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

The National Initiative for Monetary Stability

14:44 | 31 August 2026LIMS output
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monetary

A National Initiative for Monetary Stability was launched in July through a series of meetings bringing together leading international experts on currency boards, Lebanese banks, policymakers and business leaders. Sponsored by the central bank, the initiative held three technical workshops examining whether a currency-board system could provide Lebanon with a credible monetary anchor, drawing on the experience of countries that have adopted similar arrangements.
LIMS endorsed the initiative on the grounds that the central weakness of both fixed and floating exchange-rate regimes is ultimately the same: a government can create more domestic currency than the economy can absorb. Under a floating regime, the adjustment comes through depreciation. Under a fixed regime, authorities can postpone the adjustment, but the underlying imbalance eventually has to be corrected through a sharp devaluation.

A currency board is different. It operates according to a simple and binding rule: domestic currency in circulation must be fully backed by foreign-exchange reserves. The monetary authority can issue additional domestic currency only when the corresponding foreign assets enter its reserves. This removes discretionary money creation and, with it, the mechanism through which monetary financing can ultimately force a devaluation.

LIMS added that the case is particularly relevant for Lebanon, where political and security shocks have repeatedly translated into monetary instability. Under a floating exchange rate, a war or political crisis can trigger a rapid depreciation, while an improvement in confidence can produce an equally rapid appreciation. Such volatility complicates investment decisions, raises currency risk and discourages long-term capital commitments. A currency board would instead anchor the pound to the foreign assets backing it, providing a more predictable monetary framework during periods of instability.

The experience of Hong Kong, Bosnia and Herzegovina, Estonia, Lithuania and other economies that adopted currency-board arrangements following financial or banking crises offers relevant evidence. In these cases, monetary stabilisation helped restore confidence, support the banking system, revive lending and create conditions for renewed capital inflows and economic recovery.

A currency board, however, should not be confused with a solution to Lebanon’s deposit losses. It cannot recover funds already spent by the state or lost during the financial crisis. That requires a separate framework, principally a financial gap law. The role of a currency board is narrower but no less important: preventing the same mechanism from producing another crisis.

A Currency Board Law would therefore form an important pillar of Lebanon’s broader financial reform. By imposing strict limits on monetary issuance and preventing the reserves backing the currency from being diverted to finance government spending, it would strengthen monetary discipline, reduce currency risk and speculation, and give households, businesses and investors greater predictability.

LIMS therefore endorses the National Initiative for Monetary Stability and calls for its transition from technical discussion to legislation and implementation.

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  • The Cash Economy Reflects A Crisis Of Confidence… And A “Currency Board” Is The Key To Restoring It. August 26, 2026: VDL, Audio interview (AR)