After falling suddenly in the wake of saad Hariri's appointment on 23 October as prime minister to form a new government, the dollar/pound rate began to rise again this weekend.

Stuck on a rather stable average of 6,600/6,700 pounds to the dollar on the black market throughout the week, the national currency fell sharply on Saturday to exceed the 7,000 pound mark.

The trend has continued since then, peaking at nearly 7,800 pounds before a pullback to around 7,300 in the middle of the day yesterday.

For many observers who have been following the evolution of the pound since the beginning of the economic and financial crisis, more than a year ago, these recent fluctuations are not the result of a natural game between the supply and demand of currencies on the black market.

As a reminder, if the Bank of Lebanon (BDL) publishes every day the rate imposed on authorized stockbrokers – at 3,900 pounds per dollar for months – it is the floating exchange rate adopted by illegal dealers that acts as a metronome for economic agents, which adapt their prices according to its evolution.

"Microstructural" approach

The pound began to fall against the dollar from the moment the BDL stopped injecting dollars into the market last summer to support the official parity of 1,507.5 pounds to the dollar in effect since 1997.

A measure taken to try to slow the erosion of its foreign exchange reserves but which triggered a liquidity crisis that had been simmering for months and whose effects were amplified in two stages: first with the implementation of banking restrictions on foreign currency transactions; then, from April, with the publication of several circulars allowing the withdrawal in pounds and at a rate closer to the market of amounts in foreign currency deposited in national banks and which could no longer be withdrawn in their original currency.

This mechanism, embodied in the now famous circular n°151 of the BDL, whose duration of application was extended by six months in October, has contributed to exploding the money supply in circulation, which, combined with the scarcity of the dollar in the market, accentuated the depreciation of the pound.

Demand has remained strong, fuelled by the fact that the country imports the majority of its needs and that some households send money abroad for various reasons (including to finance their children's education).

For Professor Hassan Ayoub, a professor at the Faculty of Economics and Management of the Lebanese University where he heads the Department of Economics, "it is useless today to try to explain the latest fluctuations in the exchange rate by simply taking into account fundamental macroeconomic variables", such as prices, money supply, interest rates, productivity gaps, public debt, terms of trade, etc.

On the other hand, it calls for a "microstructural" approach, which consists in studying the dynamics of prices by analyzing the way in which these exchanges are actually organized, which makes it possible to have a more realistic vision better understanding the complexity of the relations between the actors.

This bias is all the more credible as the current market is completely deregulated, in particular because of the lack of political will to legalise banking restrictions or because of the almost total freedom of movement enjoyed by black market stockbrokers.

The murky role played by the banks and the BDL in this configuration also weighs in the balance.

Contacted, an expert who wishes to remain anonymous recalls that the BDL had repeatedly provided estimates on the volume of transactions on the black market without explaining how it had been able to obtain these figures.

It also points out that in May, a BDL official and a banker were arrested and then released as part of a large-scale security operation ordered by financial prosecutor Ali Ibrahim, during which several illegal and licensed stockbrokers, including trade union leaders in the sector, had suffered the same fate.

"Several months later, the illegal agents still do what they want without making anyone react," the expert laments.

Other parameters

The framework having been set, it remains to be seen what are the parameters that, in addition to the interplay of supply and demand, make the dollar/pound rate evolve the most.

Hassan Ayoub evokes, for example, the "psychological factors" linked to the instability of the political-security, local and regional context in which the country evolves.

"In this context, the appointment of Saad Hariri has helped to reassure the markets (...), but this situation is purely circumstantial and is not intended to last, especially if the formation of the government is too long overdue," adds the economist.

As a reminder, the previous chief executive, Hassane Diab, had resigned in August following the tragic double explosion that ravaged Beirut and its port.

Hassan Ayoub also highlights the impact of the "speculation strategies" of certain players, without being able to define exactly which ones, given the prevailing opacity on the market.

"Short-term fluctuations are much more correlated with agents' strategies and their reactions to economic and political information that can lead to brutal readjustments of their expectations," he explains.

"Some agents have injected dollars to influence the evolution of the rate according to their interests and objectives," he explains, recalling that some observers accused the BDL itself of being at the maneuver, while others point the finger at the manipulations of a "cartel".

But the parameter according to the teacher remains the "asymmetry of information", namely the existence of several categories of agents: those who have relevant information on trends in the foreign exchange market and those who do not.

This is typically what happened after the appointment of Saad Hariri.

According to several corroborating testimonies, rumors announcing a lasting decline in the dollar/pound rate began to fuse, after the designation, on social networks and instant messaging groups – whose role in market manipulation is also suspect.

The dollar was still around 7,000 pounds on the black market before the weekend and news announced it at 5,000 pounds on Monday.

Many Lebanese, ill-informed and fearing a continuation of the trend, rushed to stockbrokers to sell part of their currencies at rates often lower than those broadcast on the various applications that sprouted during the crisis.

Those who doubted the sustainability of this decline preferred to keep their currencies at home.

Black market agents do not seem to have had any qualms about playing this card.

An illegal dealer that L'Orient-Le Jour contacted offered, for example, 580,000 books to buy back $ 100 even though all the sites and applications advertised it at more than 6,000 books, even when buying.

Asked about the legitimacy of the proposed price, the agent was then content to repeat that the rate would quickly fall and that the proposed price remained a matter.

According to another source, financial this time, it often happens that illegal applications and agents broadcast a rate while very little or no significant transaction (of the order of a few thousand dollars at most) are recorded – either because no one is looking for currency, "or because no one wants to sell it."

In conclusion, while it is almost impossible for the uninitiated to predict the evolution of the dollar/pound rate even in the short term, the best strategy is still to limit currency purchases as much as possible in times of rise and to seize the opportunities that arise in times of decline.

Hazards with which the Lebanese will be forced to live until, it must be repeated, that the country is reformed in depth.