ERASE, Currency Crisis, Economic Update, Currency Board and Dollarization

Lebanese Pound Depreciation Pressure Revives Debate Over Currency Board Reform

20:37 | 31 May 2026LIMS output
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currency board

The Lebanese pound remained broadly stable at around LBP89,500 to the US dollar throughout April and May, despite renewed hostilities and a worsening economic outlook. The currency’s resilience has revived debate over the sustainability of the current exchange-rate regime, the extent of intervention by the Banque du Liban (BDL), and whether Lebanon should allow the pound to float more freely to preserve its dwindling foreign exchange reserves.

LIMS argues that the exchange rate has been supported by a combination of tighter domestic liquidity and continued central bank intervention. Between the end of February and the end of May, the monetary base (M0) contracted from LBP69.5tn to LBP59.4tn, while BDL’s foreign exchange reserves declined from roughly $11.9bn to $11.4bn. The withdrawal of Lebanese pound liquidity, combined with additional dollar sales by the central bank, helped maintain exchange-rate stability.

According to LIMS, renewed conflict increased demand for dollars as households and businesses sought protection against geopolitical risk, while simultaneously weakening public finances by reducing tax revenues and increasing displacement related expenditure. The resulting fiscal deficit has interrupted the reserve accumulation that had begun in 2023, when fiscal surpluses deposited at the central bank helped rebuild foreign exchange reserves.

LIMS rejects the notion that policymakers must choose between exchange-rate stability and preserving reserves for banking-sector restructuring. It argues that a currency board would achieve both objectives by requiring the monetary base to be fully backed by foreign exchange reserves. Such a framework would provide a credible anchor for the exchange rate while safeguarding reserves for their ultimate purpose, including the restoration of depositors’ claims.

The institute argues that this framework is particularly well suited to Lebanon’s history of recurrent political, security and military shocks. In such an environment, a freely floating exchange rate is more vulnerable to sharp depreciation and speculative pressure. A currency board, by contrast, would constrain discretionary monetary financing, reinforce confidence in the currency and strengthen macroeconomic resilience during periods of heightened uncertainty.

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