Millions of dollars in aid to Lebanon are being lost in currency exchange as inflation soars out of control, but internal UN documents and interviews with officials suggest that fixing the problem faces political and logistical hurdles, and could even spark violence.
Just under $500 million in cash aid is set to be given to Syrian refugees, Palestinian refugees, and an increasing number of Lebanese citizens in 2021. Given by UN agencies and NGOs instead of food or shelter, this assistance comes in the form of regular payments, often delivered on debit cards or vouchers.
But since beginning to fall in October 2019 due to a drop in money sent home from Lebanese abroad and a massive shortage of dollars, the Lebanese lira – or pound – has lost more than 85 percent of its value. Widespread protests began the same month, and politicians have been unable to form a government since a massive explosion hit Beirut’s port in August 2020.
The lira hit a new low earlier this month, and all of this has meant skyrocketing prices and shortages of basic necessities for more and more people in the country, fuelling tension and hardship. Rampant inflation has also led some shops and businesses to demand dollars for their daily transactions.
Lebanon has a range of official exchange rates for different transactions, but even the best is half the black market rate. When hard currency for aid comes into Lebanon, it is converted at the official exchange rate for international organisations – set by the Central Bank in early February at 6,240 lira to the dollar.
Comparing this official exchange rate to the street exchange rate, which is now at least 12,000 lira to the dollar, The New Humanitarian estimates that as much as $20 million could be lost each month in these transactions.
In response to these massive losses, aid agencies and the frustrated countries and organisations that fund them have been lobbying Lebanese authorities to allow them to use the informal exchange rate, or give out relief in dollars.
So far, they have been mostly unsuccessful, according to multiple sources in the aid community as well as UN documents.
Lebanon’s Central Bank did not respond to requests for comment and the finance ministry declined to comment, but a March summary of options prepared by the UN and seen by TNH noted that “authorities expressed reluctance” about allowing international organisations to use the market rate. And the Central Bank argued in a leaked letter in February that the “most vulnerable and needy” could be “adversely affected” by the destabilising effect of further currency devaluation if they were allowed to do so.
However, there does appear to have been some movement. In a letter reported last week by the Thomson Reuters Foundation, representatives of the EU, the UN, and the World Bank noted a “verbal agreement” on 22 February with Lebanon’s finance ministry and Central Bank to allow aid groups to distribute relief in dollars.
Still, nothing has been signed yet, and full “dollarisation” for at least 1.3 million people who receive cash aid in Lebanon may not be an option, given the variety and number of aid programmes operating in the country. In addition, experts say it risks stoking tensions between communities, if some people receive help in dollars and others in lira.
An increasing proportion of international humanitarian aid is given in the form of cash or vouchers. Compared to handing out food or other goods, it’s cheaper, more flexible, and gives people more choices. Devaluation, however, can wreck the value of the transfers people get. Ground Truth Solutions, an organisation that analyses cash-based aid, found that in 2020, inflation led to a growing number of aid recipients in Nigeria preferring to receive goods in-kind.
Ground Truth Solutions analyst Meg Sattler told TNH that the solution to dealing with situations like Lebanon’s is not to revert to the old way of doing things – giving stuff – but to adjust to changing prices and exchange rates. Humanitarians should be “doing their homework properly, adjusting rates along with rising prices, fluctuating monetary values, and listening to what people need – as well as being able to adapt better,” she said.
All this is much more than a question of monetary or aid policy for people like Syrian refugee Awad Ibrahim, a 42-year-old father of six who has watched helplessly as the monthly allowance the UN puts on his debit card buys less and less at the grocery store where he shops in Beirut’s southern suburbs.
"It'd be excellent if it came in dollars... What can I do with 400,000 lira?" Ibrahim said about the monthly aid he receives. Now worth only around $35 using the market rate, the assistance was equivalent to $126 in April 2020. "Nearly everything is imported and its price is linked to the dollar,” he added. “The prices are on fire.”
Lost in transfer
That inflation is a problem is not in question. But what to do about it and when – from the perspective of an aid community that aims to help an estimated 1.5 million registered Syrian refugees, hundreds of thousands of Palestinian refugees, and a growing number of Lebanese who have fallen into poverty – is very much open for debate.
Last week, UN Resident and Humanitarian Coordinator Najat Rochdi told journalists that “hyperinflation” means more and more Lebanese people and the refugees they host are “falling beyond poverty, into despair”.
Upset that much of their donations to Lebanon is being lost in transit, countries that give to the UN-coordinated aid response are ramping up the pressure to use the market exchange rate or cash dollars.
"Dollarised payments to beneficiaries can relieve pressure on the currency, temper inflation and help mitigate the surge in money supply,” the World Bank noted in a February internal paper obtained by TNH. “Disbursing in LL [lira], on the other hand, is inflationary and can possibly trigger a negative feedback loop between inflation and currency depreciation."
