The destructive mix of a sudden annihilation of income and savings, a paralysis of economic activity, and a poor social protection system is pushing the Lebanese population to the brink of a humanitarian crisis. The country’s multidimensional poverty rate stands at 82%, with families having to resort to negative coping behavior, such as sacrifices in nutrition, health, and education.¹ As it stands, Lebanon faces the looming danger of major social degradation for generations to come.

The gravity of this threat is only matched by the political elites’ sabotage of reforms, most recently with the 2022 national budget and draft law proposals on banking secrecy and capital controls.² Even as living conditions deteriorate, the government has delayed the adoption of the social protection strategy by instead committing to redrafting it. Lebanon’s social protection response since the onset of the crisis has centered around a ration card, which has yet to be launched, and a loan-funded social safety net, which was stalled for two years.³

A state-led rights-based system that builds a healthy social contract falls outside the interests of Lebanon’s political elites. For decades, they hollowed out the social role of the state and co-opted the distribution channels of social benefits to further their patronage networks. Amidst this crisis, they have effectively “subcontracted” social assistance to Banque du Liban (BdL) through an ill-conceived exchange rate subsidy that is depleting its foreign reserves for the benefit of large importers and wealthier cash holders.

Since the beginning of the crisis, BdL has arguably been the principal provider of social assistance in the country. Not only does this function fall outside the conventional remit of a central bank, but it has also played a major part in the depletion of two-thirds of the country’s foreign reserves since August 2019.  Two interventions epitomize this function.

First, BdL financed a subsidy scheme by providing credit lines for the import of wheat, fuel, medication, and a number of food items, including poultry and dairy, at advantageous exchange rates.⁴ The scheme depleted, on average, $286 million per month from the foreign reserves and ran until September 2021.⁵  Since BdL’s books are notoriously opaque, leading to large variations in the estimation of the cost of subsidies, it is estimated to have cost somewhere within the wide range of $6 billion to $12 billion.⁶ Indeed, the reserves, which stood at $31 billion in August 2019, more than halved by the time the import subsidy was lifted in September 2021, plunging to $14.6 billion. Not only was the subsidy structure costly, it was also regressive, benefitting affluent households almost four times more than the poorest 50% of the population.⁷ This is attributed to the universal nature of the subsidy, as wealthier households had the means to consume more expensive imports.

What started off as a platform to monitor and regulate currency exchanges,8 has turned into an arbitrage opportunity for households and businesses, i.e., making “profits” by buying dollar notes at the Sayrafa rate and reselling them at the market rate.

Second, the BdL-operated Sayrafa foreign exchange platform is providing a de-facto social assistance “program”, reaching full-time public servants as well as the larger public who have access to the country’s broken financial system. What started off as a platform to monitor and regulate currency exchanges,⁸ has turned into an arbitrage opportunity for households and businesses, i.e., making “profits” by buying dollar notes at the Sayrafa rate and reselling them at the market rate.

Since January 2022, BdL significantly expanded Sayrafa, requesting commercial banks to conduct currency exchanges without monthly ceilings. From the beginning of 2022 until August, the average spread between the Sayrafa rate and the market rate was 12%. This spread fluctuated significantly, from a low of 2% in mid-February and early March reaching a high of 26% one week after the elections in May. This large discrepancy provided arbitrage opportunities, meaning that people who have access to the platform are able to generate profits by exchanging their Lebanese liras (LBP) at the Sayrafa rate and re-selling their dollars at more advantageous rates in the market. While this served to complement people’s dwindling incomes, it disproportionately benefited those with access to large sums of cash LBP and civil servants who are paid their full salary at the Sayrafa rate, hence becoming a tool of selective support.

Based on the trading volumes of Sayrafa and the daily spread between both exchange rates, the potential value of arbitrage from BdL’s Sayrafa, as estimated by The Policy Initiative team, reached $885 million between January and August 2022.⁹ Strikingly, the loss incurred by the central bank to sustain Sayrafa in this period is equal to around 3.5 times the World Bank loan for the Emergency Social Safety Net program.

The alternative to this central bank-led response is very well established. A fraction of the amount depleted from the foreign reserves since August 2019, which hovers around $20 billion, could have funded the ILO-UNICEF proposed social protection floor, estimated to cost around $500 million annually.¹⁰ These funds could have provided social grants that protect against lifecycle-vulnerabilities, including childhood, disability, and old-age.