The Lebanese pound (LBP) devaluation reached a record high of 38,000 LBP to the dollar in the last week of May, having jumped a whopping 50% from the beginning of the month. The pound then closed the month at around 30, 000 LBP to the dollar.

LIMS connected the recent currency devaluation to the parliamentary elections. The central bank has been draining foreign exchange reserves to provide a relatively short period of stability and allow for a “smooth election”. Once elections were over, the central bank decreased the monthly USD quota injected into the market creating an excess of demand. The inability of the central bank to provide dollars at the exchange rate set on its own “Sayrafa” currency exchange platform sent the demand to the black market, thus raising the exchange rate. The drop at the end of the month was due to the inflection of central bank’s policy and the re-injection of more foreign exchange reserves in the market. 

LIMS added that the constant interference of the central bank in the currency market using a discretionary monetary policy via the Sayrafa platform has been causing extreme volatility. This situation raises doubt about the possibility of illegal profits, made by speculators, who might have obtained information about the central bank’s intervention in advance. Furthermore, this discretionary monetary policy will eventually lead the central bank to lose its reserves (i.e the remaining depositors’ dollars blocked at the central bank). This loss will further decrease its ability to back the LBP, leading to its uncontrollable devaluation.

For LIMS, most of the prices in the Lebanese economy are tied to the dollar, while Lebanese citizens are losing their purchasing power with each passing day. It has become apparent that the Lebanese market will have to eventually resort to full dollarization to avoid the LBP’s instability. LIMS explained that the central bank cannot keep on funding the public sector debt and deficit, keep a free flow of capital, and have a stable exchange rate simultaneously. One of the three must be dropped. The IMF plans to have Lebanon drop the free flow of capital through capital controls, while LIMS believes that the central bank should be stripped from the ability to engage in active monetary policy.

Lebanon is heading towards dollarization, and such a system can be fast tracked if the country adopts a currency board. A currency board would see the country shift from an instable and discretionary monetary policy to a rule-based monetary system. Having such a system would ensure the LBP’s stability and stop the downfall of the Lebanese people’s purchasing power.

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