ERASE, Currency Crisis, Inflation and Currency Devaluation, Economic Update, Economic Growth, Security Situation

War in South Lebanon Sparks Fears of Currency Depreciation

11:51 | 30 April 2024LIMS output
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South Lebanon

The ongoing conflict in South Lebanon, which erupted in October 2023, has raised serious concerns about a potential resurgence of currency devaluation. The Lebanese pound, having suffered the world’s steepest depreciation—plummeting over 83% since the onset of the financial crisis in 2019—had only recently achieved a semblance of stability by mid-2023.

LIMS attributes the currency’s previous collapse to rampant money printing, which fueled inflation, devaluation, and a depletion of central bank reserves. The acting governor of the central bank managed to stabilize the currency over the past year by tightening money supply. However, LIMS warns that this stability is contingent on maintaining strict monetary discipline. To prevent future manipulation of the money supply, LIMS advocates for amending the law to place rigorous controls on monetary policy or a transition to full dollarization, which would limit the government’s capacity to interfere with the money supply.

The war‘s impact on Lebanon’s economy has been severe. LIMS reports a significant hit to tourism and travel, with a 20% drop in passenger traffic at Beirut’s international airport compared to the previous year. Daily tourism spending, previously at $60 million before the crisis, has declined by 10%, amounting to a $6 million daily loss over the past six months.
Further escalation of the conflict threatens to destroy critical infrastructure, complicating future reconstruction efforts and deterring foreign investment. The volatile situation has already led investors to reconsider their positions, with many seeking to withdraw their investments from the Lebanese market, exacerbating the country’s economic woes.

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