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I was reading about the dollar crisis in Yemen the other day, which mentioned that even people who owned dollars couldn’t withdraw them.
If the situation with Lebanon’s currency is similar, what effect does that have on donations of USD to Lebanese organizations that don’t bring in new paper currency?
Lebanon has had significant current account deficit (low level of exports versus imports). This was financed by capital inflows seeking to benefit from facilities given by the CEntral Bank. The Financial Times says:
Lebanon depends on imports and for years the central bank has helped to finance the trade deficit by offering high interest rates — sometimes more than 10 per cent a year — on dollar deposits from commercial lenders. The banks, in turn, passed those generous rates to their clients, helping to attract foreign currency from local depositors and the large Lebanese diaspora abroad.
The problem is that this suddently changed based on local instability. FT:
The system has helped Lebanese banks generate impressive profits. But last summer fragile investor confidence waned, the flow of dollars began to dry up and the system started to break down. Mass protests began in October, stoked by frustration with stark inequality, and eventually toppled the government.
The lack of USD means depreciation (in the black market particularly) of the local currency (which was overvalued).
Sending USD is equivalent to foreign capital inflow. It is one way to finance deficits and can help Lebanon. But it is clearly not a sufficieny nor sustainable solution. The problem is a depressed economy crippled with enormeous corruption (a problem running deep because of the ethnic and religious fault lines dividing society), lack of public investment and low productivity. It requires a deep clean of all the rotten political and elite class, which is on the "save yourselves" mode. Let's hope it doesn't descend into another civil war.
