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Currency Board Would Stop Ongoing Currency Devaluation

0:29 | 30 نيسان 2022LIMS output
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Currency Board Would Stop Ongoing Currency Devaluation

On April 22, the Lebanese pound (LBP) went up to around 28,000 LBP to the dollar despite the announcement of an agreement with the IMF a couple of weeks earlier. At the start of April, it was traded at 24,000 LBP to the dollar. Previously, before the financial crisis engulfed the country, the currency was pegged at 1,500 LBP to the dollar. Nowadays, multiple exchange rates are still applied in various transactions with the government and banking sector.

Following news about freezing the central bank governor’s assets, the exchange rate saw a small hike. LIMS explained that the exchange rate will stay vulnerable to any instability, because the central bank follows a discretionary monetary policy. Such a policy is highly dependent on public trust—a key asset that the currency has lost since the crisis began.  LIMS explained that the Sayrafa exchange rate platform is used by Lebanon’s central bank, Bank du Liban (or BdL for short), to pump US dollars into the market. However, Sayrafa is unable to keep up with the increasing USD demand due to higher prices of international goods related to the global inflation and the war on Ukraine. In the end, Lebanon will reach a stage when the central bank runs out of reserves, which in fact are depositors’ dollars, used to stabilize the currency. Then, BdL will forcefully exit the market, leading to an uncontrolled devaluation. Therefore, Lebanon should reform its monetary system and move from the current discretionary policy to a rule-based monetary arrangement by adopting a currency board. Such a reform would allow for a stable exchange rate, regardless of internal and external shocks.

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