The Dickens character, Mr. Micawber, shared a lament and prognosis for anyone caught irretrievably in a tight spot, when chagrined he uttered, “Annual income twenty pounds, annual expenditure nineteen pounds, nineteen shillings and six pence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought six, result misery.” The bare arithmetic can be painful, when in deficit.
Just so, we turn to Lebanon. The chart below shows a stark current account deficit situation, one that has endured over the decades. This runs as an example of a sort of chronic hypertension, one which can catalyze into crisis unless confidence is mutual and durable among domestic residents and external investors alike.
In Lebanon this summer, tension was high and confidence, however, brittle, which entailed a crisis. The Lebanese pound had been pegged at LBP1500/USD but fell quickly to a rate of LBP6000/USD, with the Financial Times elaborating that the currency had registered a decline of 50% “on the parallel market in four days.”
Must it be so, though? Why should the Lebanon’s national currency lose fifty percent of its value in four days? In many respects, the country is substantial. Lebanon’s Human Development Index (HDI) scores well, placing the country among those in the “high human development category”, according to the reckoning done at the United Nations.
Lebanon’s population is well educated, relatively affluent, and they live a reasonably long time. The HDI numbers point to significant stores of human capital in Lebanon, which, when allowed to engage properly, could generate notable growth and wealth.
Of course, there is context, brutal context. Sectarian strife and conflict, foreign interference in the country, and for that matter fragile sovereignty don’t help. We would also argue that the country’s weaker public institutions, worn down by the national context, make both the quality of life and local currency value uneven and prone to correction.
In its reporting, the Financial Times queried the former central banker, Nasser Saidi, on what catalyzed the currency crisis just experienced. Mr. Saidi points both to the geopolitical difficulties – regional impact from further US sanctions against Lebanon’s neighbor, Syria, and effects from COVID; and to the country’s institutional legerdemain – the Central Bank’s decision to monetize in the face of growing fiscal deficits, and resident uncertainty over where public policy was going. So, there we are. One can almost paraphrase Micawber to effect: with current account shortfalls, but clear public policy and durable institutions, consequent local and external confidence, and available external financing, result: ample liquidity, at least – if not necessarily happiness.