebanese pounds at exchange shops, after the currency had been stable at 1,500 to the dollar since 1997. Although the official price is still pegged at 1,500 pounds to the dollar, people find it difficult to get hard currency at this rate from local banks.

An exchange shop owner in Beirut said Tuesday that security agents dropped by his office in the morning and ordered him to abide by the official price.

"The price now is 1,560 pounds but no one is selling or buying at exchange shops," he said, asking that his name not be made public for fear of reprisals.

Moody's warned that the government's reliance on the central bank's drawdown of foreign exchange reserves to meet upcoming foreign-currency bond maturities risks destabilizing the bank's ability to sustain the currency peg, and ensure financial stability over the longer term.

Moody's said its decision to place Lebanon's rating under review for downgrade reflects the recent significant tightening in external financing conditions and the reversal in the bank deposit inflows that are essential in enabling Lebanon to meet the government's financing needs.

"Together, these have aggravated already worsening balance of payments dynamics," it said.

Another downgrade by Moody's would be a blow to Lebanon's struggling economy that is suffering from a massive budget deficit, rising unemployment and one of the highest debt ratio's in the world of $86 billion, or more than 150% of the gross domestic product.

In August, Fitch Ratings downgraded Lebanon's long-term foreign currency issuer default rating to CCC from B-, while Standard & Poor's Global Ratings affirmed its long- and short-term foreign and local currency sovereign credit ratings for Beirut at B-/B, saying the country's outlook remains negative.