Demonstrations and Protests
Friday, 22nd November was Independence Day in Lebanon, usually a day for celebrations, but lately the country has been going through troubled times in an effort to stamp out corruption. For the past five weeks Lebanon has been facing a decentralised revolution movement throughout the country. The revolution started on the night of October 17 after the declaration by the government of additional fees on WhatsApp application voice calls - an international free of charge service very popular among Lebanese both within Lebanon and overseas. The uprising was triggered by this declaration announced by the Lebanese Minister of Telecommunication. The revolution also includes many demands related to the economic, social and political situation. Protesters were furious about the country`s economic recession as well as the lack of basic services and rights such as medical services, electricity availability and the high level of unemployment in the country. The Lebanese population have been demanding the resignation of the government body as well as investigating corruption and fraud activities over the past 30 years. To exercise more pressure, people have been setting fires and blocking roads in most of the cities which has paralysed the country for more than two weeks. Consequently, the Prime Minister Saad Al Hariri declared the resignation of the Lebanese Council of Ministers, promising to constitute a professional council that puts each person in the right place.
Additionally, before the revolution, Lebanon`s currency crisis had started causing concerns among citizens. Banks have been hoarding dollars as a result of a shortage and the country had been seeing the unofficial exchange rate in the black market (licensed or unlicensed currency traders) going from LBP 1,580 to the US dollar to LBP 1,600 or even LBP 1,800 for the first time since 1997. Residents have been unable to convert their Lebanese Pounds into dollars and they have been also unable to access bank`s ATM`s. The US dollar is used regularly in daily life in Lebanon alongside the Lebanese pound and most establishments have traditionally accepted payments in both currencies since the LB pound was pegged against the US dollar in 1997.
Oil and Gas Rations
Oil and gas companies and fuel stations have also been protesting since the end of September for being unable to purchase fuel at the original official currency rate. So, oil and gas companies stopped distributing fuel to the stations, and so these had to shut down for a period of time not providing services to the citizens. The problem was resolved in a short period of time when the Central Bank of Lebanon opened US accounts for stations and petroleum companies to import fuel. However, the fuel solutions didn`t last long enough and petroleum companies have since rationed fuel availability for their customers. In a country where many people rely on private diesel generators for electricity supply, this could have extensive consequences.
Bank Strikes and Financial Controls
It is worth noting that banks are currently imposing restrictions related to foreign currencies, due to the citizens` panic during the revolution. It was estimated that, during one week, Lebanese people have withdrawn around USD 2 billion from their bank accounts. Following the demonstrations and incidents with clients angered by restrictions on withdrawals, banks have been mostly closed since the start of the protests and businesses have been unable to pay their international suppliers. Banks are set to reopen on November 19, 2019 with tight restrictions on hard currency withdrawals and transfers abroad. Cash withdrawals would be limited to $1,000 a week and transfers abroad would be restricted to urgent personal spending only.
Since Lebanon is a major importer of goods, this decision has directly affected the country`s importers.
The Situation on the Ground for Importers
Cedar Rose has been doing some in depth research and interviews with Lebanese companies from different sectors to assess the challenges they are facing and find out how they are overcoming these challenges:
Cash on Delivery
A company trading in paint accessories, hardware and electrical tools, importing mainly from China and some European countries has confirmed that with the bank`s closure they are unable to pay their suppliers. A 30% down payment was made on an order before the protests, and the remaining 70% should be settled before the shipment`s arrival in December. Once banks open the company will be able to fulfil its obligations, however, will be highly affected by the current exchange rate converting Lebanese Pounds into US Dollars.
Imports Being Affected
An international pharmaceutical distributor based in Lebanon is mainly facing issues with third party manufacturers and companies engaged in the packaging of the medicines, which usually rely on foreign currency funds from the Central Bank of Lebanon. The lack of these foreign funds is affecting the import of pharmaceutical products.
In order to pay their international suppliers, companies in Lebanon are being issued a US Dollar bank draft from the Central Bank of Lebanon by their banks and the draft is directly transferred to the supplier. However, only a small number of importers can benefit from this solution, as in order to have a bank draft, sufficient funds should be available in the account of the importer which means no credit facilities can be granted by the bank. Also, as there are restrictions on transfers outside of the country and in US dollars, the company should provide US dollars to the bank in cash in order to be issued a bank draft.
Throughout all the current situation in Lebanon related to the revolution, corruption, fraud, foreign currency shortage and international payment restrictions, the only solution for the settlement of international payments is for importers to have US dollars in cash. This solution is costly especially because of the depreciation of the street value of the Lebanese pound and this can heavily affect the cost of the products and consequently the increase of the prices for the consumer.
The Situation for Exporters
During such a crisis, it is advisable that exporters to Lebanon exercise extreme caution, and maintain a regular dialogue with their customers to keep up to date with the situation. The central bank controls at this point seem sensible, in order to avoid total economic collapse, but as there is currently no end in sight to the revolution and the daily demonstrations, these controls can only help in the short term.
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Written by Mario Maroun, Financial Analyst
*** The sole purpose of the article above is to generate public discussion, it has no intention to constitute legal advice. ***