A draft of another internal UN document – prepared for Rochdi in February to analyse the UN’s options for dealing with the issue – expresses concerns that aid money is not getting where it needs to go because of inflation, and is instead being used to shore up Lebanon’s dwindling foreign reserves. “In an unprecedented crisis and human tragedy, [US dollar] contributions must be used for their intended purpose of assisting vulnerable households, as opposed to forcibly recapitalising the banking sector, or central bank foreign reserves,” it says.
The document, entitled “Humanitarian and Development Assistance: Disbursement in LBP vs USD: Value for Money, Economic and Risk Analysis”, also warns that the currency issue "raises concerns of effectiveness and accountability towards taxpayers in donor countries and poses legal risks and political consequences”.
The European Union has been clear that it expects at least one UN agency to get around Lebanon’s official exchange rate, or else.
“This is an artificial emergency created and upheld by the unwillingness of Lebanese decision makers to resolve the matter,” EU Ambassador to Lebanon Ralph Tarraf wrote to UNICEF Representative Yukie Mokuo in a 3 March email seen by TNH.
“It is your exclusive prerogative and your judgement call to decide whether exchanging the hard currency at the rate suggested by [the government of Lebanon] respects the principle of sound financial management or not in the current circumstances.
“I trust that, according to standard practice, your and our internal oversight and audit bodies might look into the matter ex post to assess whether the principle of sound financial management has been upheld or not,” he warned.
Asked about the letter by TNH, Tarraf declined to comment.
‘Hybrid solutions’
At the end of the day, despite the reported verbal agreement between Lebanon’s financial authorities and the EU, UN, and World Bank, many believe it unlikely that all aid programmes will be able to switch, at least not at the same time.
That’s because multiple programmes that give out cash aid have been affected by the devaluation. These are run by different agencies, backed by different donors, and – most importantly – benefit different sectors of society. There are cash allowances and food vouchers for refugees, cash-for-work programmes that aim to get people in jobs, and a new $246 million World Bank-funded expansion of Lebanon’s National Poverty Targeting Program.
In an email to TNH, Rochdi said “hybrid solutions” may be needed, with some aid being paid in lira and converted at a revised rate set for humanitarian organisations, and some in dollars.
It’s also likely that aid programmes that go through the state will be treated differently than those that go through the UN. The EU, for instance, channelled around $57.5 million through the Lebanese government in 2020 to top up the salaries of teachers holding classes for Syrian refugees, amongst other things.
This possibility is reflected in the March UN document that says Lebanese authorities had proposed that a “preferential exchange rate”, likely to be closer to the market rate, be used for “forms of aid that go through the government”.
But there is concern about what would happen, for example, if a Syrian refugee is paid in dollars, and a Lebanese teacher of refugee children receives lira, which are dropping in value almost daily.
The February UN document warns of "grave concern" about stoking perceptions of bias. It cautioned that this could raise tensions between those who receive dollar payments and those who get lira, and between Syrian refugee and Lebanese communities. "Heightened anti-refugee rhetoric would spark violence given the fragility of the country," it says.
"It's going to be really important, if dollarisation goes through, for NGOs to be raising awareness really heavily on how it will benefit the wider community," Nadine Kheshen, who facilitates a network of 26 local NGOs, told TNH. "Already, we’ve seen incidents of refugees being harassed when collecting aid at banks, so there needs to be some thinking about how to protect people, and part of that will be educating people about the benefits to the community as a whole."
One donor official, who requested anonymity because discussions are ongoing, told TNH they believe that people who are part of cash-for-work programmes could be first in the queue to get their money in dollars as equal numbers of participants are Syrian and Lebanese.
Many had hoped that if dollarisation goes ahead, the World Bank-funded expansion of Lebanon’s National Poverty Targeting Program, or NPTP, which gives money to vulnerable Lebanese citizens, could be first.
"The sentiment among implementing [aid] agencies is that they would prefer not to dollarise until the [NPTP expansion] is enacted, because it would likely be them held liable for the tensions that might arise," an aid agency official, who requested anonymity due to the sensitivity of the issue, told TNH.
But after the Lebanese parliament unilaterally removed several oversight provisions from the loan agreement earlier this month, the World Bank programme is currently on hold.
“It is unclear whether the World Bank will accept these amendments. Even after final loan terms are agreed, the government must meet several conditions before any loan proceeds are disbursed,” economist Mike Azar said. “There is a long road ahead before any money goes out the door.”
Meanwhile, the aid community waits for the government’s next move with rising urgency but limited optimism.
"[Dollarisation or the market exchange rate] is what the donors are calling for, but it will certainly not be the case,” said the aid agency official. “[The Central Bank] will never give the market rate. If they give the humanitarian community market rate, why don't they give it to everyone else?"
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