Imagine going to the market with a purse full of money and returning with a bare handful of grains in exchange for it and nothing else! Unimaginable, right? This is the situation of hyperinflation. Hyperinflation is a phenomenon that is characterized by a rapid rise in prices of goods and services, accompanied by varying irregularities in the increase. Hyperinflation is a time period which is said to accommodate different market sentiments from everywhere. For instance loss of confidence among the consumers leads to unforeseen panic in the money market. It was a blight to many countries such as Venezuela, Germany, Greece, Hungary, and Argentina, especially after the 2nd World War, and continues to vex Venezuela even today.
Hyperinflation does not produce static results. It goes on to create huge demand for foreign exchange currency, usually for one of the strongest currencies (like the US Dollar). Thus it is stated by various economists that paradoxically people lose confidence in the domestic currency at the same high rate as they gain confidence in the most robust foreign currency.
Typically during such a phase the country can experience its inflation to shoot up to 500 percent in a span of mere one year.
Hyperinflation is an abnormal phenomenon. By observing countries which have faced hyperinflation, one can understand certain peculiarities about this economic plague:
It is most prominent at places which go through various economic disturbances i.e. crippling of the economy due to war, decrease in liquidity in the economy among others.
As a result of the exorbitant rise in prices in the economy, we notice the production cost rise due to costlier resources.
This leads to a skyrocketing inflation rate from 5% to 15% percent in just a span of 2 weeks.
HYPERINFLATION IN LEBANON
Lebanon is known for its delectable foods nuts, grape leaves and platters bursting with fruits and kebabs, among other things. The place was previously acclaimed for its extravagant luxuries, like many Middle Eastern nations. Naturally, the sudden grip of hyperinflation on the economy has perturbed many, especially since it the first Middle Eastern economy to ever experience the phenomenon. The economy has dropped to the extent where extracts value equal to $1,000 for one time meal. The economy is currently grappling with a whopping 462.
CAUSES OF HYPERINFLATION IN LEBANON
ECONOMIC CRISIS
Lebanon witnessed the worst economic crisis of the decade, wherein the Lebanese pound plunged to 60 percent of its actual value. The country uses the Lebanese pound and US Dollars interchangeably at times to keep their savings robust enough to not fall into debt-related crises. Due to multifaceted variations of policies and the prohibition of usage of the US Dollar, the Lebanese pound witnessed a tremendous drop in the market. The crisis began in March 2020 and has worsened when the country’s remittances started drying up which ultimately prompted the lenders to limit withdrawal of dollars, thereafter stopping the supply of the dollar bill.
2. LOSS OF TRUST IN GOVERNMENT
Since last October, the country has been experiencing various protests and gatherings against the corruption and mismanagement among the ones warming the political seats. As a result of the loss of trust and fear of the situation degenerating further, the people started taking charge individually, and started hoarding dollars. This lurching cannot see a way out until trust with the government is resumed. Lebanon is an import-driven economy. The plunge in the currency valuation has had a crippling effect on the purchasing power.
3. DEBT CRISIS
In recent times, the country has claimed to have huge US based-debts. This is primarily because imports of Lebanon are priced in US dollars but sold in domestic currency. Adding to its problems, the foreign debt instruments are priced in US Dollars too. The major objective faced by the government at present times is to create a reliable fiat, rather than defending its depreciating currency.
It is estimated that Lebanon will default by a huge sum of $1.12 million of foreign currency debts, stumbling deeper into their economic crisis. Furthermore, Lebanese banks fear a Bank run (situation where in a large number of customers come to the bank to withdraw at the same time fearing insolvency) which would eventually lead to the capping of the amount that can be withdrawn. Its public debt in 2020 is more than 184 percent of the GDP- amounting to the highest debt to GDP ratio in the world.
IMF recently issued a statement wherein they clarified the position of Lebanon and said that it is ready to extend help to the Lebanese government, but at the condition that it’ll take notable actions by putting an end to corruption and restructuring the economy thereafter. Moreover, it has to make various modifications in the country's financial system and strictly implement some policy measures. For thwarting the rise in the exchange rates and inflation, it is essential that the government of Lebanon comes up with robust macroeconomic policy changes and reduces the uncertainty rampant in the economy.
While there is much to be done in the situation, developing their plan of action is not going to be an easy task. Below are some suggestions on neutralising hyperinflation:
INFLATION TAX
Issuing an Inflation tax (the fine paid to the government for holding cash at the time of high inflation) reduces the value of money that people hold. This will ultimately increase the flow of money in the economy which will result in an increase in the value of the cash and assets that people hold.
2. LIRAFICATION
Lirafication is a forceful measure, which if adopted by the Lebanese government to convert a major part of its currency deposits into the Lebanese pounds (as a considerable part of it is in US Dollars) would achieve internal real devaluation. Today, savings that were entrusted to Lebanese banks have been gradually lost. The sharp reduction in real income and fluctuations in the value of the pound are leading to a massive contraction of imports and the government has reduced the current account deficit to protect the remaining international reserves. This calls for strengthening the country’s domestic currency, and this can be achieved through the Lirafication of its currency.
3. CAPITAL CONTROLS ACT
The country already has numerous controls in place but it definitely requires the Capital Control Act. This will help in establishing a more transparent and effective economic system. It’ll prove beneficial in regaining public trust and setting up a more stabilized exchange rate system, helping in easy flow of capital within and outside the country.
4. BRINGING THE BANKING SECTOR BACK TO HEALTH
The present non-performing assets in the country will ultimately lead to more incapacitated banks with numerous cases tethering on the edge of solvency. This requires the merging of various operational banks in the economy and induce fresh capital of about $20-25 billion, which will help in recapitalizing the different sectors.
Lebanon has witnessed various defaults in debts in recent times, leading to the present economic crisis. The hyperinflation hit country is in a situation where it is experiencing a severe halt in all of its products and services, thus rendering the economy stagnant. The prices saw an upsurge of 50 percent in mere 30 days, making it the first country in the Middle East to experience such a lump-sum rise. This calls for a consolidated plan from the government, for restructuring the banking and various financial institutions of the economy. These steps will be in the direction of coming up with various reforms for the presently staggering economy. The steps include strengthening the banking system, inducing fresh cash, and regaining public confidence.
Vasudha Jha
https://www.nationalreview.com/2020/07/life-in-lebanon-under-hyperinflation/
https://www.bloomberg.com/news/articles/2020-07-07/lebanon-s-economic-collapse-is-gathering-pace
https://www.reuters.com/article/us-emerging-inflation-graphic/lebanon-follows-venezuela-into-hyperinflation-wilderness-idUSKCN24O20J
https://www.forbes.com/sites/rogerhuang/2020/05/03/hyperinflation-in-lebanon-leads-to-mass-protests/#31425b06730b
https://www.nytimes.com/2020/03/07/world/middleeast/lebanon-debt-financial-crisis.html
Comments