Why some currencies in the Middle East are under huge pressure?
Currencies in countries including Lebanon and Iraq are under pressure, reflecting concerns about a weak economic outlook and the political and financial ability of their governments to manage crises
A combination of macroeconomic and geopolitical factors is hurting several currencies in the Middle East, which have inevitably had ill effects on their countries’ economies.
Currencies in the region, like those across emerging markets, have come under pressure, reflecting concerns about their respective countries’ external vulnerabilities, weak economic outlook and the political and financial capacity of governments to manage crises.
Pressures on external finances include lower export earnings for commodity producers, plummeting non-oil goods exports earnings and services earnings from tourism, deep remittance losses due to stalled economic activity, massive portfolio outflows and reduced potential for foreign direct investment inflows.
Vulnerable economies have already seen their foreign reserves come under considerable pressure. Governments, however, are introducing measures to stem the trend, yet there are still many questions about if and when these currencies will be able to recover.
We take a look at some of these currencies, how they got into this situation and their outlooks.
Lebanese pound: worrying record lows
Crisis-hit Lebanon is grappling with its currency’s depreciation to record lows on the parallel market, prompting the country to slash the value of its currency to 38,000 pounds to the dollar on its exchange platform.
The Banque du Liban has blamed currency speculation and the smuggling of US dollars outside Lebanon.
The economic crisis has pushed many in Lebanon into poverty, with severe shortages of essentials including clean water, electricity and medicine.
Inflation in Lebanon increased an average of 189.4 per cent year-on-year in the first 11 months of 2022, government data has shown.
Lebanon is expected to post the second-highest inflation rate in the world this year, behind Sudan, according to Fitch Solutions.
Lebanon is in the grip of an economic crisis described by the World Bank as one of the worst in modern history and has failed to enforce critical structural and financial reforms required to unlock $3 billion of assistance from the International Monetary Fund.
Lebanon’s economy collapsed after it defaulted on about $31 billion of euro-bonds in March 2020, with its currency losing more than 90 per cent against the dollar on the black market.
Iraqi dinar: sanctions bite
The value of the Iraqi dinar has further plummeted against the US dollar following new measures by the US Federal Reserve aimed at blacklisting several Iraqi banks that deal mainly with Iran.
The move has led to a scarcity of hard currency supply in the Iraqi market.
One US dollar is traded at 1,580 Iraqi dinars on the street, against the central bank rate of 1,470 dinars, state news agency Ina reported.
The Central Bank of Iraq has blamed the currency drop on “adopting mechanisms to protect the banking sector, customers and the financial system, as all foreign trade requirements … are fully covered by the official price”, Ina reported.
Iraq’s central bank has taken several measures to help stabilize the currency, including reducing the exchange rate for travel and ensuring a flow of dollars at the official rate.
Turkish lira: ‘bullish trend’ expected
The Turkish lira lost more than 40 per cent of its value against the dollar in 2022. That is an improvement compared with the 77 per cent plunge it posted in 2021, with analysts saying it is now stabilizing against the greenback.
The lira was trading at about 18.55 on Tuesday.
The government is working to boost the currency’s value, including what it calls “liraisation”, which aims to ensure the lira is the currency of choice in the country.
Turkey’s central bank also said on December 30 that it planned to increase the share of lira deposits to 60 per cent of all deposits in the country’s banking system over the next six months.
However, a remaining sticking point is consumer prices, which rose 64.3 per cent annually in December, the highest in more than a quarter of a century.
That was, however, still better than the 84.4 per cent surge in November, which alleviates concerns of decreased consumer spending power.
In general, there is a “bullish trend” in the lira, analyst Akram Adel wrote on Daily Forex.
Iranian rial: ‘cautious’ approach
Iran’s rial dived to a record low of 44,000 against the dollar on December 28, which was a 22 per cent decline in only a month.
This prompted the appointment of a new central bank chief in a bid to stem the currency’s fall. The rial, trading at about 41,850 on Thursday, has fallen more than tenfold since 2018.
Among the factors that are hitting the currency include continued civil unrest, the country’s continued isolation as a result of ties with Russia and fading hopes to revive the 2015 nuclear deal between Tehran and global powers, which the US withdrew from in 2018.
“Cautious buyers” are entering the dollar market, and the price of the currency is seen to be on an upward path, the Iranian economic website Ecoiran said. It said the central bank could still lend support to the rial.
